GOVERNMENT SECURITIES MARKET
The market in government securities is significant part of the stock market in India. The government securities also dominate the Indian debt market both in term of outstanding stock as well as turnover. A large statutory borrowing is from the RBI providing the government with the ability to meet its requirements to finance large fiscal deficits. Fresh funds mobilized through the issue of government and semi-government securities and the private corporate securities accounted for 93 to 97 percent and 3 to 7 percent respectively of the total amount of fresh funds mobilized through the issue of all securities on the stock market during eighties. The share of government securities in the total capital raised varied between 94 and 80 percent during the period 1986 and 1989. Liquidity conditions in the market are affected by demand for credit from productive sector and other events such as foreign funds flow and monetary policy actions, with specialized knowledge about the market conditions, reserve bank is in a position to advise the government about the appropriate timing of debt issue.
The marketable debt issued by the government and semi-government bodies which represents a claim on the government is called government securities. It is also called as gilt-edged security. Government securities are issued for the purpose of refunding the maturing securities for advance refunding of securities which are not yet matured, and raising fresh cash resources. Treasury bills and bonds are the examples of government securities. One of the important features of the government securities is that they are considered to be totally secured financial instruments. They ensure safety of both capital and income. Central government securities are the safest amongst all securities. Thus government securities are unique and important financial instruments in the financial market of any country. These securities are normally issued in the denomination of Rs. 100 or Rs. 1000. These instruments are liquid and safe and hence the rate of interest on these instruments is relatively lower. Interest is paid half-yearly. There are three forms of central and state government securities Stock certificate, promissory note and bearer bond. Bearer bonds and stock certificates are not very popular in India. Government securities currently are in the form of promissory notes.
Government securities are issued by central government, state government, semi-government authorities like municipal corporations, port trusts, state electricity boards, public sector enterprises and other government agencies like IFCI, ICICI, IDBI, NABARD, SIDCs and housing boards. These agencies supply government securities and demand essentially comes from banks, financial institutions and other investors. RBI plays an active role in purchase and sale of these securities as a part of its monetary management exercise. There is no underwriting or guaranteeing required in the sale of government securities, as Reserve Bank of India is policy-bond to buy a substantial portion of the loan unsubscribe by the public. Dealings in government securities are made through the mechanism provided by the Reserve Bank of India. The brokers and dealers are approved by the RBI who are eligible to deal in these securities.
One of the important features of the government securities is that they offer wide ranging tax incentives to the investors. Therefore, these securities are popular in the market. Investors in these securities get tax rebate under the Income Tax Act. The central government securities have high profile of liquidity. However, state government and local government securities have limited liquidity. The government securities market in India has two segments, namely, primary market and secondary market. The issue of securities by central and state government constitutes the primary market. The secondary market comprises the exchange of these securities by the banks, financial institutions, insurance companies, provident funds trusts, primary dealers, individuals and Reserve Bank of India.
The Public Debt Office (PDO) of the RBI undertakes to issue government securities. A notification for the issue of securities is made a few days before the public subscription is open. The opening of subscription depends on the response of the market and varies between two to three days. The issue is made in a number of branches in order to avoid flooding of securities n the market. If facilitates smooth subscription to securities and helps to avoid sudden liquidity problems in the market. The offices of RBI and SBI receive applications for the securities. Government reserves the rights to retain over-subscription up to a pre-specified percentage which is normally 10 percent in excess of the notified amount of issue.
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