A STUDY ON

Government securities
A Mini Project Report submitted to JNTU University, KAKINADA In Partial fulfillment of the requirements for the Award of the Degree of

MASTER OF BUSINESS ADMINISTRATION In the subject

SECURITY ANALYSIS AND PROTFOLIO MANAGEMENT

By S. Narayanarao (Reg. No. 11pm1e0014) Under the Guidance of Sri B. BALARAM M.Com, M.B.A., M.Phil, (PhD) Senior Assistant Professor

Department of Management Studies

ADITYA INSTITUTE OF TECHNOLOGY AND MANAGEMENT,
(Affiliated To JNTU Kakinada, Approved By AICTE and Accredited By NBA) TEKKALI, SRIKAKULAM. 2011-2013

Contents
Introduction Investment alternatives Government securities analysis Suggestions conclusion

Introduction

Government Securities futures, which are the most voluminous exchange traded products in the world, are back in focus with the RBI announcement to introduce Interest Rate futures. This article analyzes the move, in light of the recommendations made by the RBI committee, and the factors that led to the IRF market failure, when introduced in 2003. Presently, favorable factors in the economy- like banks being allowed to take trading positionsare pitted against

impediments, like patchy liquidity. In such a conflicting situation, the success of this market will depend on the astute handling of these factors. Government security (G-Sec) means a security created and issued by the Government for the purpose of raising a public loan or any other purpose as notified by the Government in the Official Gazette and having one of the following forms.

a Government Promissory Note (GPN) payable to or to the order of a certain person; or

a bearer bond payable to a bearer; or a stock; or a bond held in a Bond Ledger Account (BLA).

Government Securities Act, 2006

The Government Securities Act, 2006 (G S Act) is an Act to consolidate and amend the laws relating to Government securities and its management by the RBI and for matters connected therewith.

Various Investment Alternatives

Corporate bonds: - A commercial surety bond is sometimes referred to as a "non-contract bond" because it does not guarantee a specific contract like a construction bond would. However, commercial bonds are more commonly referred to as "license and permit bonds."

Preference shares: -Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation.

Equity shares: - Equity shares are those shares which are ordinary in the course of company's business. They are also called as ordinary shares. These share holders do not enjoy preference regarding payment of dividend and- repayment of capital. Derivatives: - A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. Government Securities: - A government debt obligation (local or national) backed by the credit and taxing power of a country with very little risk of default. Life Insurance: - A protection against the loss of income that would result if the insured passed away. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured. Private Insurance Companies:- A company that offers insurance policies to the public, either by selling directly to an individual or through another source such as an employee's benefit plan. An insurance company is usually comprised of multiple insurance agents. Unit trust of India:- An registered of investment company which purchases a fixed, unmanaged portfolio of income-producing securities and then sells shares in the trust to investors. The major difference between a Unit Trust and a mutual fund is that a mutual fund is actively managed, while a unit investment trust is not managed at all. Commercial Banks:- An institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. Provident Fund:- A fund into which the employer and the employee both pay money regularly, so that when the employee retires or leave A fund into which the employer and the employee both pay money regularly, so that when the employee retires or leaves the company, he or she receives a sum of money.

 Post Office Schemes:- Indian Post offers several Savings Schemes which are safe, ( earlier tax rebates, now are interest earned in these schemes are taxed under the income head of Income from Other Sources ) and relatively more interest rates than bank deposits National Savings Schemes: - Program designed to encourage savings through small but regular deposits or automatic deductions from salaries or wages. Fixed Deposit Schemes in companies: - In deposit terminology, the term Fixed Deposit refers to a savings account or certificate of deposit that pays a fixed rate of interest until a given maturity date. Funds placed in a Fixed Deposit usually cannot be withdrawn prior to maturity or they can perhaps only be withdrawn with advanced notice and/or by having a penalty assessed. New Instruments: - In general, any financial security such as a bond, stock, check, etc. Money market securities (such as a Treasury Bill, U.S. government bonds, or commercial paper) and capital market securities (such as a mortgage, Certificate of Deposit, or long-term bonds) are also referred to as instruments. Financial Engineering Securities: - Financial Engineering is employing theoretical finance and computer modeling skills to make pricing, hedging, trading and portfolio management decisions. Utilizing various derivative securities and other methods, financial engineering aims to precisely control the financial risk that an entity takes on.

Non-Bank Finance Companies: - Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. These institutions are not allowed to take deposits from the public. Nonetheless, all operations of these institutions are still exercised under banking regulation Mutual Funds: - An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's

investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. Land and House Property: -A mortgage loan is a loan secured by real property through the use of a mortgage loan which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan. Gold: A particularly valuable precision metal Gold is an element with the atomic number 79. It is used for jewelry, electronics and for other purposes. Historically, gold was used in many cultures as the basis for currency, but this is no longer the case. Investments in gold are often used as a hedge against inflation because it tends to maintain its value over time. Silver: -Silver was one of the earliest metals known to humans, and it has been considered a precious metal since ancient times. Silver has been used as a form of currency by more people throughout history than any other metal, even gold. Although it is usually found in ores with less rare metals, such as copper, lead, and Zink, silver was apparently discovered in nuggets form, called native silver, about 4000 B.C. Silver utensils and ornaments have been found in ancient tombs

Coins and Stamp collection: -Coins of interest to collectors often include those that circulated for only a brief time, coins with mint errors and especially beautiful or historically significant pieces. Coin collecting can be differentiated from numismatics in that the latter is the systematic study of currency The hobby involving the collection and study of postage stamps and their history is called 'stamp collecting'. It can also be called 'philately'; both terms are correct. This term also refers to collecting stamps for reasons other than historical study: some people collect stamps because of the illustrations used on individual stamps, flowers, or aircraft, or buildings, for example; others collect stamps of a particular color. Diamonds & Antiques: - A diamond stimulant may be artificial, natural, or in some cases a combination thereof. While their material properties depart markedly from those of diamond

An antique is an old collectable item. It is collected or desirable because of its age (see definition), beauty, rarity, condition, utility, personal

emotional connection, and/or other unique features. It is an object that represents a previous era or time period in human society

Features of Government Securities:

Issued at face value

 No default risk as the securities carry sovereign guarantee. Ample liquidity as the investor can sell the security in the secondary market Interest payment on a half yearly basis on face value No tax deducted at source Can be held in Demat form. Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change (unless intrinsic to the security like FRBs - Floating Rate Bonds). Redeemed at face value on maturity Maturity ranges from of 2-30 years.

Securities qualify as SLR (Statutory Liquidity Ratio)

investments (unless otherwise stated).

The dated Government securities market in India has two segments:

Primary Market:

The Primary Market consists of the issuers of the securities, viz., Central and Sate Government and buyers include Commercial Banks, Primary Dealers, Financial Institutions, Insurance Companies & Co-operative Banks. RBI also has a scheme of non-competitive bidding for small investors (see SBI DFHI Invest on our website for further details). Secondary Market: The Secondary Market includes Commercial banks, Financial Institutions, Insurance Companies, Provident Funds, Trusts, Mutual Funds, Primary Dealers and Reserve Bank of India. Even Corporate and Individuals can invest in Government Securities. The eligibility criteria is specified in the relative Government notification.

Auctions
Auctions for government securities are either multiple- price auctions or uniform price auction - either yield based or price based.

Yield Based:
In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned. The bidders submit bids in term of the yield at which they are ready to buy the security. If the Bid is more than the cut-off yield then its rejected otherwise it is accepted

Price Based:
In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned, as well as the coupon rate. The bidders submit bids in terms of the price. This method of auction is normally used in case of reissue of existing Government Securities. Bids at price lower then the cut off price are rejected and bids higher than the cut off price are accepted.

What is a Government Security?

Government security means a security created

and issued by the Government for the purpose of raising a public loan or for any other purpose as may be notified by the Government in the Official Gazette and having one of the forms mentioned in The Public Debt Act, 1944.

A Government security may, subject to such terms and conditions as may be specified, be in such forms as may be prescribed or in one of the following forms, namely: (i) a Government promissory note payable to or to the order of a certain persons; or (ii) a bearer, bond payable to bearer; or (iii) a stock; or (iv) a bond held in a bond ledger account.

2. Why should one invest in Government securities?

Holding of cash in excess of the day-to-day needs of a bank does not give any return to it. Investment in gold has attendant problems in regard to appraising its purity, valuation, safe custody, etc. Investing in Government securities has the following advantages:

Besides providing a return in the form of coupons (interest), Government securities offer the maximum safety

as they carry the Sovereigns commitment for payment of interest and repayment of principal.

They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need for safekeeping.

Government securities are available in a wide range of maturities from 91 days to as long as 30 years to suit the duration of a bank's liabilities.

Government securities can be sold easily in the secondary market to meet cash requirements.

Government securities can also be used as collateral to borrow funds in the repo market.

Besides banks, insurance companies and other large investors, smaller investors like Co-operative bankRegional Rural Banks, Provident Funds are also required to hold Government securities as indicated below:

Primary (Urban) Co-operative Banks Rural Co-operative Banks Regional Rural Banks (RRBs) Provident funds and other entities

Types of Government Securities

Government Securities are of the following types:-

Dated Government securities:

Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face value, payable at fixed time periods (usually halfyearly).

They are issued at face value. Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value.

 The security is redeemed at par (face value) on its maturity date. Zero Coupon bonds : Zero Coupon bonds are bonds issued at discount to face value and redeemed at par. These were issued first on January 19, 1994 and were followed by two subsequent issues in 1994-95 and 1995-96 respectively. The key features of these securities are: They are issued at a discount to the face value. The tenor of the security is fixed. The securities do not carry any coupon or interest rate. The security is redeemed at par (face value) on its .

Partly Paid Stock :

Partly Paid Stock is stock where payment of principal amount is made in installments over a given time frame. It meets the needs of investors with regular flow of funds and the need of Government when it does not need funds immediately. The first

issue of such stock of eight year maturity was made on November 15, 1994 for Rs. 2000 crore. Such stocks have been issued a few more times thereafter. The key features of these securities are: They are issued at face value, but this amount is paid in installments over a specified period. Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date. Floating Rate Bonds Bonds with Call/Put Option Capital indexed Bonds

Objects

* Undertake debt and cash management operations for the Central and State Governments with the objective of minimizing the cost of Government borrowing over a long period consistent with the objective of the monetary policy. * * Develop a deep and liquid Government Securities Market. Regulate the government securities market.

* Improve the transmission mechanism for monetary policy and facilitate the use of indirect instruments of monetary policy. * Develop a yield curve across maturities so as to provide benchmarks for development of debt markets. * Facilitate the development of hedging products to manage liquidity and market risk.

Investment suggestions of government securities

Check whether the scheme falls within FSA regulation: this is essential. Could it possibly be construed or interpreted as an investment scheme Carry out a careful review of the representations made about the scheme, whether in the form of the brochure or, as is often the case, online. If a rate of return is shown, is it indicative or guaranteed and if so by whom and for how long? Look carefully at the exit routes off ered; while the return on capital placed within the scheme may appear att reactive, if the underlying capital is locked in, or, more seriously, is at risk, then something is very

wrong. If Im unsure, I remind myself that the early investors in Charles Ponzis and Bernard Mad off s arrangements eulogized over their investments until they lost everything. Verify how the underlying assets are being held, what security exists for the parties and issues such as in whose name are the assets be registered. When it is proposed that individual assets are to be held for them check how they are allocated to individual investors, especially if there are assets that might vary in quality such as precious stones. Is there any way of checking on the assets in the scheme? Is it to be audited regularly and if so by whom? When establishing that trustees are being appointed to hold the assets, clearly there is a need to check that they are genuinely dependent of the promoters of the scheme.

Conclusion:
We are therefore committed to taking resolute action to address financial market tensions, restore confidence and revive growth. We reaffirm our commitment to preserve the EMU and put it on a more solid basis for the future. Strong, smart, sustainable and inclusive growth, based on sound public finances, structural reforms and investment to boost competitiveness, remains our key priority. The inverstment have be more care full invested the all dymention.