Government Securities

Government Securities

Subject :Economy

Context: 

Insurance companies’ holding of G-Secs rose at a faster clip than the growth for commercial banks.

Details:

• To meet the robust demand for credit, public sector banks are selling excess statutory liquidity ratio (SLR) securities, including G-Secs, in their investment portfolio whenever the yield comes down.
• Excess holdings of SLR securities of scheduled commercial banks were at 8.8 per cent of their deposits as at September-end 2022, according to RBI’s monetary policy report.

G-sec:

•  A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments.
• Types:
  • Short term (usually called treasury bills, with original maturities of less than one year) or
  • Long term (usually called Government bonds or dated securities with original maturity of one year or more).
• In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
• G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

How G sec issued?

• Competitive bidding- G-Secs are issued through auctions conducted by RBI on the electronic platform called the E-Kuber.
  • Commercial banks, scheduled UCBs, Primary Dealers, insurance companies and provident funds  are members of this electronic platform.
  • All members of E-Kuber can place their bids in the auction through this electronic platform.
  • All non-E-Kuber members including non-scheduled UCBs can participate in the primary auction through scheduled commercial banks or PDs (called as Primary Members-PMs).
• Non-Competitive Bidding (NCB):
  • Retail investors are allowed participation on a “non-competitive” basis in select auctions of dated Government of India (GoI) securities and Treasury Bills.
    • Retail investor-is any person, including individuals, firms, companies, corporate bodies, institutions, provident funds, trusts, and any other entity as may be prescribed by RBI.
  • Regional Rural Banks (RRBs) and Cooperative Banks shall be covered under this Scheme only in the auctions of dated securities.
  • State Governments, eligible provident funds in India, the Nepal Rastra Bank, Royal Monetary Authority of Bhutan and any Person or Institution, specified by the Bank, with the approval of Government, shall be covered under this scheme only in the auctions of Treasury Bills without any restriction on the maximum amount of bid for these entities and their bids will be outside the notified amount.
• The government securities can be sold in the secondary market either through an anonymous online trading mechanism on an exchange or through the over-the-counter sale.

Who Decides the Price of G-secs?

• The price of G-secs is decided by the Reserve Bank of India.
  • The bidders or bidding companies are allotted securities at an average price of auction decided by the RBI every week.
  • Most government securities are not tax-free.
    • If the government securities are sold within one year of purchase, a short term tax liability arises – making them taxable as per your current slab rate.
    • If the government securities are held for a longer period, the gains are taxed at 10% as long term capital gains.