The government securities (G-secs) market is the largest segments of the long term debt market in India, accounting for nearly two-thirds of the issues in the primary market and more than four-fifths of the turnover in the secondary market.
From 1990 onwards, the G-secs market in India has witnessed significant developments such as:
1. Introduction of auction based price determination
2. Development of the RBI’s yield curve for marking to market the G-secs portfolios of the banks
3. Introduction of the system of primary dealers
4. Creation of Wholesalers Debt Market segment on the National Stock Exchange the first formal mechanism for the G-secs.
5. Introduction of DVP (delivery versus payment) for settlement
6. Increase in the number of players in the G-secs market with the facility for non-competitive bidding in auctions
7. Establishments of gilt-oriented mutual funds
8. Re-emergence of repos as an instruments of short term liquidity management
9. Phenomenal growth in the volume of secondary market transactions in G-secs.
10. Emergence of self regulating bodies such as the primary Dealers Association of India (PDAI) and Fixed Income and Money Market Dealers association (FIMMDA).
Some others developments on the anvil are to establish a Clearing Corporation with State Bank of India as the chief promoters, to introduce an order driven screen based trading system in G-secs to promote retail access, and to replace the Public Debt Act with the Government Securities Act.
The issue of G-secs is regulated by the Reserve Bank of India under the Public Debt Act (which is to be replaced by the Government Securities Act) .
G secs are issued through an auction mechanism. The Reserve Bank of India (RBI),which essentially serves as the mechanism banker to the central and state governments announces the auction of G-secs through a press notification and invites sealed bids from prospective investors like banks, insurance companies, mutual funds, and so on. The RBI opens the sealed bids at an appointed time and makes allotment on the basis of the cutoff price.
Two systems of treasury auctions are widely used all over the world: (1) French auction (or discriminatory price action); (2) Dutch auction (or uniform price auction).
In a French auction, successful bidders pay the actual price (yield) the bid for whereas in a Dutch auction successful bidders pay a uniform price which is usually the cut off price (yield). Till recently, the RBI was following the French auction. The credit policy of 2001-2002 announced that the government would experiment with the Dutch auction. The auction notice would specify whether the auction will be a Dutch auction or a French auction.
Certain categories of prospective investors can submit non-competitive bids. Those who submit such bids receive allotment (from a small portion reserved of them) at the weighted average price of all successful bids.
Participants in the G-secs Market:
Banks are the largest holders of G-secs. About one-third of the net demand and time liabilities of the banks are invested in G-secs mainly to meet statutory liquidity requirements and partly for investment purposes. Apart from banks, insurance companies and provident funds have substantial holdings of G-secs almost one fifth of the outstanding G-secs are held by these institutions. Other investors in G-secs include mutual funds, primary and satellite dealers and trusts.
The RBI provides the facility of Subsidiary General Ledger (SGL) account to large banks and financial institutions so that it can hold their investment in G-secs and treasury bills in the electronic book entry form. These institutions can settle their trade in securities through a DVP (delivery versus payment) mechanism, which ensures a simultaneous transfer of funds and securities. Investors who do not have access to the SGL account system can open a constituent SGL account with entities authorized by the RBI for this purpose.