There are several infrastructure projects, activities, government schemes which are running across the country. Hence the Government of India or State Government issue the government securities to fulfil such excess requirements of funds and recover the deficit or mismatch of cash flow occurred.
Before we discuss types of Government Securities in India, we must know what does it mean by Government Securities?
Hence, let’s understand the meaning and definition of Government Securities.
What are Government Securities?
Government Securities (G- Securities) are the Debt Instruments issued by the Central Government or State Governments to fulfil the requirements of funds. Government securities are issued for short term and long term period on fixed or variable interest rates called a coupon.
Short term tenure (maturity period) refers to less than one year whereas long term tenure refers to more than one year. The central government issues both short term as well as long term Government Securities, on the other hand, the State Governments issue only long term securities.
The Reserve Bank of India (RBI) is responsible for sales and purchase of Government Securities on the behalf of Central Government or State Government across the country.
Government Securities are the safest instruments if we think of investment perspective as these securities are backed up by the Government of India itself. This means the government itself is responsible for repaying the face value of these securities on the maturity date. Therefore, we can say these types of securities carry no risk of defaults.
Hence Government Securities are also known as ‘Gilt Edged Securities’ instruments.
Types of Government Securities:
On the basis of the maturity period (Tenure), issuing authorities and coupons, government securities can be classified. There are different types of government securities in India which are discussed as follows.
- Treasury Bills (T- Bills)
- Cash Management Bills (CMBs)
- Dated G-Securities or Government Bonds
- State Development Loans
1)Treasury Bills (T-Bills):
Treasury bills are the government securities which are issued with a maturity period of less than one year. This means it can be issued for a period of 91 days or 182 days or 364 days. Treasury Bills are issued only by the Central Government of India, that means the state government can’t issue the treasury bills.
Treasury bills are issued at zero-coupon, this means no interest rate will be paid. It doesn’t mean that those who hold T-Bills are not entitled to any profit. In fact, treasury bills are issued at a discounted price on Face Value. Therefore, treasury bills are also known as Zero-Coupon Bonds.
For instance, suppose Mr A wants to purchase a T-bills of face value Rs 1,00,000/- for a maturity period of 364 days, then the price which Mr A has to is just Rs 97,000/- (for example). That means Mr A got a discount of Rs 3,000/- on a treasury bill of face value 1.0 lac.
Moreover, after 364 days he will get the whole amount as per the face value.
2) Cash Management Bills (CMBs):
Cash Management Bills are a very short term G- securities typically issued for the maturity period of fewer than 91 days. CMBs were first introduced in 2010 by the Government of India with the consultation of RBI to fulfil the temporary mismatch of cash flow statement of Government of India. CMBs are same as treasury bills but the only difference is the shorter tenure.
See also, What are debentures?
3) Dated G- Securities or Government Bonds:
Dated Securities are one of the most popular types of government securities in India. Government Bonds or Dated G-Securities are those government securities which are typically issued for a longer tenure at a fixed or floating interest rate (Coupon). The coupon on Dated G-securities are typically paid on face value and the maturity period varies from 5 years to 40 years.
Government bonds or Dated G-securities are redeemable on a future specific date after a certain period of time (maturity period) and coupons are paid on the halfyearly basis.
Moreover, if the coupon payment date falls on Sunday or any other holiday, the payment is done on the next working day. On the other hand, if the redemption date falls on Sunday or other holidays, the redemption procedure will be initiated before the holiday.
Dated G-securities can also be classified further as below on the basis of various characteristics of the coupon offered.
Fixed Coupon Bonds:
The bonds which are issued at a fixed coupon for the entire maturity period are known as Fixed coupon bonds. Most of the bonds in India offer a fixed coupon on face value.
Floating Coupon Bonds:
Those bonds which offer a variable coupon that is announced at predecided periodically such as 6 months or 1 year are called Floating Coupon Bonds. These types of government securities in India were first introduced in September 1995.
Capital Indexed Bonds:
Capital Indexed Bonds are those types of bonds which were introduced in December 1997 to secure the principal amount of investors from the rate of inflation. Hence, capital indexed bonds offer inflation protection in future in addition to fixed coupon.
Inflation-indexed bonds provide the security against both coupons as well as the principal amount. Inflation index might be related to the Wholesale Price Index (WPI) or Consumer Price Index (CPI). These bonds were first introduced by the Government of India in June 2013 through RBI.
Call/ Put Options Bonds:
The bonds also provide features like buy back or sell after a stipulated period of time. This means if issuer wishes to buy back (Call option) the bonds, he can buy after a certain period of time, conversely, if the bonds-holder want to sell (Put option) to the issuer, he can do so.
Thus, the G-securities which offer Call or Put option or both are called Call/Put Option Bonds.
Sovereign Gold Bonds:
Sovereign Gold Bonds are special bonds which price depends on the price of a commodity such as gold. These bonds will be denominated in the unit of 1 gm gold and multiple of it. The investment limits vary from a minimum of 1 gm and a maximum of 4 kg for an individual.
4) State Development Loans (SDLs):
State Development Loans are similar to Dated Securities issued by the central government, however, these dated securities are issued by the state governments. The state government also raised funds from the market by selling securities such as bonds.
The procedure of issuing securities is the normal auction just like dated securities and also coupons are paid periodically (6 months).
For more detail information, You can also follow the FAQ section on the official website of Reserve Bank of India.
Hope you have gone through the above article and I have discussed each type of Government securities in India. Government Securities are one of the safest avenues of investment carry no risk as these are backed up by the Government of India. Not only it offers security but at the same time, it also provides a better rate of return (Coupon).