Government Security

A Government Security is a debt instrument issued either by the Central Government of India or by the State Governments, and which is tradeable. The Central Government issues both bills (original maturities under one year) and bonds; State Governments issue only bonds, known as State Government Securities (SGSs).

G-Secs are considered risk-free, with nearly no risk of default. Each security carries a unique ISIN, tagged to it at issuance.

The G-Sec market is the most active segment of the Indian fixed income market, and it does three jobs at once: it funds the government, it supplies the benchmark interest rates used to price other products and schemes, and it serves as an indirect channel for monetary policy. Which is why a client who never buys one is still affected by it — every loan and deposit rate they meet is priced off this curve.

RBI runs the plumbing. It notifies an issuance calendar in March (for sales between April and September) and again in September (for October to March), with notified amounts announced well in advance. The Public Debt Office of RBI handles the issue, the coupon payments and the principal repayment; RBI is the depository of Government securities under the legal provisions, and acts as both merchant banker and Registrar and Transfer Agent for the issue.

Two conventions that run in opposite directions and are routinely examined: when a coupon payment date falls on a holiday, the coupon is paid on the next working day; when a maturity date falls on a holiday, redemption proceeds are paid on the previous working day.

The instrument family, in the workbook's order: T-bills (91, 182 and 364 days, zero coupon, issued at a discount and redeemed at par, weekly auctions); CMBs (maturing within 91 days, for temporary cash flow mismatches, launched 2010); dated securities (one to fifty years, fixed or floating coupon paid semi-annually — the largest component); Floating Rate Bonds (first issued September 1995, coupons reset at pre-announced intervals, mostly off the 182-day T-bill rate); Zero Coupon Bonds (last issued 1996); Capital Indexed Bonds (a five-year CIB issued December 1997, principal linked to an inflation index); Inflation Indexed Bonds (WPI-linked from June 2013, CPI-linked for retail from December 2013); bonds with call/put options (6.72% GS 2012, issued 18 July 2002); special securities (oil, food, fertiliser and bank recapitalisation bonds — not SLR eligible, so a marginally higher coupon); STRIPS; Sovereign Gold Bonds; Savings (Taxable) Bonds (minimum Rs 1,000 face value and multiples, no maximum, floating rate reset every six months from FY21); and SGSs, which are SLR eligible — though Uday bonds, issued by states for the financial turnaround of DISCOMs, are not.

Take the workbook's own security: 5.77% GS 2030, issued on 3 August 2020 and maturing on 3 August 2030. It pays a coupon every six months, on 3 February and 3 August, at 2.8850% of the Rs 100 face value — half of the annual 5.77%.

A client holds Rs 20,00,000 of face value.

Now strip it. When Rs 100 of 5.77% GS 2030 is stripped, the Rs 100 principal repayment at maturity becomes a principal STRIP and each Rs 2.885 coupon becomes a coupon STRIP, and all of them trade separately as independent zero coupon securities.

For this client's holding that is one principal STRIP of Rs 20,00,000 due August 2030, plus twenty coupon STRIPs of Rs 57,700 each. Suppose a school fee of Rs 57,700 falls due in August 2027: buying the single coupon STRIP maturing then delivers exactly that amount on exactly that date, with zero reinvestment risk, because there is no intervening coupon to reinvest. That is precisely the workbook's argument for STRIPS being attractive to retail and non-institutional investors — and it only works because STRIPS can be created out of all existing fixed coupon SLR-eligible G-Secs.

Chapter 9 (Investing in Fixed Income Securities), section 9.9 — Introduction to Government Debt Market — with the money market in 9.8 immediately before it. The section is unusually dense with recallable facts and the paper mines it accordingly: which T-bill tenors RBI auctions weekly (91, 182, 364), what a CMB is and its maximum maturity (under 91 days), who handles issue and repayment (RBI's Public Debt Office), when the issuance calendars are notified, how the semi-annual coupon on a named security such as 5.77% GS 2030 is computed, and which instruments are not SLR eligible.

• Central Government issues bills and bonds; State Governments issue only bonds. And the 14-day T-bill is not available for public consumption — RBI may use it to park state governments' short-term surpluses.
• A dated G-Sec pays semi-annually. "5.77% GS 2030" pays 2.8850% of face value twice a year, not 5.77% twice a year.
• The holiday conventions point opposite ways. Coupon on a holiday → next working day. Redemption on a holiday → previous working day.
• Risk-free means free of default risk, not free of risk. A G-Sec still carries interest rate risk, and its price falls when yields rise. Duration decides how far.
• Not every government-issued bond is SLR eligible. Special securities — oil, food, fertiliser, bank recapitalisation bonds — and Uday bonds are not, which is why special securities pay a marginally higher coupon than a similar-maturity G-Sec.
• Capital Indexed Bonds protect only the principal; Inflation Indexed Bonds protect principal and coupon flows. Both were discontinued after the initial issues.
• A STRIP is not something the government issues. It is created by separating the cash flows of an existing fixed coupon SLR-eligible G-Sec.