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Government Securities Market
Feb 15, 2011 Government Securities Market in India A Primer
July 09, 2012 The Government Securities Act, 2006 and The Government
Securities Regulations, 2007
Jun 03, 2013 Additional FAQs on Inflation Indexed Bonds (Accounting Norms)
May 28, 2013 Inflation Indexed Bonds (IIBs)
Oct 18, 2012 NDS-OM web
May 11, 2000 Gilt Funds
Oct 03, 2011 Investment Opportunities for Provident Funds
Oct 11, 2011 Non-competitive Bidding Facility for Dated Government
Securities
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1. What is a Government Security?
1.1 A Government security is a tradable instrument issued by the Central Government or the
State Governments. It acknowledges the Governments debt obligation. Such securities are 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). Government securities carry practically no risk of default and,
hence, are called risk-free gilt-edged instruments. Government of India also issues savings
instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (oil
bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.). They are, usually
not fully tradable and are, therefore, not eligible to be SLR securities.
a. Treasury Bills (T-bills)
1.2 Treasury bills or T-bills, which are money market instruments, are short term debt
instruments issued by the Government of India and are presently issued in three tenors, namely,
91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. They
are issued at a discount and redeemed at the face value at maturity. For example, a 91 day
Treasury bill of Rs.100/- (face value) may be issued at say Rs. 98.20, that is, at a discount of say,

Rs.1.80 and would be redeemed at the face value of Rs.100/-. The return to the investors is the
difference between the maturity value or the face value (that is Rs.100) and the issue price (for
calculation of yield on Treasury Bills please see answer to question no. 26). The Reserve Bank of
India conducts auctions usually every Wednesday to issue T-bills. Payments for the T-bills
purchased are made on the following Friday. The 91 day T-bills are auctioned on every
Wednesday. The Treasury bills of 182 days and 364 days tenure are auctioned on alternate
Wednesdays. T-bills of of 364 days tenure are auctioned on the Wednesday preceding the
reporting Friday while 182 T-bills are auctioned on the Wednesday prior to a non-reporting
Fridays. The Reserve Bank releases an annual calendar of T-bill issuances for a financial year in
the last week of March of the previous financial year. The Reserve Bank of India announces the
issue details of T-bills through a press release every week.
b. Cash Management Bills (CMBs)
1.3 Government of India, in consultation with the Reserve Bank of India, has decided to issue a
new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary
mismatches in the cash flow of the Government. The CMBs have the generic character of T-bills
but are issued for maturities less than 91 days. Like T-bills, they are also issued at a discount and
redeemed at face value at maturity. The tenure, notified amount and date of issue of the CMBs
depends upon the temporary cash requirement of the Government. The announcement of their
auction is made by Reserve Bank of India through a Press Release which will be issued one day
prior to the date of auction. The settlement of the auction is on T+1 basis. The non-competitive
bidding scheme (referred to in paragraph number 4.3 and 4.4 under question No. 4) has not been
extended to the CMBs. However, these instruments are tradable and qualify for ready forward
facility. Investment in CMBs is also reckoned as an eligible investment in Government securities
by banks for SLR purpose under Section 24 of the Banking Regulation Act, 1949. First set of
CMBs were issued on May 12, 2010.
c. Dated Government Securities
1.4 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 half-yearly).
The tenor of dated securities can be up to 30 years.
The Public Debt Office (PDO) of the Reserve Bank of India acts as the
registry / depository of Government securities and deals with the issue,
interest payment and repayment of principal at maturity. Most of the dated
securities are fixed coupon securities.
The nomenclature of a typical dated fixed coupon Government security contains the following
features - coupon, name of the issuer, maturity and face value. For example, 7.49% GS 2017
would mean:

Coupon : 7.49% paid on face value

Name of Issuer : Government of India
Date of Issue : April 16, 2007
Maturity : April 16, 2017
Coupon Payment Dates : Half-yearly (October 16 and April 16) every year
Minimum Amount of issue/ sale : Rs.10,000
In case there are two securities with the same coupon and are maturing in the same year, then one
of the securities will have the month attached as suffix in the nomenclature. For example, 6.05%
GS 2019 FEB, would mean that Government security having coupon 6.05 % that mature in
February 2019 along with the other security with the same coupon, namely,, 6.05% 2019 which
is maturing in June 2019.
If the coupon payment date falls on a Sunday or a holiday, the coupon payment is made on the
next working day. However, if the maturity date falls on a Sunday or a holiday, the redemption
proceeds are paid on the previous working day itself.
1.5 The details of all the dated securities issued by the Government of India are available on the
RBI website at http://www.rbi.org.in/Scripts/financialmarketswatch.aspx. Just as in the case of
Treasury Bills, dated securities of both, Government of India and State Governments, are issued
by Reserve Bank through auctions. The Reserve Bank announces the auctions a week in advance
through press releases. Government Security auctions are also announced through
advertisements in major dailies. The investors, are thus, given adequate time to plan for the
purchase of government securities through such auctions.
A specimen of a dated security in physical form is given at Annex 1.
1.6 Instruments:
i.

Fixed Rate Bonds These are bonds on which the coupon rate is fixed for the entire life
of the bond. Most Government bonds are issued as fixed rate bonds.
For example 8.24%GS2018 was issued on April 22, 2008 for a tenor of 10 years
maturing on April 22, 2018. Coupon on this security will be paid half-yearly at 4.12%
(half yearly payment being the half of the annual coupon of 8.24%) of the face value on
October 22 and April 22 of each year.

ii.

Floating Rate Bonds Floating Rate Bonds are securities which do not have a fixed
coupon rate. The coupon is re-set at pre-announced intervals (say, every six months or
one year) by adding a spread over a base rate. In the case of most floating rate bonds
issued by the Government of India so far,the base rate is the weighted average cut-off
yield of the last three 364- day Treasury Bill auctions preceding the coupon re-set date
and the spread is decided through the auction. Floating Rate Bonds were first issued in
September 1995 in India.
For example, a Floating Rate Bond was issued on July 2, 2002 for a tenor of 15 years,

thus maturing on July 2, 2017. The base rate on the bond for the coupon payments was
fixed at 6.50% being the weighted average rate of implicit yield on 364-day Treasury
Bills during the preceding six auctions. In the bond auction, a cut-off spread (markup
over the benchmark rate) of 34 basis points (0.34%) was decided. Hence the coupon for
the first six months was fixed at 6.84%.
iii.

Zero Coupon Bonds Zero coupon bonds are bonds with no coupon payments. Like
Treasury Bills, they are issued at a discount to the face value. The Government of India
issued such securities in the nineties, It has not issued zero coupon bond after that.

iv.

Capital Indexed Bonds These are bonds, the principal of which is linked to an accepted
index of inflation with a view to protecting the holder from inflation. A capital indexed
bond, with the principal hedged against inflation, was issued in December 1997. These
bonds matured in 2002. The government is currently working on a fresh issuance of
Inflation Indexed Bonds wherein payment of both, the coupon and the principal on the
bonds, will be linked to an Inflation Index (Wholesale Price Index). In the proposed
structure, the principal will be indexed and the coupon will be calculated on the indexed
principal. In order to provide the holders protection against actual inflation, the final WPI
will be used for indexation.

v.

Bonds with Call/ Put Options Bonds can also be issued with features of optionality
wherein the issuer can have the option to buy-back (call option) or the investor can have
the option to sell the bond (put option) to the issuer during the currency of the bond.
6.72%GS2012 was issued on July 18, 2002 for a maturity of 10 years maturing on July
18, 2012. The optionality on the bond could be exercised after completion of five years
tenure from the date of issuance on any coupon date falling thereafter. The Government
has the right to buyback the bond (call option) at par value (equal to the face value) while
the investor has the right to sell the bond (put option) to the Government at par value at
the time of any of the half-yearly coupon dates starting from July 18, 2007.

vi.

Special Securities - In addition to Treasury Bills and dated securities issued by the
Government of India under the market borrowing programme, the Government of India
also issues, from time to time, special securities to entities like Oil Marketing Companies,
Fertilizer Companies, the Food Corporation of India, etc. as compensation to these
companies in lieu of cash subsidies. These securities are usually long dated securities
carrying coupon with a spread of about 20-25 basis points over the yield of the dated
securities of comparable maturity. These securities are, however, not eligible SLR
securities but are eligible as collateral for market repo transactions. The beneficiary oil
marketing companies may divest these securities in the secondary market to banks,
insurance companies / Primary Dealers, etc., for raising cash.

vii.

Steps are being taken to introduce new types of instruments like STRIPS (Separate
Trading of Registered Interest and Principal of Securities). Accordingly, guidelines for
stripping and reconstitution of Government securities have been issued. STRIPS are
instruments wherein each cash flow of the fixed coupon security is converted into a
separate tradable Zero Coupon Bond and traded. For example, when Rs.100 of the

8.24%GS2018 is stripped, each cash flow of coupon (Rs.4.12 each half year) will become
coupon STRIP and the principal payment (Rs.100 at maturity) will become a principal
STRIP. These cash flows are traded separately as independent securities in the secondary
market. STRIPS in Government securities will ensure availability of sovereign zero
coupon bonds, which will facilitate the development of a market determined zero coupon
yield curve (ZCYC). STRIPS will also provide institutional investors with an additional
instrument for their asset- liability management. Further, as STRIPS have zero
reinvestment risk, being zero coupon bonds, they can be attractive to retail/noninstitutional investors. The process of stripping/reconstitution of Government securities is
carried out at RBI, Public Debt Office (PDO) in the PDO-NDS (Negotiated Dealing
System) at the option of the holder at any time from the date of issuance of a Government
security till its maturity. All dated Government securities, other than floating rate bonds,
having coupon payment dates on 2nd January and 2nd July, irrespective of the year of
maturity are eligible for Stripping/Reconstitution. Eligible Government securities held in
the Subsidiary General Leger (SGL)/Constituent Subsidiary General Ledger (CSGL)
accounts maintained at the PDO, RBI, Mumbai. Physical securities shall not be eligible
for stripping/reconstitution. Minimum amount of securities that needs to be submitted for
stripping/reconstitution will be Rs. 1 crore (Face Value) and multiples thereof.
d. State Development Loans (SDLs)
1.7 State Governments also raise loans from the market. SDLs are dated securities issued through
an auction similar to the auctions conducted for dated securities issued by the Central
Government (see question 3 below). Interest is serviced at half-yearly intervals and the principal
is repaid on the maturity date. Like dated securities issued by the Central Government, SDLs
issued by the State Governments qualify for SLR. They are also eligible as collaterals for
borrowing through market repo as well as borrowing by eligible entities from the RBI under the
Liquidity Adjustment Facility (LAF).
2. Why should one invest in Government securities?
2.1 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.

The settlement system for trading in Government securities, which is based on Delivery
versus Payment (DvP), is a very simple, safe and efficient system of settlement. The DvP
mechanism ensures transfer of securities by the seller of securities simultaneously with
transfer of funds from the buyer of the securities, thereby mitigating the settlement risk.

Government security prices are readily available due to a liquid and active secondary
market and a transparent price dissemination mechanism.

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

A. Primary (Urban) Co-operative Banks

2.2 Section 24 of the Banking Regulation Act 1949, (as applicable to co-operative societies)
provides that every primary (urban) cooperative bank shall maintain liquid assets, which at the
close of business on any day, should not be less than 25 percent of its demand and time liabilities
in India (in addition to the minimum cash reserve requirement). Such liquid assets shall be in the
form of cash, gold or unencumbered Government and other approved securities. This is
commonly referred to as the Statutory Liquidity Ratio (SLR) requirement.
2.3 All primary (urban) co-operative banks (UCBs) are presently required to invest a certain
minimum level of their SLR holdings in the form of Government and other approved securities
as indicated below:
a. Scheduled UCBs have to hold 25 per cent of their SLR requirement in Government and
other approved securities.
b. Non-scheduled UCBs with Demand and Time Liabilities (DTL) more than Rs. 25 crore
have to hold 15 per cent of their SLR requirement in Government and other approved
securities.
c. Non-scheduled UCBs with DTL less than Rs. 25 crore have to hold 10 per cent of their
SLR requirements in Government and other approved securities.
B. Rural Co-operative Banks
2.4 As per Section 24 of the Banking Regulation Act 1949, the State Co-operative Banks (SCBs)
and the District Central Co-operative Banks (DCCBs) are required to maintain in cash, gold or
unencumbered approved securities, valued at a price not exceeding the current market price, an
amount which shall not, at the close of business on any day, be less than 25 per cent of its

demand and time liabilities as part of the SLR requirement. DCCBs are allowed to meet their
SLR requirement by maintaining cash balances with their respective State Co-operative Bank.
C. Regional Rural Banks (RRBs)
2.5 Since April 2002, all the RRBs are required to maintain their entire Statutory Liquidity Ratio
(SLR) holdings in Government and other approved securities. The current SLR requirement for
the RRBs is 24 percent of their Demand and Time Liabilities (DTL).
2.6 Presently, RRBs have been exempted from the 'mark to market' norms in respect of their
SLR-securities. Accordingly, RRBs have been given freedom to classify their entire investment
portfolio of SLR-securities under 'Held to Maturity' and value them at book value.
D. Provident funds and other entities
2.7 The non-Government provident funds, superannuation funds and gratuity funds are required
by the Central Government, effective from January 24, 2005, to invest 40 per cent of their
incremental accretions in Central and State Government securities, and/or units of gilt funds
regulated by the Securities and Exchange Board of India (SEBI) and any other negotiable
security fully and unconditionally guaranteed by the Central/State Governments. The exposure of
a trust to any individual gilt fund, however, should not exceed five per cent of its total portfolio
at any point of time. The investment guidelines for non-government PFs have been recently
revised in terms of which investments up to 55% of the investible funds are permitted in a basket
of instruments consisting of Central Government securities, State Government securities and
units of gilt funds, effective from April 2009.
3. How are the Government Securities issued?
3.1 Government securities are issued through auctions conducted by the RBI. Auctions are
conducted on the electronic platform called the NDS Auction platform. Commercial banks,
scheduled urban co-operative banks, Primary Dealers (a list of Primary Dealers with their contact
details is given in Annex 2), insurance companies and provident funds, who maintain funds
account (current account) and securities accounts (SGL account) with RBI, are members of this
electronic platform. All members of PDO-NDS can place their bids in the auction through this
electronic platform. All non-NDS members including non-scheduled urban co-operative banks
can participate in the primary auction through scheduled commercial banks or Primary Dealers.
For this purpose, the urban co-operative banks need to open a securities account with a bank /
Primary Dealer such an account is called a Gilt Account. A Gilt Account is a dematerialized
account maintained by a scheduled commercial bank or Primary Dealer for its constituent (e.g., a
non-scheduled urban co-operative bank).
3.2 The RBI, in consultation with the Government of India, issues an indicative half-yearly
auction calendar which contains information about the amount of borrowing, the tenor of
security and the likely period during which auctions will be held. A Notification and a Press
Communique giving exact particulars of the securities, viz., name, amount, type of issue and
procedure of auction are issued by the Government of India about a week prior to the actual date

of auction. RBI places the notification and a Press Release on its website (www.rbi.org.in) and
also issues an advertisement in leading English and Hindi newspapers. Information about
auctions is also available with the select branches of public and private sector banks and the
Primary Dealers.
4. What are the different types of auctions used for issue of securities?
Prior to introduction of auctions as the method of issuance, the interest rates were
administratively fixed by the Government. With the introduction of auctions, the rate of interest
(coupon rate) gets fixed through a market based price discovery process.
4.1 An auction may either be yield based or price based.
i.

Yield Based Auction: A yield based auction is generally conducted when a new
Government security is issued. Investors bid in yield terms up to two decimal places (for
example, 8.19 per cent, 8.20 per cent, etc.). Bids are arranged in ascending order and the
cut-off yield is arrived at the yield corresponding to the notified amount of the auction.
The cut-off yield is taken as the coupon rate for the security. Successful bidders are those
who have bid at or below the cut-off yield. Bids which are higher than the cut-off yield
are rejected. An illustrative example of the yield based auction is given below:
Yield based auction of a new security

Maturity Date: September 8, 2018

Coupon: It is determined in the auction (8.22% as shown in the

illustration below)

Auction date: September 5, 2008

Auction settlement date: September 8, 2008*

Notified Amount: Rs.1000 crore

* September 6 and 7 being holidays, settlement is done on September 8, 2008

under T+1 cycle.

Details of bids received in the increasing order of bid yields

Bid No. Bid Yield Amount of bid
(Rs. crore)

Cummulative
amount (Rs.Cr)

Price* with
coupon as

8.22%
1

8.19%

300

300

100.19

8.20%

200

500

100.14

8.20%

250

750

100.13

8.21%

150

900

100.09

8.22%

100

1000

100

8.22%

100

1100

100

8.23%

150

1250

99.93

8.24%

100

1350

99.87

The issuer would get the notified amount by accepting bids up to 5. Since
the bid number 6 also is at the same yield, bid numbers 5 and 6 would get
allotment pro-rata so that the notified amount is not exceeded. In the above
case each would get Rs. 50 crore. Bid numbers 7 and 8 are rejected as the
yields are higher than the cut-off yield.
*Price corresponding to the yield is determined as per the relationship
given under YTM calculation in question 24.
ii.

Price Based Auction: A price based auction is conducted when Government of India reissues securities issued earlier. Bidders quote in terms of price per Rs.100 of face value of
the security (e.g., Rs.102.00, Rs.101.00, Rs.100.00, Rs.99.00, etc., per Rs.100/-). Bids are
arranged in descending order and the successful bidders are those who have bid at or
above the cut-off price. Bids which are below the cut-off price are rejected. An
illustrative example of price based auction is given below:

Price based auction of an existing security 8.24% GS 2018

Maturity Date: April 22, 2018

Coupon: 8.24%

Auction date: September 5, 2008

Auction settlement date: September 8, 2008*

Notified Amount: Rs.1000 crore

* September 6 and 7 being holidays, settlement is done on September 8, 2008 under T+1 cycle.

Details of bids received in the decreasing order of bid price

Bid no. Price of bid

Amount of bid
(Rs. Cr)

Implicit
yield

Cumulative
amount

100.31

300

8.1912%

300

100.26

200

8.1987%

500

100.25

250

8.2002%

750

100.21

150

8.2062%

900

100.20

100

8.2077%

1000

100.20

100

8.2077%

1100

100.16

150

8.2136%

1250

100.15

100

8.2151%

1350

The issuer would get the notified amount by accepting bids up to 5. Since
the bid number 6 also is at the same price, bid numbers 5 and 6 would get
allotment in proportion so that the notified amount is not exceeded. In the
above case each would get Rs. 50 crore. Bid numbers 7 and 8 are rejected
as the price quoted is less than the cut-off price.
4.2 Depending upon the method of allocation to successful bidders, auction could be classified as
Uniform Price based and Multiple Price based. In a Uniform Price auction, all the successful
bidders are required to pay for the allotted quantity of securities at the same rate, i.e., at the
auction cut-off rate, irrespective of the rate quoted by them. On the other hand, in a Multiple
Price auction, the successful bidders are required to pay for the allotted quantity of securities at
the respective price / yield at which they have bid. In the example under (ii) above, if the auction
was Uniform Price based, all bidders would get allotment at the cut-off price, i.e., Rs.100.20. On
the other hand, if the auction was Multiple Price based, each bidder would get the allotment at
the price he/ she has bid, i.e., bidder 1 at Rs.100.31, bidder 2 at Rs.100.26 and so on.
4.3 An investor may bid in an auction under either of the following categories:
i. Competitive Bidding : In a competitive bidding, an investor bids at a specific price / yield and
is allotted securities if the price / yield quoted is within the cut-off price / yield. Competitive bids
are made by well informed investors such as banks, financial institutions, primary dealers,
mutual funds, and insurance companies. The minimum bid amount is Rs.10,000 and in multiples
of Rs.10,000 thereafter. Multiple bidding is also allowed, i.e., an investor may put in several bids
at various price/ yield levels.
ii. Non-Competitive Bidding : With a view to providing retail investors, who may lack skill and
knowledge to participate in the auction directly, an opportunity to participate in the auction
process, the scheme of non-competitive bidding in dated securities was introduced in January
2002. Non-competitive bidding is open to individuals, HUFs, RRBs, co-operative banks, firms,
companies, corporate bodies, institutions, provident funds, and trusts. Under the scheme, eligible
investors apply for a certain amount of securities in an auction without mentioning a specific
price / yield. Such bidders are allotted securities at the weighted average price / yield of the
auction. In the illustration given under 4.1 (ii) above, the notified amount being Rs.1000 crore,
the amount reserved for non-competitive bidding will be Rs.50 crore (5 per cent of the notified
amount as indicated below). Non-competitive bidders will be allotted at the weighted average
price which is Rs.100.26 in the given illustration. The participants in non-competitive bidding
are, however, required to hold a gilt account with a bank or PD. Regional Rural Banks and cooperative banks which hold SGL and Current Account with the RBI can also participate under
the scheme of non-competitive bidding without holding a gilt account.

4.4 In every auction of dated securities, a maximum of 5 per cent of the notified amount is
reserved for such non-competitive bids. In the case of auction for Treasury Bills, the amount
accepted for non-competitive bids is over and above the notified amount and there is no limit
placed. However, non-competitive bidding in Treasury Bills is available only to State
Governments and other select entities and is not available to the co-operative banks. Only one
bid is allowed to be submitted by an investor either through a bank or Primary Dealer. For
bidding under the scheme, an investor has to fill in an undertaking and send it along with the
application for allotment of securities through a bank or a Primary Dealer. The minimum amount
and the maximum amount for a single bid is Rs.10,000 and Rs.2 crore respectively in the case of
an auction of dated securities. A bank or a Primary Dealer can charge an investor up to maximum
of 6 paise per Rs.100 of application money as commission for rendering their services. In case
the total applications received for non-competitive bids exceed the ceiling of 5 per cent of the
notified amount of the auction for dated securities, the bidders are allotted securities on a pro-rata
basis.
4.5 Non-competitive bidding scheme has been introduced in the State Government securities
(SDLs) from August 2009. The aggregate amount reserved for the purpose in the case of SDLs is
10% of the notified amount (Rs.100 Crore for a notified amount of Rs.1000 Crore) and the
maximum amount an investor can bid per auction is capped at 1% of the notified amount (as
against Rs.2 Crore in Central Government securities). The bidding and allotment procedure is
similar to that of Central Government securities.
5. What are the Open Market Operations (OMOs)?
OMOs are the market operations conducted by the Reserve Bank of India by way of sale/
purchase of Government securities to/ from the market with an objective to adjust the rupee
liquidity conditions in the market on a durable basis. When the RBI feels there is excess liquidity
in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly,
when the liquidity conditions are tight, the RBI will buy securities from the market, thereby
releasing liquidity into the market.
5 (b) What is meant by buyback of Government securities?
Buyback of Government securities is a process whereby the Government of India and State
Governments buy back their existing securities from the holders. The objectives of buyback can
be reduction of cost (by buying back high coupon securities), reduction in the number of
outstanding securities and improving liquidity in the Government securities market (by buying
back illiquid securities) and infusion of liquidity in the system. Governments make provisions in
their budget for buying back of existing securities. Buyback can be done through an auction
process or through the secondary market route, i.e., NDS/NDS-OM.
6. What is Liquidity Adjustment Facility (LAF)?
LAF is a facility extended by the Reserve Bank of India to the scheduled commercial banks
(excluding RRBs) and primary dealers to avail of liquidity in case of requirement or park excess
funds with the RBI in case of excess liquidity on an overnight basis against the collateral of

Government securities including State Government securities. Basically LAF enables liquidity
management on a day to day basis. The operations of LAF are conducted by way of repurchase
agreements (repos and reverse repos please refer to paragraph numbers 30.4 to 30.8 under
question no. 30 for details) with RBI being the counter-party to all the transactions. The interest
rate in LAF is fixed by the RBI from time to time. Currently the rate of interest on repo under
LAF (borrowing by the participants) is 6.25% and that of reverse repo (placing funds with RBI)
is 5.25%. LAF is an important tool of monetary policy and enables RBI to transmit interest rate
signals to the market.
7. How and in what form can Government Securities be held?
7.1 The Public Debt Office (PDO) of the Reserve Bank of India, Mumbai acts as the registry and
central depository for the Government securities. Government securities may be held by
investors either as physical stock or in dematerialized form. From May 20, 2002, it is mandatory
for all the RBI regulated entities to hold and transact in Government securities only in
dematerialized (SGL) form. Accordingly, UCBs are required to hold all Government securities in
demat form.
a. Physical form: Government securities may be held in the form of stock certificates. A
stock certificate is registered in the books of PDO. Ownership in stock certificates can
not be transferred by way of endorsement and delivery. They are transferred by executing
a transfer form as the ownership and transfer details are recorded in the books of PDO.
The transfer of a stock certificate is final and valid only when the same is registered in
the books of PDO.
b. Demat form: Holding government securities in the dematerialized or scripless form is
the safest and the most convenient alternative as it eliminates the problems relating to
custody, viz., loss of security. Besides, transfers and servicing are electronic and hassle
free. The holders can maintain their securities in dematerialsed form in either of the two
ways:
i.

SGL Account: Reserve Bank of India offers Subsidiary General Ledger Account
(SGL) facility to select entities who can maintain their securities in SGL accounts
maintained with the Public Debt Offices of the Reserve Bank of India.

ii.

Gilt Account: As the eligibility to open and maintain an SGL account with the
RBI is restricted, an investor has the option of opening a Gilt Account with a bank
or a Primary Dealer which is eligible to open a Constituents' Subsidiary General
Ledger Account (CSGL) with the RBI. Under this arrangement, the bank or the
Primary Dealer, as a custodian of the Gilt Account holders, would maintain the
holdings of its constituents in a CSGL account (which is also known as SGL II
account) with the RBI. The servicing of securities held in the Gilt Accounts is
done electronically, facilitating hassle free trading and maintenance of the
securities. Receipt of maturity proceeds and periodic interest is also faster as the
proceeds are credited to the current account of the custodian bank / PD with the

RBI and the custodian (CSGL account holder) immediately passes on the credit to
the Gilt Account Holders (GAH).
7.2 Investors also have the option of holding Government securities in a dematerialized account
with a depository (NSDL / CDSL, etc.). This facilitates trading of Government securities on the
stock exchanges.
8. How does the trading in Government securities take place?
8.1 There is an active secondary market in Government securities. The securities can be bought /
sold in the secondary market either (i) Over the Counter (OTC) or (ii) through the Negotiated
Dealing System (NDS) or (iii) the Negotiated Dealing System-Order Matching (NDS-OM).
i. Over the Counter (OTC)/ Telephone Market
8.2 In this market, a participant, who wants to buy or sell a government security, may contact a
bank / Primary Dealer / financial institution either directly or through a broker registered with
SEBI and negotiate for a certain amount of a particular security at a certain price. Such
negotiations are usually done on telephone and a deal may be struck if both counterparties agree
on the amount and rate. In the case of a buyer, like an urban co-operative bank wishing to buy a
security, the bank's dealer (who is authorized by the bank to undertake transactions in
Government Securities) may get in touch with other market participants over telephone and
obtain quotes. Should a deal be struck, the bank should record the details of the trade in a deal
slip (specimen given at Annex 3) and send a trade confirmation to the counterparty. The dealer
must exercise due diligence with regard to the price quoted by verifying with available sources
(See question number 14 for information on ascertaining the price of Government securities). All
trades undertaken in OTC market are reported on the secondary market module of the NDS, the
details of which are given under the question number 15.
ii. Negotiated Dealing System
8.3 The Negotiated Dealing System (NDS) for electronic dealing and reporting of transactions in
government securities was introduced in February 2002. It facilitates the members to submit
electronically, bids or applications for primary issuance of Government Securities when auctions
are conducted. NDS also provides an interface to the Securities Settlement System (SSS) of the
Public Debt Office, RBI, Mumbai thereby facilitating settlement of transactions in Government
Securities (both outright and repos) conducted in the secondary market. Membership to the NDS
is restricted to members holding SGL and/or Current Account with the RBI, Mumbai.
8.4 In August, 2005, RBI introduced an anonymous screen based order matching module on
NDS, called NDS-OM. This is an order driven electronic system, where the participants can
trade anonymously by placing their orders on the system or accepting the orders already placed
by other participants. NDS-OM is operated by the Clearing Corporation of India Ltd. (CCIL) on
behalf of the RBI (Please see answer to the question no.19 about CCIL). Direct access to the
NDS-OM system is currently available only to select financial institutions like Commercial
Banks, Primary Dealers, Insurance Companies, Mutual Funds, etc. Other participants can access

this system through their custodians, i.e., with whom they maintain Gilt Accounts. The
custodians place the orders on behalf of their customers like the urban co-operative banks. The
advantages of NDS-OM are price transparency and better price discovery.
8.5 Gilt Account holders have been given indirect access to NDS through custodian institutions.
A member (who has the direct access) can report on the NDS the transaction of a Gilt Account
holder in government securities. Similarly, Gilt Account holders have also been given indirect
access to NDS-OM through the custodians. However, currently two gilt account holders of the
same custodian are not permitted to undertake repo transactions between themselves.
iii. Stock Exchanges
8.6 Facilities are also available for trading in Government securities on stock exchanges (NSE,
BSE) which cater to the needs of retail investors.
9. Who are the major players in the Government Securities market?
Major players in the Government securities market include commercial banks and primary
dealers besides institutional investors like insurance companies. Primary Dealers play an
important role as market makers in Government securities market . Other participants include cooperative banks, regional rural banks, mutual funds, provident and pension funds. Foreign
Institutional Investors (FIIs) are allowed to participate in the Government securities market
within the quantitative limits prescribed from time to time. Corporates also buy/ sell the
government securities to manage their overall portfolio risk.
10. What are the Do's and Donts prescribed by RBI for the Co-operative banks dealing in
Government securities?
While undertaking transactions in securities, urban co-operative banks should adhere to the
instructions issued by the RBI. The guidelines on transactions in government securities by the
UCBs have been codified in the master circular UBD.BPD. (PCB). MC.No 12/16.20.000/201011 dated July 1, 2010 which is updated from time to time. This circular can also be accessed
from the RBI website under the Notifications Master circulars section
(http://rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=3686). The important guidelines to be
kept in view by the UCBs relate to formulation of an investment policy duly approved by their
Board of Directors, defining objectives of the policy, authorities and procedures to put through
deals, dealings through brokers, preparing panel of brokers and review thereof at annual
intervals, and adherence to the prudential ceilings fixed for transacting through each of the
brokers, etc.
The important Dos & Donts are summarized in the Box I below.
BOX I
Dos & Donts for Dealing in Government Securities
Dos

Segregate dealing and back-up functions. Officials deciding about purchase and sale
transactions should be separate from those responsible for settlement and accounting.

Monitor all transactions to see that delivery takes place on settlement day. The funds
account and investment account should be reconciled on the same day before close of
business.

Keep a proper record of the SGL forms received/issued to facilitate counter-checking by

their internal control systems/RBI inspectors/other auditors.

Seek a Scheduled Commercial Bank (SCB), a Primary Dealer (PD) or a Financial

Institution (FI) as counterparty for transactions.

Give preference for direct deals with counter parties.

Use CSGL/ Gilt Accounts for holding the securities and maintain such accounts in the
same bank with whom the cash account is maintained.

Insist on Delivery versus Payment for all transactions.

Take advantage of the non-competitive bidding facility for acquiring Government of

India securities in the primary auctions conducted by the Reserve Bank of India.

Restrict the role of the broker to that of bringing the two parties to the deal together, if a
deal is put through with the help of broker.

Have a list of approved brokers. Utilize only brokers registered with NSE or BSE or
OTCEI for acting as intermediary.

Place a limit of 5% of total transactions (both purchases and sales) entered into by a bank
during a year as the aggregate upper contract limit for each of the approved brokers. A
disproportionate part of the business should not be transacted with or through one or a
few brokers.

Maintain and transact in Government securities only in dematerialized form in SGL

Account or Gilt Account maintained with the CSGL Account holder.

Open and maintain only one Gilt or dematerialized account.

Open a funds account for securities transactions with the same Scheduled Commercial
bank or the State Cooperative bank with whom the Gilt Account is maintained.

Ensure availability of clear funds in the designated funds accounts for purchases and
sufficient securities in the Gilt Account for sales before putting through the transactions.

Observe prudential limits for investment in permitted non-SLR securities (bonds of

nationalized banks, unlisted securities, unlisted shares of all-India Financial Institutions
and privately placed debt securities).

The Board of Directors to peruse all investment transactions at least once a month

Donts

Do not undertake any purchase/sale transactions with broking firms or other

intermediaries on principal to principal basis.

Do not use brokers in the settlement process at all, i.e., both funds settlement and delivery
of securities should be done with the counter-parties directly.

Do not give power of attorney or any other authorisation under any circumstances to
brokers/intermediaries to deal on your behalf in the money and securities markets.

Do not undertake Government Securities transaction in the physical form with any
broker.

Do not routinely make investments in non-SLR securities (e.g., corporate bonds, etc)
issued by companies or bodies other than in the co-operative sector.

11. How are the dealing transactions recorded by the dealing desk?
11.1 For every transaction entered into by the trading desk, a deal slip should be generated which
should contain data relating to nature of the deal, name of the counter-party, whether it is a direct
deal or through a broker (if it is through a broker, name of the broker), details of security,
amount, price, contract date and time and settlement date. The deal slips should be serially
numbered and verified separately to ensure that each deal slip has been properly accounted for.
Once the deal is concluded, the deal slip should be immediately passed on to the back office (it
should be separate and distinct from the front office) for recording and processing. For each deal,
there must be a system of issue of confirmation to the counter-party. The timely receipt of
requisite written confirmation from the counter-party, which must include all essential details of
the contract, should be monitored by the back office. With The need for counterparty
confirmation of deals matched on NDS-OM will not arise, as NDS-OM is an anonymous
automated order matching system. However, in case of trades finalized in the OTC market and
reported on NDS, confirmations have to be submitted by the counterparties in the system i.e.,
NDS. Also, please see question no. 15.
11.2 Once a deal has been concluded through a broker, there should not be any substitution of the
counter-party by the broker. Similarly, the security sold / purchased in a deal should not be
substituted by another security under any circumstances. A maker-checker framework should be
implemented to prevent any individual misdemeanor. It should be ensured that the same person

is not carrying out the functions of maker (one who inputs the data) and checker (one who
verifies and authorizes the data) on the system.
11.3 On the basis of vouchers passed by the back office (which should be done after verification
of actual contract notes received from the broker / counter party and confirmation of the deal by
the counter party), the books of account should be independently prepared.
12. What are the important considerations while undertaking security transactions?
The following steps should be followed in purchase of a security:
i.

Which security to invest in Typically this involves deciding on the maturity and coupon.
Maturity is important because this determines the extent of risk an investor like an UCB
is exposed to higher the maturity, higher the interest rate risk or market risk. If the
investment is largely to meet statutory requirements, it may be advisable to avoid taking
undue market risk and buy securities with shorter maturity. Within the shorter maturity
range (say 5-10 years) it would be safer to buy securities which are liquid, that is,
securities which trade in relatively larger volumes in the market. The information about
such securities can be obtained from the website of the CCIL
(http://www.ccilindia.com/OMMWCG.aspx), which gives real-time secondary market
trade data on NDS-OM. Since pricing is more transparent in liquid securities, prices for
these securities are easily obtainable thereby reducing the chances of being
misled/misinformed on the price in these cases. The coupon rate of the security is equally
important for the investor as it affects the total return from the security. In order to
determine which security to buy, the investor must look at the Yield to Maturity (YTM)
of a security (please refer to Box III under para 24.4 for a detailed discussion on YTM).
Thus, once the maturity and yield (YTM) is decided, the UCB may select a security by
looking at the price/yield information of securities traded on NDS-OM or by negotiating
with bank or PD or broker.

ii.

Where and Whom to buy from- In terms of transparent pricing, the NDS-OM is the safest
because it is a live and anonymous platform where the trades are disseminated as they are
struck and where counterparties to the trades are not revealed. In case the trades are
conducted on the telephone market, it would be safe to trade directly with a bank or a PD.
In case one uses a broker, care must be exercised to ensure that the broker is registered on
NSE or BSE or OTC Exchange of India. Normally, the active debt market brokers may
not be interested in deal sizes which are smaller than the market lot (usually Rs.5 crore).
So it is better to deal directly with bank / PD or on NDS-OM, which also has a screen for
odd-lots. Wherever a broker is used, the settlement should not happen through the broker.
Trades should not be directly executed with any counterparties other than a bank, PD or a
financial institution, to minimize the risk of getting adverse prices.

iii.

How to ensure correct pricing Since investors like UCBs have very small requirements,
they may get a quote/price, which is worse than the price for standard market lots. To be
sure of prices, only liquid securities may be chosen for purchase. A safer alternative for
investors with small requirements is to buy under the primary auctions conducted by RBI

through the non-competitive route. Since there are bond auctions about twice every
month, purchases can be considered to coincide with the auctions. Please see question 14
for details on ascertaining the prices of the Government securities.
13. Why does the price of Government security change?
The price of a Government security, like other financial instruments, keeps fluctuating in the
secondary market. The price is determined by demand and supply of the securities. Specifically,
the prices of Government securities are influenced by the level and changes in interest rates in
the economy and other macro-economic factors, such as, expected rate of inflation, liquidity in
the market, etc. Developments in other markets like money, foreign exchange, credit and capital
markets also affect the price of the Government securities. Further, developments in international
bond markets, specifically the US Treasuries affect prices of Government securities in India.
Policy actions by RBI (e.g., announcements regarding changes in policy interest rates like Repo
Rate, Cash Reserve Ratio, Open Market Operations, etc.) can also affect the prices of
Government securities.
14. How does one get information about the price of a Government security?
14.1 The return on a security is a combination of two elements (i) coupon income that is,
interest earned on the security and (ii) the gain / loss on the security due to price changes and
reinvestment gains or losses.
14.2 Price information is vital to any investor intending to either buy or sell Government
securities. Information on traded prices of securities is available on the RBI website
http://www.rbi.org.in under the path Home Financial Markets Watch Government
securities market NDS. This will show a table containing the details of the latest trades
undertaken in the market along with the prices. Additionally, trade information can also be seen
on CCIL website http://www.ccilindia.com/OMHome.aspx. This page can also be accessed from
the RBI website through the link provided. In this page, the list of securities and the summary of
trades is displayed. The total traded amount (TTA) on that day is shown against each security.
Typically liquid securities are those with the largest amount of TTA. Pricing in these securities is
efficient and hence UCBs can choose these securities for their transactions. Since the prices are
available on the screen they can invest in these securities at the current prices through their
custodians. Participants can thus get real-time information on traded prices and make informed
decision while buying / selling government securities. The screenshots of the above website
pages are given below:
NDS Market

NDS-OM Market

The website of the Fixed Income, Money Market and Derivatives Association (FIMMDA),
(www.fimmda.org) is also a source of price information, especially on securities that are not
traded frequently.
15. How are the Government securities transactions reported?
15.1 Transactions undertaken between market participants in the OTC/telephone market are
expected to be reported on the NDS platform within 15 minutes after the deal is put through over
telephone. All OTC trades are required to be mandatorily reported on the secondary market
module of the NDS for settlement. Reporting on NDS is a four stage process wherein the seller
of the security has to initiate the reporting followed by confirmation by the buyer. This is further
followed by issue of confirmation by the sellers back office on the system and reporting is
complete with the last stage wherein the buyers back office confirms the deal. The system
architecture incorporates maker-checker model to preempt individual mistakes as well as
misdemeanor.
15.2 Reporting on behalf of entities maintaining gilt accounts with the custodians is done by the
respective custodians in the same manner as they do in case of their own trades i.e., proprietary
trades. The securities leg of these trades settle in the CSGL account of the custodian. Once the
reporting is complete, the NDS system accepts the trade. Information on all such successfully
reported trades flow to the clearing house i.e., the CCIL.
15.3 In the case of NDS-OM, participants place orders (price and quantity) on the system.
Participants can modify / cancel their orders. Order could be a bid for purchase or offer for sale

of securities. The system, in turn will match the orders based on price and time priority. That is, it
matches bids and offers of the same prices with time priority. The NDS-OM system has separate
screen for the Central Government, State Government and Treasury bill trading. In addition,
there is a screen for odd lot trading for facilitating trading by small participants in smaller lots of
less than Rs. 5 crore (i.e., the standard market lot). The NDS-OM platform is an anonymous
platform wherein the participants will not know the counterparty to the trade. Once an order is
matched, the deal ticket gets generated automatically and the trade details flow to the CCIL. Due
to anonymity offered by the system, the pricing is not influenced by the participants size and
standing.
16. How do the Government securities transactions settle?
Primary Market
16.1 Once the allotment process in the primary auction is finalized, the successful participants
are advised of the consideration amounts that they need to pay to the Government on settlement
day. The settlement cycle for dated security auction is T+1, whereas for that of Treasury bill
auction is T+2. On the settlement date, the fund accounts of the participants are debited by their
respective consideration amounts and their securities accounts (SGL accounts) are credited with
the amount of securities that they were allotted.
Secondary Market
16.2 The transactions relating to Government securities are settled through the members
securities / current accounts maintained with the RBI, with delivery of securities and payment of
funds being done on a net basis. The Clearing Corporation of India Limited (CCIL) guarantees
settlement of trades on the settlement date by becoming a central counter-party to every trade
through the process of novation, i.e., it becomes seller to the buyer and buyer to the seller.
16.3 All outright secondary market transactions in Government Securities are settled on T+1
basis. However, in case of repo transactions in Government securities, the market participants
will have the choice of settling the first leg on either T+0 basis or T+1 basis as per their
requirement.
17. What is shut period?
Shut period means the period for which the securities can not be delivered. During the period
under shut, no settlements/ delivery of the security which is under shut will be allowed. The main
purpose of having a shut period is to facilitate servicing of the securities viz., finalizing the
payment of coupon and redemption proceeds and to avoid any change in ownership of securities
during this process. Currently the shut period for the securities held in SGL accounts is one day.
For example, the coupon payment dates for the security 6.49% CG 2015 are June 8 and
December 8 of every year. The shut period will fall on June 7 and December 7 for this security
and trading in this security for settlement on these two dates is not allowed.
18. What is Delivery versus Payment (DvP) Settlement?

Delivery versus Payment (DvP) is the mode of settlement of securities wherein the transfer of
securities and funds happen simultaneously. This ensures that unless the funds are paid, the
securities are not delivered and vice versa. DvP settlement eliminates the settlement risk in
transactions. There are three types of DvP settlements, viz., DvP I, II and III which are explained
below;
i. DvP I The securities and funds legs of the transactions are settled on a gross basis, that is, the
settlements occur transaction by transaction without netting the payables and receivables of the
participant.
ii. DvP II In this method, the securities are settled on gross basis whereas the funds are settled
on a net basis, that is, the funds payable and receivable of all transactions of a party are netted to
arrive at the final payable or receivable position which is settled.
iii. DvP III In this method, both the securities and the funds legs are settled on a net basis and
only the final net position of all transactions undertaken by a participant is settled.
Liquidity requirement in a gross mode is higher than that of a net mode since the payables and
receivables are set off against each other in the net mode.
19. What is the role of the Clearing Corporation of India Limited (CCIL)?
The CCIL is the clearing agency for Government securities. It acts as a Central Counter Party
(CCP) for all transactions in Government securities by interposing itself between two
counterparties. In effect, during settlement, the CCP becomes the seller to the buyer and buyer to
the seller of the actual transaction. All outright trades undertaken in the OTC market and on the
NDS-OM platform are cleared through the CCIL. Once CCIL receives the trade information, it
works out participant-wise net obligations on both the securities and the funds leg. The payable /
receivable position of the constituents (gilt account holders) is reflected against their respective
custodians. CCIL forwards the settlement file containing net position of participants to the RBI
where settlement takes place by simultaneous transfer of funds and securities under the Delivery
versus Payment system. CCIL also guarantees settlement of all trades in Government securities.
That means, during the settlement process, if any participant fails to provide funds/ securities,
CCIL will make the same available from its own means. For this purpose, CCIL collects margins
from all participants and maintains Settlement Guarantee Fund.
20. What is the When Issued market?
'When Issued', a short term of "when, as and if issued", indicates a conditional transaction in a
security notified for issuance but not yet actually issued. All "When Issued" transactions are on
an "if" basis, to be settled if and when the security is actually issued. 'When Issued' transactions
in the Central Government securities have been permitted to all NDS-OM members and have to
be undertaken only on the NDS-OM platform. When Issued market helps in price discovery of
the securities being auctioned as well as better distribution of the auction stock. For urban
cooperative banks, detailed guidelines have been issued in the RBI master circular UBD.BPD.
(PCB). MC.No /16.20.000/2009-10 dated July 01, 2009.

21. What are the basic mathematical concepts one should know for calculations involved in
bond prices and yields?
The time value of money functions related to calculation of Present Value (PV), Future Value
(FV), etc. are important mathematical concepts related to bond market. An outline of the same
with illustrations is provided in the Box II below.
Box II
Time Value of Money
Money has time value as a Rupee today is more valuable and useful than a Rupee a year later.
The concept of time value of money is based on the premise that an investor prefers to receive a
payment of a fixed amount of money today, rather than an equal amount in the future, all else
being equal. In particular, if one receives the payment today, one can then earn interest on the
money until that specified future date. Further, in an inflationary environment, a Rupee today
will have greater purchasing power than after a year.
Present value of a future sum
The present value formula is the core formula for the time value of money.
The present value (PV) formula has four variables, each of which can be solved for:
Present Value (PV) is the value at time=0
Future Value (FV) is the value at time=n
i is the rate at which the amount will be compounded each period
n is the number of periods

An illustration
Taking the cash flows as;
Period (in Yrs)
Amount

100

100

3
100

Assuming that the interest rate is at 10% per annum;

The discount factor for each year can be calculated as 1/(1+interest rate)^no. of years
The present value can then be worked out as Amount x discount factor
The PV of Rs.100 accruing after;
Year

Amount

discount factor

P.V.

100

0.9091

90.91

100

0.8264

82.64

100

0.7513

75.13

The cumulative present value = 90.91+82.64+75.13 = Rs.248.69

Net Present Value (NPV)
Net present value (NPV) or net present worth (NPW) is defined as the present value of net
cash flows. It is a standard method for using the time value of money to appraise long-term
projects. Used for capital budgeting, and widely throughout economics, it measures the excess or
shortfall of cash flows, in present value (PV) terms, once financing charges are met. Use
Advanced Financial Calculators.
Formula
Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed.
Therefore

In the illustration given above under the Present value, if the three cash flows accrues on a
deposit of Rs. 240, the NPV of the investment is equal to 248.69-240 = Rs.8.69
22. How is the Price of a bond calculated? What is the total consideration amount of a
trade and what is accrued interest?
The price of a bond is nothing but the sum of present value all future cash flows of the bond. The
interest rate used for discounting the cash flows is the Yield to Maturity (YTM) (explained in
detail in question no. 24) of the bond. Price can be calculated using the excel function Price
(please refer to Annex 4, serial no 5.).
Accrued interest is the interest calculated for the broken period from the last coupon day till a
day prior to the settlement date of the trade. Since the seller of the security is holding the security
for the period up to the day prior to the settlement date of the trade, he is entitled to receive the
coupon for the period held. During settlement of the trade, the buyer of security will pay the
accrued interest in addition to the agreed price and pays the consideration amount.
An illustration is given below;
For a trade of Rs.5 crore (face value) of security 6.49%2015 for settlement date August 26, 2009
at a price of Rs.96.95, the consideration amount payable to the seller of the security is worked
out below;
Here the price quoted is called clean price as the accrued interest component is not added to
it.
Accrued interest:
The last coupon date being June 8, 2009, the number of days in broken period till August 25,
2009 (one day prior to settlement date) are 78.
The accrued interest on Rs.100 face value for 78 days = 6.49x(78/360)

= Rs.1.4062
When we add the accrued interest component to the clean price, the resultant price is called the
dirty price. In the instant case, it is 96.95+1.4062 = Rs.98.3562
The total consideration amount

= Face value of trade x dirty price

= 5,00,00,000 x (98.3562/100)
= Rs.4,91,78,083.33

23. What is the relationship between yield and price of a bond?

If interest rates or market yields rise, the price of a bond falls. Conversely, if interest rates or
market yields decline, the price of the bond rises. In other words, the yield of a bond is inversely
related to its price. The relationship between yield to maturity and coupon rate of bond may be
stated as follows:

When the market price of the bond is less than the face value, i.e., the bond sells at a
discount, YTM > current yield > coupon yield.

When the market price of the bond is more than its face value, i.e., the bond sells at a
premium, coupon yield > current yield > YTM.

When the market price of the bond is equal to its face value, i.e., the bond sells at par,
YTM = current yield = coupon yield.

24. How is the yield of a bond calculated?

24.1 An investor who purchases a bond can expect to receive a return from one or more of the
following sources:

The coupon interest payments made by the issuer;

Any capital gain (or capital loss) when the bond is sold; and

Income from reinvestment of the interest payments that is interest-on-interest.

The three yield measures commonly used by investors to measure the potential return from
investing in a bond are briefly described below:
i) Coupon Yield
24.2 The coupon yield is simply the coupon payment as a percentage of the face value. Coupon
yield refers to nominal interest payable on a fixed income security like Government security.
This is the fixed return the Government (i.e., the issuer) commits to pay to the investor. Coupon
yield thus does not reflect the impact of interest rate movement and inflation on the nominal
interest that the Government pays.
Coupon yield = Coupon Payment / Face Value
Illustration:
Coupon: 8.24
Face Value: Rs.100
Market Value: Rs.103.00
Coupon yield = 8.24/100 = 8.24%
ii) Current Yield
24.3 The current yield is simply the coupon payment as a percentage of the bonds purchase
price; in other words, it is the return a holder of the bond gets against its purchase price which
may be more or less than the face value or the par value. The current yield does not take into
account the reinvestment of the interest income received periodically.
Current yield = (Annual coupon rate / Purchase price)X100
Illustration:
The current yield for a 10 year 8.24% coupon bond selling for Rs.103.00 per Rs.100 par value is
calculated below:
Annual coupon interest = 8.24% x Rs.100 = Rs.8.24
Current yield = (8.24/Rs.103)X100 = 8.00%
The current yield considers only the coupon interest and ignores other sources of return that will
affect an investors return.
iii) Yield to Maturity
24.4 Yield to Maturity (YTM) is the expected rate of return on a bond if it is held until its
maturity. The price of a bond is simply the sum of the present values of all its remaining cash
flows. Present value is calculated by discounting each cash flow at a rate; this rate is the YTM.
Thus YTM is the discount rate which equates the present value of the future cash flows from a
bond to its current market price. In other words, it is the internal rate of return on the bond. The
calculation of YTM involves a trial-and-error procedure. A calculator or software can be used to
obtain a bonds yield-to-maturity easily (please see the Box III).

Box III
YTM Calculation
YTM could be calculated manually as well as using functions in any standard spread sheet like
MS Excel.
Manual (Trial and Error) Method
Manual or trial and error method is complicated because Government securities have many cash
flows running into future. This is explained by taking an example below.
Take a two year security bearing a coupon of 8% and a price of say Rs. 102 per face value of Rs.
100; the YTM could be calculated by solving for r below. Typically it involves trial and error
by taking a value for r and solving the equation and if the right hand side is more than 102, take
a higher value of r and solve again. Linear interpolation technique may also be used to find out
exact r once we have two r values so that the price value is more than 102 for one and less
than 102 for the other value.
102 = 4/(1+r/2)1+ 4/(1+r/2)2 + 4/(1+r/2)3 + 104/(1+r/2)4
Spread Sheet Method using MS Excel
In the MS Excel programme, the following function could be used for calculating the yield of
periodically coupon paying securities, given the price.
YIELD (settlement,maturity,rate,price,redemption,frequency,basis)
Wherein;
Settlement is the security's settlement date. The security settlement date is the date on which the
security and funds are exchanged.Maturity is the security's maturity date. The maturity date is the
date when the security expires.
Rate is the security's annual coupon rate.
Price is the security's price per Rs.100 face value.
Redemption is the security's redemption value per Rs.100 face value.
Frequency is the number of coupon payments per year. (2 for Government bonds in India)
Basis is the type of day count basis to use. (4 for Government bonds in India which uses 30/360
basis)
25. What are the day count conventions used in calculating bond yields?
Day count convention refers to the method used for arriving at the holding period (number of
days) of a bond to calculate the accrued interest. As the use of different day count conventions

can result in different accrued interest amounts, it is appropriate that all the participants in the
market follow a uniform day count convention.
For example, the conventions followed in Indian market are given below.
Bond market: The day count convention followed is 30/360, which means that irrespective of the
actual number of days in a month, the number of days in a month is taken as 30 and the number
of days in a year is taken as 360.
Money market: The day count convention followed is actual/365, which means that the actual
number of days in a month is taken for number of days(numerator) whereas the number of days
in a year is taken as 365 days. Hence, in the case of Treasury bills, which are essentially money
market instruments, money market convention is followed.
26. How is the yield of a Treasury Bill calculated?
It is calculated as per the following formula

Wherein;
P Purchase price
D Days to maturity
Day Count: For Treasury Bills, D = [actual number of days to maturity/365]
Illustration
Assuming that the price of a 91 day Treasury bill at issue is Rs.98.20, the yield on the same
would be

After say, 41 days, if the same Treasury bill is trading at a price of Rs. 99, the yield would then
be

Note that the remaining maturity of the treasury bill is 50 days (91-41).
27. What is Duration?
27.1 Duration (also known as Macaulay Duration) of a bond is a measure of the time taken to
recover the initial investment in present value terms. In simplest form, duration refers to the
payback period of a bond to break even, i.e., the time taken for a bond to repay its own purchase
price. Duration is expressed in number of years. A step by step approach for working out
duration is given in the Box IV below.
Box: IV
Calculation for Duration
First, each of the future cash flows is discounted to its respective present value for each period.
Since the coupons are paid out every six months, a single period is equal to six months and a
bond with two years maturity will have four time periods.
Second, the present values of future cash flows are multiplied with their respective time periods
(these are the weights). That is the PV of the first coupon is multiplied by 1, PV of second
coupon by 2 and so on.
Third, the above weighted PVs of all cash flows is added and the sum is divided by the current
price (total of the PVs in step 1) of the bond. The resultant value is the duration in no. of periods.
Since one period equals to six months, to get the duration in no. of year, divide it by two. This is
the time period within which the bond is expected to pay back its own value if held till maturity.
Illustration:
Taking a bond having 2 years maturity, and 10% coupon, and current price of Rs.102, the cash
flows will be (prevailing 2 year yield being 9%):
Time period (years)

Total

Inflows (Rs.Cr)

105

PV at an yield of 9%

4.78

4.58

4.38

88.05

101.79

PV*time

4.78

9.16

13.14

352.20

379.28

Duration in number of periods = 379.28/101.79 = 3.73

Duration in years = 3.73/2 = 1.86 years
More formally, duration refers to:
a. the weighted average term (time from now to payment) of a bond's cash flows or of any
series of linked cash flows.
b. The higher the coupon rate of a bond, the shorter the duration (if the term of the bond is
kept constant).
c. Duration is always less than or equal to the overall life (to maturity) of the bond.
d. Only a zero coupon bond (a bond with no coupons) will have duration equal to its
maturity.
e. the sensitivity of a bond's price to interest rate (i.e., yield) movements.
Duration is useful primarily as a measure of the sensitivity of a bond's market price to interest
rate (i.e., yield) movements. It is approximately equal to the percentage change in price for a
given change in yield. For example, for small interest rate changes, the duration is the
approximate percentage by which the value of the bond will fall for a 1% per annum increase in
market interest rate. So a 15-year bond with a duration of 7 years would fall approximately 7% in
value if the interest rate increased by 1% per annum. In other words, duration is the elasticity of
the bond's price with respect to interest rates.
What is Modified Duration?
27.2 Modified duration (MD) is a modified version of Macaulay Duration. It refers to the change
in value of the security to one per cent change in interest rates (Yield). The formula is

Illustration
In the above example given in Box IV, MD = 1.86/(1+0.09/2) = 1.78
What is PV 01?
27.3 PV01 describes the actual change in price of a bond if the yield changes by one basis point
(equal to one hundredth of a percentage point). It is the present value impact of 1 basis point

(0.01%) movement in interest rate. It is often used as a price alternative to duration (a time
measure). Higher the PV01, the higher would be the volatility (sensitivity of price to change in
yield).
Illustration
From the modified duration (given in the illustration under 27.2), we know that the security
value will change by 1.78% for a change of 100 basis point (1%) change in the yield. In value
terms that is equal to 1.78*(102/100) = Rs.1.81.
Hence the PV01 = 1.81/100 = Rs. 0.018, which is 1.8 paise. Thus, if the yield of a bond with a
Modified Duration of 1.78 years moves from say 9% to 9.05% (5 basis points), the price of the
bond moves from Rs.102 to Rs.101.91 (reduction of 9 paise, i.e., 5x1.8 paise).
What is Convexity?
27.4 Calculation of change in price for change in yields based on duration works only for small
changes in prices. This is because the relationship between bond price and yield is not strictly
linear i.e., the unit change in price of the bond is not proportionate to unit change in yield. Over
large variations in prices, the relationship is curvilinear i.e., the change in bond price is either
less than or more than proportionate to the change in yields. This is measured by a concept called
convexity, which is the change in duration of a bond per unit change in the yield of the bond.
28. What are the important guidelines for valuation of securities?
28.1 For the Cooperative banks, investments classified under 'Held to Maturity' (HTM) category
need not be marked to market and will be carried at acquisition cost unless it is more than the
face value, in which case the premium should be amortized over the period remaining to
maturity. The individual scrip in the Available for Sale (AFS) category in the books of the
cooperative banks will be marked to market at the year-end or at more frequent intervals. The
individual scrip in the Held for Trading (HFT) category will be marked to market at monthly or
at more frequent intervals. The book value of individual securities in AFS and HFT categories
would not undergo any change after marking to market.
28.2 Central Government securities should be valued by taking the prices/ yields put out by the
Fixed Income Money Market and Derivatives Association of India (FIMMDA) and the Primary
Dealers Association of India (PDAI) jointly on the website of the FIMMDA. Prices of all Central
Government securities are given out everyday while prices and yield curve for valuation are
given at the end of every month. For example, the FIMMDA valuation of a Central Government
security, 7.46%2017 as on March 31, 2009 was Rs.101.69. If a cooperative bank was holding the
same security in AFS or HFT categories at a book value of Rs.102, the bank would be required to
book a depreciation of Rs.0.31 per Rs.100 face value of holding. If the total holding was Rs. 1
crore, the total depreciation to be booked would be Rs.31,000/-.
28.3 State Government and other securities are to be valued by adding a spread on the Central
Government security yield of the corresponding residual maturity. Currently, a spread of 25 basis

points (0.25%) is added while valuing State Government securities, special securities (oil bonds,
fertilizer bonds, SBI bonds, etc.) whereas for corporate bonds the spreads given by the FIMMDA
need to be added. An illustration of valuation taking a State Government bond is given in the
Box V below.
Box: V
Valuation of securities
Illustration for valuation of State Government Bonds
Security 7.32% A.P.SDL 2014
Issue date December 10, 2004
Maturity date December 10, 2014
Coupon 7.32%
Date of valuation March 31, 2008
Procedure
Valuation of the above bond involves the following steps
i.

Find the residual maturity of the bond to be valued.

ii.

Find the Central Government security yield for the above residual maturity.

iii.

Add appropriate spread to the above yield to get the yield for the security

iv.

Calculate the price of the security using the derived yield above.

Step i.
Since valuation is being done on March 31, 2008, we need to find out the number of years from
this date to the maturity date of the security, December 10, 2014 to get the residual maturity of
the security. This could be done manually by counting the number of years and months and days.
However, an easier method is to use MS. Excel function Yearfrac wherein we specify the two
dates and basis (please refer to Annex 4 on Excel functions for details). This gives us the residual
maturity of 6.69 years for the security.
Step ii.
To find the Central Government yield for 6.69 years, we derive it by interpolating the yields
between 6 years and 7 years, which are given out by FIMMDA. As on March 31, 2008,
FIMMDA yields for 6 and 7 years are 7.73% and 7.77% respectively. The yield for the 6.69
years is derived by using the following formula.

Here we are finding the yield difference for 0.69 year and adding the same to the yield for 6
years to get the yield for 6.69 years. Also notice that the yield has to be used in decimal form
(e.g., 7.73% is equal to 7.73/100 which is 0.0773)
Step iii.
Having found the Central Government yield for the particular residual maturity, we have to now
load the appropriate spread to get the yield of the security to be valued. Since the security is State
Government security, the applicable spread is 25 basis points (0.25%). Hence the yield would be
7.76%+0.25% = 8.01%.
Step iv.
The price of the security will be calculated using the MS Excel function Price (Please see the
details in Annex 4). Here, we specify the valuation date as March 31, 2008, maturity date as
December 10, 2014, rate as 7.32% which is the coupon, yield as 8.01%, redemption as 100
which is the face value, frequency of coupon payment as 2 and basis as 4 (Pl. see example 3 in
Annex 4). The price we get in the formula is Rs.96.47 which is the value of the security.
If the bank is holding Rs.10 crore of this security in its portfolio, the total value would be
10*(96.47/100) = 9.647 crore.
28.4 In the case of corporate bonds, the procedure of valuation is similar to the illustration given
in Box V above. The only difference is the spread that need to be added to the corresponding
yield on central government security will be higher (instead of the fixed 25 bps for State
Government securities), as published by the FIMMDA from time to time. FIMMDA gives out
the information on corporate bonds spreads for various rated bonds. While valuing a bond, the
appropriate spread has to be added to the corresponding CG yield and the bond has to be valued
using the standard Price formula.
For example, assuming that a AAA rated corporate bond is having same maturity as that of the
State Government bond in Box V, the applicable yield for valuation will be 7.73%+ 2.09%
(being the spread given by FIMMDA) which is 9.82%. With the same parameters as in the Box
V, the value of the bond works out to Rs.87.92.
29. What are the risks involved in holding Government securities? What are the techniques
for mitigating such risks?
Government securities are generally referred to as risk free instrumentsas sovereigns are not
expected to default on their payments. However, as is the case with any financial instrument,

there are risks associated with holding the Government securities. Hence, it is important to
identify and understand such risks and take appropriate measures for mitigation of the same. The
following are the major risks associated with holding Government securities.
29.1 Market risk Market risk arises out of adverse movement of prices of the securities that are
held by an investor due to changes in interest rates. This will result in booking losses on marking
to market or realizing a loss if the securities are sold at the adverse prices. Small investors, to
some extent, can mitigate market risk by holding the bonds till maturity so that they can realize
the yield at which the securities were actually bought.
29.2 Reinvestment risk Cash flows on a Government security includes fixed coupon every half
year and repayment of principal at maturity. These cash flows need to be reinvested whenever
they are paid. Hence there is a risk that the investor may not be able to reinvest these proceeds at
profitable rates due to changes in interest rate scenario.
29.3 Liquidity risk Liquidity risk refers to the inability of an investor to liquidate (sell) his
holdings due to non availability of buyers for the security, i.e., no trading activity in that
particular security. Usually, when a liquid bond of fixed maturity is bought, its tenor gets reduced
due to time decay. For example, a 10 year security will become 8 year security after 2 years due
to which it may become illiquid. Due to illiquidity, the investor may need to sell at adverse prices
in case of urgent funds requirement. However, in such cases, eligible investors can participate in
market repo and borrow the money against the collateral of the securities.
Risk Mitigation
29.4 Holding securities till maturity could be a strategy through which one could avoid market
risk. Rebalancing the portfolio wherein the securities are sold once they become short term and
new securities of longer tenor are bought could be followed to manage the portfolio risk.
However, rebalancing involves transaction and other costs and hence needs to be used
judiciously. Market risk and reinvestment risk could also be managed through Asset Liability
Management (ALM) by matching the cash flows with liabilities. ALM could also be undertaken
by matching the duration of the cash flows.
Advanced risk management techniques involve use of derivatives like Interest Rate Swaps (IRS)
through which the nature of cash flows could be altered. However, these are complex
instruments requiring advanced level of expertise for proper understanding. Adequate caution,
therefore, need to be observed for undertaking the derivatives transactions and such transactions
should be undertaken only after having complete understanding of the associated risks and
complexities.
30. What is Money Market?
30.1 While the Government securities market generally caters to the investors with a long term
investment horizon, the money market provides investment avenues of short term tenor. Money
market transactions are generally used for funding the transactions in other markets including
Government securities market and meeting short term liquidity mismatches. By definition,

money market is for a maximum tenor of up to one year. Within the one year, depending upon
the tenors, money market is classified into:
i. Overnight market - The tenor of transactions is one working day.
ii. Notice money market The tenor of the transactions is from 2 days to 14 days.
Iii. Term money market The tenor of the transactions is from 15 days to one year.
What are the different money market instruments?
30.2 Money market instruments include call money, repos, Treasury bills, Commercial Paper,
Certificate of Deposit and Collateralized Borrowing and Lending Obligations (CBLO).
Call money market
30.3 Call money market is a market for uncollateralized lending and borrowing of funds. This
market is predominantly overnight and is open for participation only to scheduled commercial
banks and the primary dealers.
Repo market
30.4 Repo or ready forward contact is an instrument for borrowing funds by selling securities
with an agreement to repurchase the said securities on a mutually agreed future date at an agreed
price which includes interest for the funds borrowed.
30.5 The reverse of the repo transaction is called reverse repo which is lending of funds against
buying of securities with an agreement to resell the said securities on a mutually agreed future
date at an agreed price which includes interest for the funds lent.
30.6 It can be seen from the definition above that there are two legs to the same transaction in a
repo/ reverse repo. The duration between the two legs is called the repo period. Predominantly,
repos are undertaken on overnight basis, i.e., for one day period. Settlement of repo transactions
happens along with the outright trades in government securities.
30.7 The consideration amount in the first leg of the repo transactions is the amount borrowed by
the seller of the security. On this, interest at the agreed repo rate is calculated and paid along
with the consideration amount of the second leg of the transaction when the borrower buys back
the security. The overall effect of the repo transaction would be borrowing of funds backed by
the collateral of Government securities.
30.8 The money market is regulated by the Reserve Bank of India. All the above mentioned
money market transactions should be reported on the electronic platform called the Negotiated
Dealing System (NDS).
30.9 As part of the measures to develop the corporate debt market, RBI has permitted select
entities (scheduled commercial banks excluding RRBs and LABs, PDs, all-India FIs, NBFCs,
mutual funds, housing finance companies, insurance companies) to undertake repo in corporate

debt securities. This is similar to repo in Government securities except that corporate debt
securities are used as collateral for borrowing funds. Only listed corporate debt securities that are
rated AA or above by the rating agencies are eligible to be used for repo. Commercial paper,
certificate of deposit, non-convertible debentures of original maturity less than one year are not
eligible for the purpose. These transactions take place in the OTC market and are required to be
reported on FIMMDA platform within 15 minutes of the trade for dissemination of information.
They are also to be reported on the clearing house of any of the exchanges for the purpose of
clearing and settlement.
Collateralised Borrowing and Lending Obligation (CBLO)
30.10 CBLO is another money market instrument operated by the Clearing Corporation of India
Ltd. (CCIL), for the benefit of the entities who have either no access to the inter bank call money
market or have restricted access in terms of ceiling on call borrowing and lending transactions.
CBLO is a discounted instrument available in electronic book entry form for the maturity period
ranging from one day to ninety days (up to one year as per RBI guidelines). In order to enable
the market participants to borrow and lend funds, CCIL provides the Dealing System through
Indian Financial Network (INFINET), a closed user group to the Members of the Negotiated
Dealing System (NDS) who maintain Current account with RBI and through Internet for other
entities who do not maintain Current account with RBI.
30.11 Membership to the CBLO segment is extended to entities who are RBI- NDS members,
viz., Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks, Financial
Institutions, Insurance Companies, Mutual Funds, Primary Dealers, etc. Associate Membership
to CBLO segment is extended to entities who are not members of RBI- NDS, viz., Co-operative
Banks, Mutual Funds, Insurance companies, NBFCs, Corporates, Provident/ Pension Funds, etc.
30.12 By participating in the CBLO market, CCIL members can borrow or lend funds against the
collateral of eligible securities. Eligible securities are Central Government securities including
Treasury Bills, and such other securities as specified by CCIL from time to time. Borrowers in
CBLO have to deposit the required amount of eligible securities with the CCIL based on which
CCIL fixes the borrowing limits. CCIL matches the borrowing and lending orders submitted by
the members and notifies them. While the securities held as collateral are in custody of the CCIL,
the beneficial interest of the lender on the securities is recognized through proper documentation.
Commercial Paper (CP)
30.13 Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. Corporates, primary dealers (PDs) and the all-India financial institutions (FIs)
that have been permitted to raise short-term resources under the umbrella limit fixed by the
Reserve Bank of India are eligible to issue CP. CP can be issued for maturities between a
minimum of 7 days and a maximum up to one year from the date of issue.
Certificate of Deposit (CD)

30.14 Certificate of Deposit (CD) is a negotiable money market instrument and issued in
dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period. Banks can issue CDs for maturities from
7 days to one a year whereas eligible FIs can issue for maturities 1 year to 3 years.
31. What are the role and functions of FIMMDA?
31.1 The Fixed Income Money Market and Derivatives Association of India (FIMMDA), an
association of Scheduled Commercial Banks, Public Financial Institutions, Primary Dealers and
Insurance Companies was incorporated as a Company under section 25 of the Companies
Act,1956 on June 3rd, 1998. FIMMDA is a voluntary market body for the bond, money and
derivatives markets. FIMMDA has members representing all major institutional segments of the
market. The membership includes Nationalized Banks such as State Bank of India, its associate
banks and other nationalized banks; Private sector banks such as ICICI Bank, HDFC Bank, IDBI
Bank; Foreign Banks such as Bank of America, ABN Amro, Citibank, Financial institutions such
as IDFC, EXIM Bank, NABARD, Insurance Companies like Life Insurance Corporation of India
(LIC), ICICI Prudential Life Insurance Company, Birla Sun Life Insurance Company and all
Primary Dealers.
31.2 The FIMMDA represents market participants and aids the development of the bond, money
and derivatives markets. It acts as an interface with the regulators on various issues that impact
the functioning of these markets. It also undertakes developmental activities, such as,
introduction of benchmark rates and new derivatives instruments, etc. FIMMDA releases rates of
various Government securities that are used by market participants for valuation purposes.
FIMMDA also plays a constructive role in the evolution of best market practices by its members
so that the market as a whole operates transparently as well as efficiently.
32. What are the various websites that give information on Government securities?
32.1. RBI financial market watch - http://www.rbi.org.in/Scripts/financialmarketswatch.aspx
This site provides links to information on prices of Government securities on NDS (OTC
market), NDS-OM, money market and other information on Government securities like
outstanding stock etc.

32.2. NDS-OM market watch http://www.ccilindia.com/OMHome.aspx

This site provides real-time information on traded as well as quoted prices of Government
securities. In addition prices of When Issued (WI) (whenever trading takes place) segment are
also provided.

32.3. NDS market watch http://www.rbi.org.in/Scripts/NdsUserXsl.aspx

This site provides information on prices of Government securities in OTC market. Facility is
provided for searching the prices of particular securities in a date range.

32.4 FIMMDA - http://www.fimmda.org/

This site provides host of information on market practices for all the fixed income securities
including Government securities. Details of various pricing models adopted by FIMMDA are
provided in this site. In addition, the details of daily, monthly and yearly closing prices of
Government securities, corporate bond spreads etc. are made available by FIMMDA through this
site. Accessing information from this site requires a valid login and password which are provided
by FIMMDA to the eligible entities.

Annex 1

Annex 2
List of Primary Dealers
A

Bank PDs

1 Citibank N.A., Mumbai Branch

2 Standard Chartered Bank

Contact no. in Mumbai

(022) 40015453/40015378
(022)
622303/22652875/22683695

3 Bank of America N.A.

(022) 66323040/3140/3192

4 J P Morgan Chase Bank, N.A.

(022) 6639 3084/66392944

5 HSBC Bank
6 Bank of Baroda

(022) 22623329/22681031/34/33
(022) 66363682/83

7 Canara Bank

(022) 22800101-105/22661348

8 Kotak Mahindra Bank Ltd.

(022) 67836107

FREE

(022) 67836107 & 66596235/

6454
9 Corporation Bank

10 HDFC Bank

(022)
22832429/22022796/22871054
(022) 66521372/9892975232

11 ABN AMRO Bank N.V.

(022) 66386132/128

12 Axis Bank

(022)22181836/2765

Stand alone PDs

1 IDBI Gilts
2 ICICI Sec P D Ltd.

Contact no. in Mumbai

(022) 66177900/911
(022) 66377421/22882460/70

3 PNB Gilts Ltd.

(022) 22693315/17

4 SBI DFHI Ltd

(022) 22610490/66364696

5 STCI PD Ltd
6 Deutsche Securities (India) Pvt Ltd
7 Morgan Stanley Primary Dealer Pvt.
Ltd.

(022) 66202261/2200
(022) 67063068/3066/67063115
(022) 22096600

FREE

(022) 22096600
8 Nomura Fixed Income Securities Pvt.
Ltd.

(022) 67855111/67855118

* Bank PDs are those which take up PD business departmentally as part of the bank itself.
** Stand alone PDs are Non Banking Financial Companies (NBFCs) that exclusively take
up PD business.
Update to the list of Primary dealers is available on the RBI website at
http://www.rbi.org.in/commonman/English/Scripts/PrimaryDealers.aspx

Annex 3

Annex 4

Important Excel functions for bond related calculations

Function

Syntax

1. Present Value

PV (rate,nper,pmt,fv,type)

This function is used to find the present value of a series of future payments given the discount
rate. This forms the basis for pricing a bond
Rate is the interest rate per period.
Nper is the total number of payment periods in an annuity.
Pmt is the payment made each period and cannot change over the life of the annuity.
Fv is the future value, or a cash balance you want to attain after the last payment is made. If fv is
omitted, it is assumed to be 0 (the future value of a loan, for example, is 0).
Type is the number 0 or 1 and indicates when payments are due.
Set type equal to

If payments are due

0 or omitted

At the end of the period

At the beginning of the period

Example: To calculate the present value of Rs.100 after every year for three years at an interest
rate of 9%, the values would be;
Rate 9% or 0.09; Nper 3 (3 years); Pmt 100; Fv 0 as there is no balance left at the end of
three years; Type 0 (at the end of the period)
The answer would be 253.13
2. Future Value FV(rate,nper,pmt,pv,type)
This function is used to calculate the future value of a series of investments made, given the
interest rate.

Rate is the interest rate per period.

Nper is the total number of payment periods in an annuity.
Pmt is the payment made each period; it cannot change over the life of the annuity. Typically,
pmt contains principal and interest but no other fees or taxes. If pmt is omitted, you must include
the pv argument.
Pv is the present value, or the lump-sum amount that a series of future payments is worth right
now. If pv is omitted, it is assumed to be 0 (zero), and you must include the pmt argument.
Type is the number 0 or 1 and indicates when payments are due. If type is omitted, it is assumed
to be 0.
Example: To calculate the future value of Rs.100 paid every year for three years at an interest
rate of 9%, the values would be;
Rate 9% or 0.09; Nper 3 (3 years); Pmt 100; Pv 0 as there is no lumpsum payment at the
beginning; Type 1 (at the beginning of the period)The answer would be 357.31
3. Coupon days

COUPDAYBS(settlement,maturity,frequency,basis)

This function is used to workout the number of days from the beginning to the end of the coupon
period that contains the settlement date.
Settlement is the security's settlement date. The security settlement date is the date after the issue
date when the security is traded to the buyer.
Maturity is the security's maturity date. The maturity date is the date when the security expires.
Frequency is the number of coupon payments per year. For annual payments, frequency = 1; for
semiannual, frequency = 2; for quarterly, frequency = 4.
Basis is the type of day count basis to use. Appropriate code for the day count convention has to
be provided as shown below;
Basis

Day count basis

Basis

Day count basis

0 or omitted

US (NASD) 30/360

Actual/365

Actual/actual

European 30/360

Actual/360

Example: In the case of security maturing on February 2, 2019, and settlement date May 27,
2009, the values in the formula would be;
Maturity 2/2/2019; settlement 27/5/2009; frequency 2 (half yearly coupon) and basis 4
(day count convention 30/360)
The result would be 180 (number of coupon days in the coupon period)
4. Yearfrac

YEARFRAC(start_date,end_date,basis) (to find residual

maturity)

This function is used to find the residual maturity of a security in years.

Start_date is a date that represents the start date.
End_date is a date that represents the end date.
Basis is the type of day count basis to use.
Example: For a security maturing on February 6, 2019, the residual maturity in number of years
as on May 27, 2009 can be calculated as;
Start date May 27, 2009; End date 2/2/2019, basis 4
The result would be 9.68 years
5.
PRICE(settlement,maturity,rate,yld,redemption,frequency,basis
PRICE )
This function is used to find the price of security that pays periodic interest.
Settlement is the security's settlement date. The security settlement date is the dateon which the
security and funds are exchanged.
Maturity is the security's maturity date. The maturity date is the date when the security expires.
Rate is the security's annual coupon rate.
Yld is the security's annual yield.
Redemption is the security's redemption value per Rs.100 face value.
Frequency is the number of coupon payments per year. For annual payments, frequency = 1; for
semiannual, frequency = 2; for quarterly, frequency = 4.
Basis is the type of day count basis to use.

Example : 6.05%2019 security maturing on February 2, 2019. It is yielding 6.68% in secondary

market on June 1, 2009. Settlement date is June 2, 2009. Values in the price formula would be;
Settlement 2/6/2009; maturity 2/2/2019; rate 6.05%; Yield 6.68%; Redemption 100
(face value); frequency 2 (half yearly coupon); basis 4. The result would be 95.55
6.
YIELD(settlement,maturity,rate,pr,redemption,frequency,basis)
YIELD
This function is used to find the Yield to Maturity of a security given the price of the security.
Settlement is the security's settlement date. The security settlement date is the date on which the
security and funds are exchanged. Maturity is the security's maturity date. The maturity date is
the date when the security expires.
Rate is the security's annual coupon rate.
Pr is the security's price per Rs.100 face value.
Redemption is the security's redemption value per Rs.100 face value.
Frequency is the number of coupon payments per year. For annual payments, frequency = 1; for
semiannual, frequency = 2; for quarterly, frequency = 4.
Basis is the type of day count basis to use.
Taking the same example as above, and price at 95.55, the result for the yield would be 6.68%.
7.
DURATION(settlement,maturity,coupon,yld,frequency,basis)
DURATION
This function is used to find the Duration of a security in number of years.
Settlement is the security's settlement date. The security settlement date is the date on which the
security and funds are exchanged. Maturity is the security's maturity date. The maturity date is
the date when the security expires.
Coupon is the security's annual coupon rate.
Yld is the security's annual yield.
Frequency is the number of coupon payments per year. For annual payments, frequency = 1; for
semiannual, frequency = 2; for quarterly, frequency = 4.
Basis is the type of day count basis to use.

Example : 6.05%2019 security maturing on February 2, 2019. It is yielding 6.68% in secondary

market on June 1, 2009. Settlement date is June 2, 2009. Values in the Duration formula would
be;
Settlement 2/6/2009; maturity 2/2/2019; Coupon 6.05%; Yield 6.68%; frequency 2 (half
yearly coupon); basis 4.
The result will be 7.25 years.
8. Modified Duration MDURATION(settlement,maturity,coupon,yld,frequency,basis)
This function is used to calculate the Modified Duration of a security.
Settlement is the security's settlement date. The security settlement date is the date on which the
security and funds are exchanged. Maturity is the security's maturity date. The maturity date is
the date when the security expires.
Coupon is the security's annual coupon rate.
Yld is the security's annual yield.
Frequency is the number of coupon payments per year. For annual payments, frequency = 1; for
semiannual, frequency = 2; for quarterly, frequency = 4.
Basis is the type of day count basis to use.
Taking the same example given above for Duration and feeding the values in the excel function,
the formula result will be 7.01

Annex 5
Glossary of Important Terms And Commonly Used Market Terminology
Accrued Interest
The accrued interest on a bond is the amount of interest accumulated on a bond since the last
coupon payment. The interest has been earned, but because coupons are paid only on coupon
dates, the investor has not gained the money yet. In India day count convention for G-Secs is
30/360.
Bid Price/ Yield
The price/yield being offered by a potential buyer for a security.

Big Figure
When the price is quoted as Rs.102.35, the portion other than decimals (102) is called the big
figure.
Competitive Bid
Competitive bid refers to the bid for the stock at the price stated by a bidder in an auction.
Coupon
The rate of interest paid on a debt security as calculated on the basis of the securitys face value.
Coupon Frequency
Coupon payments are made at regular intervals throughout the life of a debt security and may be
quarterly, semi-annual (twice a year) or annual payments.
Discount
When the price of a security is below the par value, it is said to be trading at discount. The value
of the discount is the difference between the FV and the Price. For example, if a security is
trading at Rs.99, the discount is Rs.1.
Duration(Macaulay Duration)
Duration of a bond is the number of years taken to recover the initial investment of a bond. It is
calculated as the weighted average number of years to receive the cash flow wherein the present
value of respective cash flows are multiplied with the time to that respective cash flows. The
total of such values is divided by the price of the security to arrive at the duration. Refer to Box
IV under question 27.
Face Value
Face value is the amount that is to be paid to an investor at the maturity date of the security. Debt
securities can be issued at varying face values, however in India they typically have a face value
of Rs.100. The face value is also known as the repayment amount. This amount is also referred
as redemption value, principal value (or simply principal), maturity value or par value.
Floating-Rate Bond
Bonds whose coupon rate is re-set at predefined intervals and is based on a pre-specified market
based interest rate.
Gilt/ Government Securities

Government securities are also known as gilts or gilt edged securities. 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 Government Securities Act, 2006.
Market Lot
Market lot refers to the standard value of the trades that happen in the market. The standard
market lot size in the Government securities market is Rs. 5 crore in face value terms.
Maturity Date
The date when the principal (face value) is paid back. The final coupon and the face value of a
debt security is repaid to the investor on the maturity date. The time to maturity can vary from
short term (1 year) to long term (30 years).
Non-Competitive Bid
Non-competitive bidding means the bidder would be able to participate in the auctions of dated
government securities without having to quote the yield or price in the bid. The allotment to the
non-competitive segment will be at the weighted average rate that will emerge in the auction on
the basis of competitive bidding. It is an allocating facility wherein a part of total securities are
allocated to bidders at a weighted average price of successful competitive bid. (Please also see
paragraph no.4.3 under the question no.4).
Odd Lot
Transactions of any value other than the standard market lot size of Rs. 5 crore are referred to as
odd lot. Generally the value is less than the Rs. 5 crore with a minimum of Rs.10,000/-. Odd lot
transactions are generally done by the retail and small participants in the market.
Par
Par value is nothing but the face value of the security which is Rs. 100 for Government
securities. When the price of a security is equal to face value, the security is said to be trading at
par.
Premium
When the price of a security is above the par value, the security is said to be trading at premium.
The value of the premium is the difference between the price and the face value. For example, if
a security is trading at Rs.102, the premium is Rs.2.
Price

The price quoted is for per Rs. 100 of face value. The price of any financial instrument is equal
to the present value of all the future cash flows. The price one pays for a debt security is based on
a number of factors. Newly-issued debt securities usually sell at, or close to, their face value. In
the secondary market, where already-issued debt securities are bought and sold between
investors, the price one pays for a bond is based on a host of variables, including market interest
rates, accrued interest, supply and demand, credit quality, maturity date, state of issuance, market
events and the size of the transaction.
Primary Dealers
In order to accomplish the objective of meeting the government borrowing needs as cheaply and
efficiently as possible, a group of highly qualified financial firms/ banks are appointed to play
the role of specialist intermediaries in the government security market between the issuer on the
one hand and the market on the other. Such entities are generally called Primary dealers or
market makers. In return of a set of obligations, such as making continuous bids and offer price
in the marketable government securities or submitting reasonable bids in the auctions, these
firms receive a set of privileges in the primary/ secondary market.
Real Time Gross Settlement (RTGS) system
RTGS system is a funds transfer mechanism for transfer of money from one bank to another on a
real time and on gross basis. This is the fastest possible money transfer system through the
banking channel. Settlement in real time means payment transaction is not subjected to any
waiting period. The transactions are settled as soon as they are processed. Gross settlement
means the transaction is settled on one to one basis without bunching with any other transaction.
Considering that money transfer takes place in the books of the Reserve Bank of India, the
payment is taken as final and irrevocable.
Repo Rate
Repo rate is the return earned on a repo transaction expressed as an annual interest rate.
Repo/Reverse Repo
Repo means an instrument for borrowing funds by selling securities of the Central Government
or a State Government or of such securities of a local authority as may be specified in this behalf
by the Central Government or foreign securities, with an agreement to repurchase the said
securities on a mutually agreed future date at an agreed price which includes interest for the fund
borrowed.
Reverse Repo means an instrument for lending funds by purchasing securities of the Central
Government or a State Government or of such securities of a local authority as may be specified
in this behalf by the Central Government or foreign securities, with an agreement to resell the
said securities on a mutually agreed future date at an agreed price which includes interest for the
fund lent.

Residual Maturity
The remaining period until maturity date of a security is its residual maturity. For example, a
security issued for an original term to maturity of 10 years, after 2 years, will have a residual
maturity of 8 years.
Secondary Market
The market in which outstanding securities are traded. This market is different from the primary
or initial market when securities are sold for the first time. Secondary market refers to the buying
and selling that goes on after the initial public sale of the security.
Tap Sale
Under Tap sale, a certain amount of securities is created and made available for sale, generally
with a minimum price, and is sold to the market as bids are made. These securities may be sold
over a period of day or even weeks; and authorities may retain the flexibility to increase the
(minimum) price if demand proves to be strong or to cut it if demand weakens. Tap and
continuous sale are very similar, except that with Tap sale the debt manager tends to take a more
pro-active role in determining the availability and indicative price for tap sales. Continuous sale
are essentially at the initiative of the market.
Treasury Bills
Debt obligations of the government that have maturities of one year or less is normally called
Treasury Bills or T-Bills. Treasury Bills are short-term obligations of the Treasury/Government.
They are instruments issued at a discount to the face value and form an integral part of the
money market.
Underwriting
The arrangement by which investment bankers undertake to acquire any unsubscribed portion of
a primary issuance of a security.
Weighted Average Price/ Yield
It is the weighted average mean of the price/ yield where weight being the amount used at that
price/ yield. The allotment to the non-competitive segment will be at the weighted average
price/yield that will emerge in the auction on the basis of competitive bidding.
Yield
The annual percentage rate of return earned on a security. Yield is a function of a securitys
purchase price and coupon interest rate. Yield fluctuates according to numerous factors including
global markets and the economy.

Yield to Maturity (YTM)

Yield to maturity is the total return one would except to receive if the security is being held until
maturity. Yield to maturity is essentially the discount rate at which the present value of future
payments (investment income and return of principal) equals the price of the security.
Yield Curve
The graphical relationship between yield and maturity among bonds of different maturities and
the same credit quality. This line shows the term structure of interest rates. It also enables
investors to compare debt securities with different maturities and coupons.
The Government Securities Act, 2006 and The Government Securities Regulations, 2007
Government securities offer the benefit of safety, liquidity and attractive returns to investors. With the enactment of the
Government Securities Act, 2006 Government securities, including the Relief/Savings Bonds issued by the Government of
India, have become more investor friendly. Investors of such bonds will particularly benefit from such changes in the Act. To
create public awareness in this regard and as a customer friendly measure, the following Frequently Asked Questions (FAQs)
along with the answers have been released by the Reserve Bank of India (RBI).
1. What does one mean by Government security?
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).
2. What is the 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.
3. What are the Government Securities Regulations, 2007?
Government Securities Regulations, 2007 (G S Regulations) have been framed by the RBI to carry out the purposes of the G

4. When did the G S Act and the G S Regulations come into force and to which Government securities do they apply?
The G S Act and the G S Regulations came into force with effect from December 1, 2007. The G S Act applies to Government
securities created and issued by the Central Government or a State Government, whether before or after the commencement
of this Act. The G S Act will apply to all Government securities created and issued even prior to December 1, 2007.

5. What about the applicability of the Public Debt Act, 1944 and the Indian Securities Act, 1920 to the Government
securities?
The Public Debt Act, 1944 shall cease to apply to the Government securities to which the G S Act applies, while the Indian
Securities Act, 1920 has been repealed.
6. Are Relief/Savings Bonds also Government securities? Does the G S Act and the G S Regulations apply to them as

Yes. Relief/Savings Bonds are also Government securities. They are issued in the form of Stock Certificate and BLA by the
RBI and in the form of BLA by the Agency Banks. All the provisions of the G S Act and the G S Regulations apply to them as
well. However, Relief/Savings Bonds may have certain features of their own as per the specific Government Loan Notification
announcing their issue. For example, Savings Bonds are not transferable except as explained at Question No. 46 below.
7. Are all the above forms of Government securities issued by RBI as well as Agency banks?
Government securities in the form of GPN, bearer bond, stock and BLA are issued by RBI, while the Agency Banks are
presently eligible to issue Relief/Savings Bonds in the form of BLA only.
8. Who are eligible to invest in Government securities?
The G S Act and the G S Regulations do not specify the eligibility criteria for investment in a G-Sec. The eligibility criteria are
specified in the respective Government Notifications. Usually any person is eligible to invest in Government securities.
9. What does one mean by Government security in the form of Stock?
Stock means a Government security registered in the books of RBI for which a Stock Certificate (SC) is issued or which are
held at the credit of the holder in the Subsidiary General Ledger (SGL) account maintained in the books of RBI and
transferable by registration in the books of RBI.
10. What does one mean by the CSGL account?
CSGL, i.e. Constituents' Subsidiary General Ledger account, means an SGL account opened and maintained with RBI by an
agent on behalf of the constituents of such agent, i.e. a second SGL account opened by an agent with the RBI to hold the
securities on behalf of their constituents. The constituents are known as the Gilt Account Holders (GAHs). Additional CSGL and
/ or Gilt Account can be opened only with the prior / specific permission of the Bank.
11. Who is deemed to be the holder of the Government securities in CSGL account?
A CSGL account holder shall be deemed to be the holder of the securities held in the respective account with RBI, however,
the constituents i.e. GAHs, as the beneficial owners of the Government security held therein, shall be entitled to claim from the
CSGL account holder all the benefits and be subjected to all the liabilities in respect of the Government securities held in the
CSGL account.
12. What does one mean by BLA?
A BLA or Bond Ledger Account means an account with RBI or an agency bank in which the Government securities are held in
a dematerialized form to the credit of the holder. The investor in this case receives a Certificate of Holding or Certificate of
Investment from RBI/Agency Banks.
13. Are the National Saving Certificates/Postal Saving Certificates also covered under the G S Act?

No. They are not covered under the G S Act or the G S Regulations.
14. How can a Government security be transferred?
Government security held in the form of GPN is transferable by endorsement and delivery, while a bearer bond is transferable
by delivery and the person in possession of the bond shall be deemed to be the holder of the bond. Government securities
held in the form of SC, SGL/CSGL and BLA are transferable, before maturity, by execution of forms - III, IV and V respectively,
appended to the G S Regulations, provided that the same are eligible for transfer as per the specific Government Loan
Notification. Further, these transfer forms may also be executed in electronic form under digital signature.
15. How does a person who is unable to write, execute or endorse a document?
In such cases, he/she may apply to the Executive Magistrate to execute the document or make endorsement on his/her behalf
after producing sufficient documentary evidence about his/her identity and satisfying the Executive Magistrate that he/she has
understood the implications of such execution or endorsement.
16. Whether there has been any simplification in the process/documentation for recognition of title to Government
security of deceased sole holder or joint holders?
Yes. The title to Government security can now be recognised not only on the basis of a Succession Certificate issued under
Part X of the Indian Succession Act, 1925 but also on the basis of a decree, order or direction passed by a competent court or
on the basis of a certificate issued or order passed by any other authority who might have been empowered under any statute
to confer on any such person a title to the Government security. Further, the title to Government security of deceased sole or
joint holders may also be recognized by the RBI/Agency Banks on the basis of any one of the following six documents as
prescribed in the G S Regulations.
a Will executed by the deceased holder of the Government security bequeathing thereby the security in favour of the
person claiming title thereto, provided the probate issued in respect of such Will has been submitted to the Bank by the
claimant; or
a registered deed of family settlement, wherein the Government security claimed has been included and given to the
claimant; or
a gift deed executed in accordance with the law relating thereto, in respect of the Government security claimed; or
a deed of relinquishment executed by other legal heir or successor of the deceased in accordance with law in favour of
the claimant in respect of the Government security claimed; or
a decree passed by a foreign court in respect of the Government security claimed, the execution whereof is
permissible in accordance with the provisions of Section 44A of the Civil Procedure Code, 1908 (5 of 1908); or
a deed of partition executed and acted upon in accordance with law, wherein the Government security claimed has
been included and given to the share allotted to the claimant.
17. Whether the G S Act provides for nomination facility?
Yes. The G S Act provides for nomination facility for a Government security other than in the form of GPN and bearer bond.
The sole holder or all the joint holders of such a Government security may nominate one or more persons, who in the event of
death of the sole holder or the death of all the joint holders, would become entitled to the Government security and payment

18. What happens if one of the joint nominees to a Government security dies?
In such cases where a nomination in respect of a Government security has been made in favour of two or more persons and
either or any of the nominees is dead, the surviving nominee or nominees will be entitled to the Government security and
payment thereon.
19. Whether a minor can be a nominee?
Yes. A minor can be a nominee. However, the sole holder or all the joint holders of a Government security may appoint another
individual, not being a minor, to receive the proceeds of the Government security on behalf of the nominee in the event of the
death of the sole holder or all the joint holders during the minority of the nominee.
20. Does conversion, sub-division, renewal or issue of duplicate Government security affect the rights of the
nominee(s)?
No. The nominee(s) will continue to have the same rights and will be the nominees in respect of each new security issued in
lieu of such Government security.
21. Can a Government securities holder nominate an individual other than blood relation as a nominee?
Yes. A Government securities holder may nominate any one as a nominee provided that the nominee, as an individual or
institution, should be eligible to invest in the particular loan as per the specific Government Loan Notification.
22. Can a Government securities holder choose to nominate and donate the proceeds of investment to institutions,
trusts, etc.?
Yes. One can donate the proceeds of his/her investments in Government securities to institution/trust by naming such
institution/trust as their nominee subject to the condition that such institution/trust shall be eligible to invest in the particular loan
as per the specific Government Loan Notification.
23. Can the payment of a Government security be made to minor or insane person?
No. If a Government security is held on behalf of a minor, the payment for the same may be made to the father or mother of
such minor and in case neither parent is alive then the payment is made to a person entitled, as per law, to take care of the
property of the minor. However, if a Government security, whose principal value does not exceed Rupees One lakh, belongs to
a minor or person who is insane and incapable of managing his affairs, RBI may make a vesting order in terms of Regulation
17 of the GS Regulations in favour of a person to represent the minor or insane person.
24. Whether duplicate Government security can be issued in lieu of a Government security that has been lost, stolen
or destroyed, or has been defaced or mutilated?
Yes. A duplicate Government security may be issued if the holding was in the form of SC and GPN. However, no duplicate
Government security will be issued for Bearer Bonds/Prize Bonds. Further, no duplicate Government security will be issued in
case of matured loans and the redemption proceeds will be paid to the investor after following the procedure for issuing
duplicate Government security.
25. What is the procedure to be followed for issue of duplicate Government security?
When a Government security is lost, stolen, destroyed, mutilated or defaced, then the investor(s) may apply to RBI for issue of
a duplicate GPN or SC in terms of Regulations 11 and 13, respectively, of GS Regulations.

26. Whether Government securities are eligible for conversion, consolidation, sub-division, renewal?
Yes. Government securities are eligible for conversion from one form of holding to another as well as consolidation, subdivision and renewal as per the terms and conditions prescribed in the G S Regulations.
Are Government securities eligible for stripping or reconstitution?
Yes. Government securities, as per eligibility, can be stripped separately for interest and principal and reconstituted as well.
28. What is STRIPS? What is the benefit of stripping Government securities?
STRIPS is the acronym for 'Separate Trading of Registered Interest and Principal of Securities'. These are basically "zerocoupon" securities where the investor receives a payment at maturity only. STRIPS allow investors to hold and trade the
individual interest and principal components of eligible Government securities as separate securities of varying tenure. They
are popular with investors who want to receive a known payment on a specific future date and want to hold securities of
desired maturity.
29. Are there any fees to be paid for conversion, consolidation, sub-division, renewal and issue of duplicate
Government securities?
Yes. A fee of Rupees twenty is payable for renewal, conversion or sub-division of Government security and a fee of Rupees
One hundred is payable for issue of a duplicate Government security. However, no fee is payable for conversion of GPN into
SC and SGL/CSGL or SC into SGL/CSGL, consolidation of Government securities and renewals due to filling up of interest
cages at the back of the GPN or filling up of transfer endorsement cages at the back of the SC.
30. Is there any period of limitation of Government's liability in respect of interest due on Government security?
Yes. The liability of the Government in respect of any interest payment due on a Government security shall terminate on the
expiry of six years from the date on which the amount due by way of interest became payable, i.e., investors are expected to
claim interest on their Government security within six years from the date it becomes payable and Government may refuse to
pay such unclaimed interest payment after six years. However, Government may allow a bonafide claim for payment of interest
even after the expiry of the limitation period of six years.
31. Is there any provision for tax to be deducted at source for interest paid in respect of Government securities?
As per clause (iv) of Section 193 of the Income Tax Act, 1961, no tax shall be deducted from any interest payable on any
security of the Central Government or a State Government effective from June 1, 1997. However, as per Finance Act, 2007
and Government of India Notification No. F.4(10)-W&M/2003 dated May 31, 2007, tax has to be deducted at source on the
interest exceeding Rupees ten thousand payable during a financial year on 8% Savings (Taxable) Bonds, 2003 with effect from
June 1, 2007.
32. Whether application for grant of information or inspection relating to a Government security is allowed?
Yes. RBI or its agent may permit grant of information or inspection of document relating to Government security on being
satisfied that the security in question has stood in the name of the applicant or of a person in whom the applicant has a
representative/bonafide interest.
33. Are Government securities eligible for creation of pledge, hypothecation or lien?
Yes. Pledge, hypothecation or lien may be created in respect of Government securities held in the form of SC, BLA,
SGL/CSGL and the holder of Government securities in such forms may avail of loan facility by keeping such securities as

collateral towards loan, subject to the stipulation mentioned in Question No. 34. However, Government securities issued in the
form of GPN and bearer bonds are not eligible for creation of pledge, hypothecation or lien.
34. Is the facility to create pledge, hypothecation or lien against Government securities available across all the loans?
No. The facility to create pledge, hypothecation or lien against Government securities is not available for those loans which, as
per the specific Government Loan Notification, are non-transferable or not eligible for collateral to avail of loan facility.
35. Who will create/note pledge in respect of Government securities?
Pledge towards Government securities will be created/noted by RBI or its agent, as the case may be, maintaining the account
in respect of such security, i.e., in case of SC, BLA & SGL for which the records and accounts are maintained by RBI, the
pledge will be noted in the books of RBI while in case of BLAs issued by Agency Banks or securities held in a CSGL account,
the pledge will be noted by the concerned Agency Bank or CSGL Account holder respectively.
36. What is the automatic redemption facility for Government securities?
An investor in Government securities, held in the form of SC, BLA and SGL/CSGL, can avail of the facility of automatic
redemption, i.e., the maturity proceeds along with the interest accruing thereon will be credited to the investor's bank account
on due date and the investor need not submit physical discharge in respect of such securities provided the investor has
furnished his/her bank account details to the RBI or its agent (A model format is given at the end of these FAQs). However, in
case, the investor does not submit his/her bank details to the RBI or the Agency Bank, he/she would be required to submit
physical discharge towards the Government securities to receive the redemption proceeds.
37. Are there any other requirements for availing the facility of automatic redemption?
Yes. In case the maturity proceeds of a Government security exceeds Rupees One lakh, the investor(s) should furnish the PAN
details in advance so as to avail the facility of automatic redemption and receive the maturity proceeds along with the accruing
interest thereon in his/her account on due date.
38. What are the powers of RBI for carrying out the purposes of the G S Act?
RBI may call for information from any agent or SGL/CSGL account holder and cause an inspection or scrutiny to be made of
any agent or SGL/CSGL account holder. Further, RBI may issue directions to the SGL/CSGL account holders, agents and to
any other person dealing with the Government securities.
39. What are the penalties for contravention of the G S Act?
If any person, for the purpose of obtaining for himself or any other person any title to a Government security, makes false
statement then he shall be punishable with imprisonment for a term which may extend to six months, or with fine, or with both.
Further, RBI may impose on any person who contravenes any provision of the G S Act, or contravenes any regulation,
notification or direction issued under the G S Act, or violates the terms and conditions for opening and maintenance of
SGL/CSGL account a penalty not exceeding five lakh rupees and where such contravention is a continuing one, further
penalty, which may extend to five thousand rupees for every day after first day during which the contravention continues.
FAQs in respect of Relief/Savings Bonds
As mentioned above, Relief/Savings Bonds are Government securities and they are issued in the form of Stock and BLA by
RBI and in the form of BLA by the Agency banks. The provisions of the G S Act and the G S Regulations also apply to them.
For the convenience of the Relief/Savings Bonds holders, certain specific aspects have been elaborated here.

40. Are nomination facilities available for Relief/Savings Bonds?

Yes. As Relief/Savings Bonds are Government securities, nomination facility is available for these as explained at Question
Nos. 17, 18, 19, 20, 21 & 22 above.
41. Is the facility of automatic redemption available to the Relief/Savings Bonds holder?
Yes. The facility of automatic redemption, i.e., the facility to receive maturity proceeds along with interest accruing thereon on
due date without the hassle of visiting the RBI/Agency Bank and submitting physical discharge in respect of the maturing
Relief/Savings Bonds is available to all the Relief/Savings Bond investors as explained at Question Nos. 36 & 37 above.
42. How the interest is paid in case of Relief/Savings Bonds?
Relief/Savings Bonds provide the investors to opt for cumulative/non-cumulative interest payment. In case of cumulative
bonds, the interest is payable along with the principal at the time of redemption. However, in case of non-cumulative bonds, the
same is paid at half-yearly intervals. If an investor requires regular income flow then it is suggested that he/she should opt for
non-cumulative mode of interest payment. Interest can be paid through interest warrants delivered through registered post or
can be credited to the investor's bank account on due date, in case the investor has submitted the bank details as per the ECS
Mandate form available in the offices of RBI and the Agency Banks. (A model format is given at the end of these FAQs)
43. Is there any TDS towards interest payment in respect of Relief/Savings Bonds?
As explained at Question No. 31, with effect from June 1, 1997, there is no TDS upon interest payable on Government
Security. However, as per Finance Act, 2007 and Government of India Notification No. F.4(10)-W&M/2003 dated May 31, 2007,
tax has to be deducted at source on the interest exceeding Rupees ten thousand payable during a financial year on 8%
Savings Bonds, 2003 (Taxable) with effect from June 1, 2007. Accordingly, there is no TDS upon interest payment in respect of
Relief/Savings Bonds other than 8% Savings Bonds, 2003 (Taxable).
44. Is the facility to create pledge, hypothecation or lien against Relief/Savings Bonds available to the investors for
availing loan against the Relief/Savings Bonds as collateral?
Yes. The facility to create pledge, hypothecation or lien against Relief/Savings Bonds is available as in case of other
Government securities as explained at Question Nos. 33 & 34. The Government of India has amended the notifications relating
to 7% Savings Bonds, 2002, 6.5% Savings Bonds, 2003 (Non-Taxable) and 8% Savings (Taxable) Bonds, 2003 schemes
allowing for pledge or hypothecation or lien of these bonds as collateral for obtaining loans from the scheduled banks with
effect from August 19, 2008. However, such collateral facility is available only for the loans to be availed by the holders of the
bonds and not in respect of the loans availed by third parties.
45. What is the procedure/documentation for recognition of title to Relief/Savings Bonds of deceased sole holder or
joint holders?
The title to Relief/Savings Bonds of a deceased sole holder or joint holder may be recognised as per the simplified procedure
explained at Question No. 16.
46. Whether Relief/Savings Bonds can be transferred?
Yes. Relief/Savings Bonds, like other Government securities, can be transferred by execution of transfer forms as explained at
Question No. 14. However, the specific Government loan notifications issued for the 7% Savings Bonds, 2002, 6.5% Savings
Bonds, 2003 (Non taxable) and 8% Savings Bonds, 2003 (Taxable) have prescribed the specific conditions subject to which
such transfers may take place. While all the three Savings Bonds are transferable to the nominee in case of death of the
holder, the 7% Savings Bonds, 2002 and 6.5% Savings Bonds, 2003 (Non taxable) are also transferable by way of gift to a

"relative" as defined in section 6 of the Indian Companies Act, 1956. Section 6 of the Indian Companies Act, 1956 defines
"relative" as under:
A person shall be deemed to be a relative of another if and only if,
a)
they
are
members
of
a
Hindu
undivided
family;
b)
they
are
husband
and
wife;
c) the one is related to the other in the manner indicated in Schedule 1A of the Indian Companies Act, 1956.

or
or

Apart from the above, the three Savings Bonds shall also be transferable in favour of the pledgee/creditor, if the
pledgee/creditor invokes the pledge, hypothecation or lien as per Regulation 21 (3) of the G S Regulations.
47. Whether an investor is entitled for any compensation for the late receipt/ delayed credit of interest
warrants/maturity value of investments, etc.?
The bank shall compensate the investors for the above mentioned financial loss at a fixed rate of 8% per annum (with effect
from April 10, 2012).

Electronic Clearing Service (Credit Clearing) Mandate Form

(Investor (s)s option to receive redemption proceeds and
interest payments through Credit Clearing Mechanism)

1.

2.

Investor(s) Name and Address

a. Member ID No./BLA No.

b. PAN/GIR No.*
c.

3.

:
:
:

Telephone No./Mobile No./E-mail ID

Particulars of Bank account

a. Name of the Bank
b. Name of the branch

c.

:
:
:
:
:

1. Address

2. Telephone No.

:
:

9-Digit MICR code number of the bank and

branch appearing on the MICR cheque

issued by the bank

d. Type of the account (Savings, Current or
Cash Credit) with codes -10/11/13
e. Ledger and Ledger folio number
f.

Account number (as appearing on the

cheque book)

(In lieu of the bank certificate to be obtained as under, please attach a blank cancelled cheque or photocopy of a cheque or
front page of your savings bank passbook issued by your bank for verification of the above particulars)
4. Date of effect :
I/We hereby declare that the particulars given above are correct and complete. If the transaction is delayed or not effected at
all for reasons of incomplete or incorrect information, I/We would not hold the user institution responsible. I/We have read the
option invitation letter and agree to discharge the responsibility expected of us as a participant under the scheme.

(.....................................)
Signature(s) of the Investor(s)
(In case of joint holdings, all the investors, whose signatures are registered with PDOs, should sign here)
Certified that the particulars furnished above are correct as per our records.
Banks Stamp:

(.................................)
Signature of the authorised official of the Bank
Compulsory for investors due to receive maturity proceeds exceeding Rs. One lakh

These FAQs are issued by the Reserve Bank of India for information and general guidance purposes only. The Bank will not
be held responsible for actions taken and/or decisions made on the basis of the same. For clarifications or interpretations, if
any, investors are requested to be guided by the relevant circulars and notifications issued from time to time by the Bank and
the Government as well as the relevant provisions of the Government Securities Act, 2006 and the Government Securities
Regulations, 2007.

Additional FAQs on Inflation Indexed Bonds (Accounting Norms)

1. How will the daily changes in the inflation adjusted principal be accounted for, regarding

Inflation Indexed Bonds (IIBs)

1. Inflation Indexed Bonds (IIBs) were issued in the name of Capital Indexed Bonds (CIBs) during 1997. How is the
new product of IIBs different from earlier CIBs?
The CIBs issued in 1997 provided inflation protection only to principal and not to interest payment.
New product of IIBs will provide inflation protection to both principal and interest payments.
2. How will inflation protection be provided to both principal and interest rate? Whether inflation component will be
paid along with interest?
Inflation component on principal will not be paid with interest but the same would be adjusted in the
principal by multiplying principal with index ratio (IR). At the time of redemption, adjusted principal or the
face, whichever is higher, would be paid.
Interest rate will be provided protection against inflation by paying fixed coupon rate on the principal
adjusted against inflation.
An example of cash flows on IIBs is furnished below.
Example 1 (For illustration purpose)

Inflation
Index

Inflation
adjusted
principal

Year

Period

Real
Coupon

II

III

IV

28-May-13

1.50%

100

1.00

100.0

28-May-14

1.50%

106

1.06

106.0

1.59

28-May-15

1.50%

111.8

1.12

111.8

1.68

28-May-16

1.50%

117.4

1.17

117.4

1.76

Index Ratio

Coupon
Principal
Payments Repayment

Vti=(IVti/IVt0) VI=(FV*V) VII=(VI*III)

VIII

28-May-17

1.50%

123.3

1.23

123.3

1.85

28-May-18

1.50%

128.2

1.28

128.2

1.92

28-May-19

1.50%

135

1.35

135.0

2.03

28-May-20

1.50%

138.5

1.39

138.5

2.08

28-May-21

1.50%

142.8

1.43

142.8

2.14

28-May-22

1.50%

150.3

1.50

150.3

2.25

10

28-May-23

1.50%

160.2

1.60

160.2

2.40

Example 2 (For illustration purpose)

0

28-May-13

1.50%

100.0

1.00

100

1.50

28-May-14

1.50%

106.0

1.06

106

1.59

28-May-15

1.50%

111.0

1.11

111

1.67

28-May-16

1.50%

104.0

1.04

104

1.56

28-May-17

1.50%

98.0

0.98

98

1.47

28-May-18

1.50%

99.0

0.99

99

1.49

28-May-19

1.50%

105.5

1.06

105.5

1.58

160.2

28-May-20

1.50%

110.2

1.10

110.2

1.65

28-May-21

1.50%

106.5

1.07

106.5

1.60

28-May-22

1.50%

104.2

1.04

104.2

1.56

10

28-May-23

1.50%

99.2

0.99

99.2

1.49

100

3. Whether capital protection will be provided?

Yes, capital protection will be provided by paying higher of the adjusted principal and face value (FV) at
redemption.
If adjusted principal goes below FV due to deflation, the FV would be paid at redemption and thus, capital
will get protected.
4. Why will WPI be used for inflation protection? Why CPI has not considered for the same?
The consumer price index (CPI) reflects the inflation people at large face and therefore, globally CPI or
Retail Price Index (RPI) is used for inflation target by the Central Banks as well as for providing inflation
protection in IIBs.
In India, all India CPI is being released since January 2011 and it will take some time in stabilizing.
Monetary policy has also been continuing to target WPI for its price stability objective. In view of above, it
has been decided to consider WPI for inflation protection in IIBs.
5. What is the formula for calculating index ratio?
Index ratio (IR) will be calculated by dividing the reference WPI on the settlement date with the reference
WPI on the issue date.
The formula for the same is as under:

6. Why will final WPI be used with a lag of four months?

Final monthly WPI will be used as reference WPI for 1st day of the calendar month. The reference WPI for

intermittent days, i.e. dates between 1st days of the two consecutive months will be computed through
interpolation.
For interpolation, two months final WPI should be available throughout the month. As final WPI is available
with a lag of about two and half months (e.g. final WPI February 2013 will be released in mid-May 2013),
two months final WPI could be available only with a lag of four months.
In view of above, the four months lag has been chosen for final WPI to be considered as reference WPI for
1st day of the calendar month. For example, December 2012 final WPI will be taken as reference WPI for
1st of May 2013 and January 2013 final WPI will be taken as reference WPI for 1st of June 2013.
7. What is the formula for interpolation of daily reference WPI?
For calculating the index ratio for a specific date, daily reference WPI values would be linearly interpolated
using Ref WPI for the first day of the calendar month and the first day of the following calendar month.
The formula for computing the reference WPI for a particular day is as under:

[Ref WPIM = Ref WPI for the first day of the calendar month in which Date falls, Ref WPIM+1 = Ref WPI for
the first day of the calendar month following the settlement date, D = Number of days in month (e.g. 31 days
in August), and t= settlement date (e.g. August 6)]
An example of daily reference WPI computed through interpolation is furnished below.

T-1

Ref WPI
(Interpolation)

2-May-13

31

168.85

3-May-13

31

168.90

4-May-13

31

168.95

Date

1-May-13

Ref WPI
(Given)
168.8

5-May-13

31

168.99

6-May-13

31

169.04

7-May-13

31

169.09

8-May-13

31

169.14

9-May-13

31

169.19

10-May-13

31

169.24

11-May-13

10

31

169.28

12-May-13

11

31

169.33

13-May-13

12

31

169.38

14-May-13

13

31

169.43

15-May-13

14

31

169.48

16-May-13

15

31

169.53

17-May-13

16

31

169.57

18-May-13

17

31

169.62

19-May-13

18

31

169.67

20-May-13

19

31

169.72

21-May-13

20

31

169.77

22-May-13

21

31

169.82

23-May-13

22

31

169.86

24-May-13

23

31

169.91

25-May-13

24

31

169.96

26-May-13

25

31

170.01

27-May-13

26

31

170.06

28-May-13

27

31

170.11

29-May-13

28

31

170.15

30-May-13

29

31

170.20

31-May-13

30

31

170.25

1-June-13

170.3

8. If there is a revision in the base year of WPI series, how will the revised series be used for indexation?
WPI series is being revised after every 10 or more years (e.g. base year revision in WPI series took place in
1981-82, 1993-94 and 2004-05).

Any revision in the base year would be tackled by splicing the base years so that a consistent WPI series with
the same base year is available for indexation purpose since the issue date of the bond.
9. What will be the tax treatment of interest payment and capital gains accrual due to inflation?
Extant tax provisions will be applicable on interest payment and capital gains on IIBs.
There will be no special tax treatment for these bonds.
10. What is non-competitive bidding and how will retail investors be able to participate in the same?
A non-competitive scheme has been devised for participation of such investors in the auction. Under this
scheme, investors are required to indicate the amount of their bids and not the price at which they want to
subscribe. Allocation to such investors is made at the weighted average price emerged in the competitive
bidding.
Presently in auction, up to 5 per cent of the notified amount is reserved for non-competitive bidding, while
up to 20 per cent of the notified amount will be earmarked for such bidding in case of IIBs to encourage
retail participation.
The retail investors will be able to participate in non-competitive bidding through primary dealers (PD) and
banks. They can open a gilt account with PDs and banks or demat account for such participation.
11. Whether foreign institutional investors (FIIs) will be allowed to invest in IIBs?
IIBs would be Government securities (G-Sec) and the different classes of investors eligible to invest in GSecs would also be eligible to invest in IIBs.
FIIs would be eligible to invest in the forthcoming IIBs but subject to the overall cap for their investment in
G-Secs (currently USD 25 billion).
12. Whether IIBs will be traded in the secondary market?
As IIBs are G-Sec, they can be tradable in the secondary market like other G-Secs. Investors will be able to
trade them in NDS-OM, NDS-OM (web-based), OTC market, and stock exchanges.
13. Whether investors will be able to participate in the primary auction of IIBs through web-based platform?
Not as of now.
The work on web-based platform for primary auction is, however, underway and as and when the same is
completed, investors will be able use the same for participating in the primary auction of G-Secs including

IIBs.
14. Whether IIBs will be eligible for short-sale and repo transactions?
IIBs would be a G-Sec and therefore, would be eligible for short-sale and repo transactions.
15. Whether IIBs will be eligible for statutory liquidity ratio (SLR)?
IIBs would be a G-Sec and issued as part of the approved Government market borrowing programme.
Therefore, IIBs would automatically get SLR status.
16. What will be the settlement cycle for IIBs?
Settlement cycle of IIBs will be T+1, like fixed rate conventional bonds.
17. What will be the day count for IIBs?
Like other G-Secs, the day count for IIBs would 30/360.
18. Whether issuance of this instrument will be within the Govt market borrowing programme?
Yes, issuance of IIBs would be within the Govt market borrowing programme of about Rs. 579,000 crore for
2013-14.
19. What will be the maturity of IIBs?
To begin with, IIBs will be issued for 10 years.
As it is advisable to issue IIBs at various maturity points to have benchmarks and cater to diverse market
demands, more maturity points may be explored subsequently.
20. What will be the frequency of coupon payment on IIBs?
Like other G-Secs, coupon on IIBs would be paid on half yearly basis.
Fixed coupon rate would be paid on the adjusted principal.
21. What will be the frequency of issuance of IIBs?
As indicated in the press release issued by Reserve Bank of India on May 15, 2013, IIBs would be launched
on June 4, 2013 and the same would be issued on the last Tuesday of each month during 2013-14. This

would also include the last Tuesday of June 2013.

22. Auction of IIBs would be yield based or price based?
As is the case with fixed rate conventional bonds, IIBs would be issued through yield based auction and
subsequent reissues will be through price based auction.
Investors would be required to bid for real yield in case of IIBs as against nominal yield in case of fixed rate
G-Sec.
23. Whether IIBs will be underwritten by primary dealers (PDs)?
Like fixed rate G-Secs, IIBs would be underwritten by the primary dealers.
24. What is going to be the issuance size of IIBs for each tranche?
As indicated in our press release dated May 15, 2013, size of the each tranche would be Rs. 1,000-2,000
crore.
25. Will there be exclusive series of IIBs for retail investors?
Exclusive series for retail investors would be launched in the second half of the current fiscal year (around
October 2013).
26. Whether product structure of the retail series of IIBs would be same as series of IIBs of all investors?
Product structure of the series of IIBs for retail investors is yet to be finalised. It will be finalised in the due
course and accordingly, the same would put in the public domain.
27. What will be methodology for valuation of these bonds?
Fixed Income Money Market and Derivatives Association of India (FIMMDA) will come out with valuation
guidelines shortly.
NDS-OM web
1. What is NDS-OM?
NDS-OM is a screen based electronic anonymous order matching system for secondary market trading in
Government securities owned by RBI. Presently the membership of the system is open to entities like Banks,
Primary Dealers, Insurance Companies, Mutual Funds etc. i.e entities who maintain SGL accounts with RBI. These
are Primary Members (PM) of NDS and are permitted by RBI to become members of NDS-OM. Gilt Account
Holders which have gilt account with the PMs are permitted to have indirect access to the NDS-OM system i.e they

can request their Primary Members to place orders on their behalf on the NDS-OM system.
2. What is NDS-OM Web Module?
To further enhance the access of such Gilt Account Holders (herein after referred to as GAHs) to NDS-OM, an
internet based web application is provided to such clients who can now have direct access to NDS OM, the system
owned by RBI. The internet based utility permits GAH to directly trade (buying and selling) in Government
Securities (G-Sec) in the secondary market. The access is however, subject to controls by respective Primary
Member (PM) with whom GAHs have gilt account and current account.
3. Why are the benefits to the GAH over the existing NDS-OM system?
The GAH will have access to the same order book of NDS-OM as the Primary Members. GAH will be in a better
position to control their orders (place/modify/cancel/hold/release) and will have access to real time live quotes in the
market. Since notifications of orders executed as well as various queries are available online to the GAH, they are
better placed to manage their positions. Web based interface that leverages on the gilt accounts already maintained
with the custodian Banks/PDs therefore provides an operationally efficient system to retail participant.
4. Which are the entities permitted to access the NDS-OM Web Module?
The potential users of the NDS-OM Web Module are GAHs permitted by RBI to access the NDS OM Web Based
Module. So far, GAHs have only the indirect access through CSGL route for placing their order/bid feed into NDSOM. Now in addition to the indirect access, permitted GAHs can directly deal on the NDS-OM Web system, subject
to controls set by PM. The access to the GAH to the NDS-OM Web Based Module is granted on a request made on
his behalf by its Primary Member.
5. What is the procedure for access to NDS-OM Web Module by GAH?
On behalf of GAH, PM needs to submit an access request form to CCIL. The Request would be formally addressed
to RBI. However, CCIL has been authorized to directly receive and process Access Request Form from PM for
operational convenience. A detailed operation flow is contained in Annexure I.
6. What are the guidelines governing access to NDS OM Web Module?
NDS-OM Web Module is only an electronic front end for accessing the main NDS-OM system. All
instructions/notifications/circulars/press releases issued by RBI, both current and future, relating to CSGL trades
would be binding and applicable. Dealing on NDS-OM Web would also be subject to RBI's NDS-OM Guiding
Principles.
7. Does RBI have any relationship with GAHs?
While RBI will facilitate the trading platform for buying and selling of G-Secs, RBI shall not have any relationship,
direct or otherwise, with any of the GAH granted access to NDS-OM Web. Further, the RBI has no role in any
possible disputes between GAH and PM.

8 What is the role of Primary Member?

PM remains responsible, as the case at present, of all the actions of his GAHs. PM will be responsible for the margin
maintenance and settlement of the trades of their GAHs also. Prior to commencement of trade on NDS-OM Web by
an eligible authorized GAH user, the PM shall ensure that the various Operational Risk Control Parameters (ORCP)
values have been set on NDS-OM Web. For the purpose, PM needs to install an application for its GAHs
Management, Risk Management and Bid Management policies and practices. NDS-OM Administrator (CCIL)
would create an authorized super-user (Client Head) for the PM for attending to the management activities.
9: How will the Gilt Account Holder access the NDS-OM Web Module?
GAH accesses the trading platform through URL, https://www.ndsind.com. This is common URL for web based
NDS-OM as well as for web based Auction. Users of GAH need to select NDS-OM in the option after logging on to
the URL. PM will need to arrange for login/password from the CCIL and Digital Certificates from any Government
Recognized Certifying Authority designated by RBI, on behalf of GAH. For added security, the digital certificates
need to be installed in an e-token as per specifications approved. Without the digital certificate, e-token and the
password, the GAH cannot log in to the NDS OM web based module. The Primary member will be responsible for
obtaining/renewal and intimating revocation to RBI/CCIL of the Digital Certificate for such GAH users.
10. If the internet connectivity is down, how the client can place the order?
PM will not be able to place orders on behalf of the client in the web based system. However the PM can continue
placing orders for the client in the existing system. But these orders will not be subject to the various risk validations
that are available in the Web system.
11. What are the charges for this application?
The system is owned by RBI. There are no charges for use of this application by clients. However, since all trades
are to be guaranteed and settled by CCIL, PMs will have to pay settlement charges and also continue to deposit
adequate margin on behalf of their clients to CCIL.
12. What is the infrastructure requirement at the GAH end?
All NDS OM-Web GAH users would need to use Digital Certificates issued by the designated Certifying Authority
obtained by the respective PM, embedded into e-tokens (of the prescribed configuration) supplied to them by their
PM. A safe, reliable, stable internet connection with suitable bandwidth is necessary for efficient operations. A
modern PC with contemporary configuration, minimum 1 GB RAM, Operating System - Windows XP and above
will be required. Only IE Browser - 7 and above can be used for accessing OM-Web.
13. What does GAHs User Management by PM involve?
GAHs Management involves PMs actions like - create transactional users (employees of GAH who can place
bids) and view only users (employees of GAH who can only view the bid related queries), modify users,
suspend/unlock users, log-off users, obtain and set/reset the login passwords of users, set risk limits, take action on

bids submitted by GAHs etc.

14. Who creates Users for the GAH?
Once the GAH is granted access to the NDS-OM Web Module, the Primary Member can create Users under the
GAH, who can log into the system. The users once created by the Primary Member have to be approved by the
NDS-OM Web Admin at CCIL.
15. What are the different types of Users of the GAH?
There are two types of GAH users (i) Transactional Users - users who can do order managementplace/modify/cancel/hold/release and trade. (ii) View Users- who can only view orders/traded placed by various
transactional users under the same GAH.
16. Can there be more than one user under one GAH?
Yes. Under one GAH, a PM can create as many users as they wish. The users created by the PM will have to be
approved by the NDS OM Web Admin at CCIL.
17. Why are digital certificate and a e-token required for login to the NDS-OM Web Module?
GAH will be accessing the NDS OM Web Based Module over the internet. To prevent unauthorized access and to
ensure non-repudiation, RBI has stipulated that a digital certificate has to be obtained for each GAH User from
IDRBT. The digital certificate has to be installed in an e-token which provides the second layer of security. Before a
GAH User is created by the PM, the PM has to ensure that the digital certificate and the e-token have been procured
for the GAH User.
18. Why the Operational Risk Control Parameters?
Before a GAH User can start dealing on the NDS-OM Web Module, the PM has to set certain operational risk
controls as well as limits for each GAH/GAH User, since PM will continue to be responsible for the settlement of
trades done by such GAHs. Accordingly PMs have the facility to set operational risk controls in respect of their
GAHs who would be given access to NDS-OM Web so as to mitigate risk arising out of their GAH trades. Every
order inputted by GAH on NDS-OM Web would be subject to validations against each risk control set by PM before
being passed on to the common order book of NDS-OM. Risk Management involves PMs setting risk limits for
GAHs before the GAHs can start trading.
19. What are the Operational Risk Control Parameters?
The risk parameters include single order limit, price/yield range limits against the last traded price/yield of the
security, activity controls (assigning buy/sell privileges to users), security stock balance, turnover limits (trading
limit in terms of gross amount in face value of all [buy + sell] orders of GAH) and funding limits (net aggregate
settlement consideration up to which GAH can accumulate net long fund position). Orders beyond the set limits will
be rejected.

20. How are the various Operational Risk Control Parameters (ORCP) managed?
All OPRC values are modifiable intra-day, subject to relative modifications being applicable only on a prospective
basis i.e., they will not impact in any manner trades already concluded prior to such modification request being
received by NDS-OM Web. Every order input by any authorized GAH user shall be validated against each of the
OPRC values on funding/trading limits given to individual GAH user set by the PM before routing orders to the
NDS-OM. Any order that violates the values prescribed for the concerned GAH and/or individual GAH user would
be rejected by NDS-OM Web. Orders that successfully pass through OPRC validations set for a GAH by its PM
would travel to the NDS-OM system and would be eligible for being traded in the same manner as any other order
on the NDS-OM system following requisite order matching rules, conventions and processes. As GAHs remain the
constituents of the PM, the trades will seamlessly settle through the existing settlement infrastructure.
21. Whether pre-funding is required?
The Web based facility is only a front end platform for placing GAHs buy and sell orders. PM continues to be
responsible for all actions undertaken by their respective GAHs including the settlement of their securities and funds
obligations. In other words, the settlement of the successful orders of GAHs will continue to happen as usual as at
present. Though the PM needs to set the funding limits as part of his risk control measure in the system, no separate
pre-funding requirements are set. The Funding Limit is a functionality that enables the PM to put a cap on the total
value (net consideration) of orders that a GAH may place on the basis of the terms and conditions mentioned in their
mutual agreements.
22. What are the securities that can be traded on NDS-OM Web Module?
All central government securities, state government securities and treasury bills are tradable on the NDS-OM Web
Module. The complete list of securities is available on the NDS-OM Web Module.
23. What is minimum order Size? What are the markets available on NDS-OM Web Module?
Since the orders placed on present application merges with main NDS-OM, the trade segment are as same as normal
NDS-OM i.e. Standard market and Odd Lot Market. The Lot size for the Standard Market is minimum Rs.5 crore
and in multiples of Rs. 5 crore. In the Odd Lot segment the minimum lot size is Rs.10,000 for Central and State
Government Securities and Rs.25,000 for Treasury Bills. Presently GAH are not permitted to participate in the
When Issued Market. GAH are also not permitted to short sale in government securities market.
24. What the order management functionalities available to the GAH?
On the NDS OM Web Module, the GAH has the functionality to directly place bids and offers. The GAH can
modify or cancel his/her outstanding orders. Outstanding orders can also be put on Hold and Released, if required
by the GAH. The complete control over his outstanding orders is available to the GAH. The GAH gets real time
update about the status of his orders through notifications and pop-ups.
25. What are the various quantity and time conditions available to the GAH?

The various quantity conditions available are as under:

Normal: By default the amount type will be Normal. A Normal order can get partly traded.
Disclosed: Disclosed Amount is the part of order amount (In Rs. Crore) which the User is willing to disclose
to the market. This is an optional field.
All or None (AON): By selecting this option, a User specifies that all of the order should be traded in full i.e.
no partial trades, should be allowed. This is an optional field.
The various time conditions available are as under:
Day: Under this time condition, order would remain valid throughout the validity of the trading session. It
will be available for trade till session close. By default Time Condition - Day is selected.
IOC (Immediate or Cancel): If a User wishes his order to be traded immediately, then he could select IOC.
Under this condition, when an IOC order is placed, the order would seek for an immediate match, if found it
results into a trade; else the IOC order would get cancelled.
GTT (Good Till Time): Here while placing an order, the User could mention the time up to which the order
would be valid and available for trade. Once the User specified order expiry time has been reached the order
would get cancelled.
26. What are the Order Matching rules of the NDS-OM system?
CG and SG match on a price- time priority basis and T Bills Match on a yield-time priority basis. For a bid in
CG/SG to match with an offer, the bid price has to be equal to or greater than the offer price. For an offer in CG/SG
to match with a bid, the offer price has to be equal to or less than the offer price. In case of T Bills, the bid yield has
to be equal to or less than the offer yield and vice versa for offers. At the same price/yield, the order which has come
first to the system will get priority.
27. Will the orders placed by a GAH match with orders placed by its Primary Member?
The NDS-OM system ensures that orders place by a GAH will not match with its Primary Member. Similarly orders
placed by two GAH of the same Primary Member will not match.
28. What are the various Order Management rights available to the Primary Member?
The Primary Member has the right to cancel/hold or release any outstanding order of the GAH. For instance, in case
of any connectivity issues at the GAH end, the GAH can request the Primary Member to either cancel or hold his
orders. Orders held by the Primary Member can only be released by the Primary Member. Orders placed by the
GAH cannot be modified by the Primary Member. Trades once concluded on the NDS OM Web Module cannot be
cancelled.

29. Will the orders placed by clients be visible to PM?

The Primary Member being responsible for the settlement of the trades done by the GAH on the NDS OM Web
Based Module, will have a view of the Orders placed by the GAH as well as the trades done by the GAH.
30. What are the various Market Queries available to the GAH?
On the NDS-OM Web Module, the GAH has access to real time quotes on various securities as available on the
main NDS-OM system. The GAH is able to view the best bid/offer (Market Watch) in various securities as well as
the best 10 bid and offers (Market By Price / Market By Order). The GAH also has access to the total Trade
information (Trade Watch) as well as half hourly movement of each security. (Market Movement). Further details
are available in the User Manual.
31. What are the various Dealer/Member Queries available to the GAH?
The GAH has an online view of the various orders placed by him which are outstanding, the orders which got
executed, the net funds position as well an activity log which provides an audit trail of each order placed by the
GAH. The transactional user will be able to view his own orders/trades whereas the View User will be able to view
orders/trades done by various transactional users under the same client.
32. How does settlement of trades concluded by GAH on the NDS-OM Web Module take place?
There is no change in the settlement current settlement procedure. The trades concluded by GAH on the NDS-OM
Web Module will flow directly in an STP manner to CCIL for settlement. The Primary Member will continue to be
responsible for the settlement of such trades as well as maintenance of adequate margins with CCIL in respect of
such trades.
33. Does a trade concluded on NDS-OM need to be reported again on PDO-NDS?
A trade concluded on the NDS-OM Web Module need not be reported again on the PDO-NDS Module.
Government Securities - Gilt Funds

Gilt Funds
Gilt funds, as they are conveniently called, are mutual fund schemes floated by asset management
companies with exclusive investments in government securities. The schemes are also referred to
as mutual funds dedicated exclusively to investments in government securities. Government

securities mean and include central government dated securities, state government securities and
treasury bills. The gilt funds provide to the investors the safety of investments made in government
securities and better returns than direct investments in these securities through investing in a variety
of government securities yielding varying rate of returns gilt funds, however, do run the risk.. The first
gilt fund in India was set up in December 1998.
Facilities from Reserve Bank of India
The Reserve Bank provides liquidity support and other facilities, such as, SGL and current accounts,
transfer of funds through the Reserve Bank's Remittance Facility Scheme and access to call money
market to dedicated gilt funds. These facilities are provided to encourage gilt funds to create a wider
investor base for government securities market. The facilities provided to gilt funds include:
i.

Liquidity support: The objective of extending liquidity support to dedicated gilt funds is to
support short-term liquidity requirements of such mutual funds. The Reserve Bank of India
provides liquidity support to gilt funds by way of reverse repurchase agreements (reverse
repos). Reverse repos are done in government of India dated securities eligible for repo
transactions and treasury bills of all maturities. The quantum of liquidity support on any day
is up to 20 per cent of the outstanding stock of government securities, including treasury
bills, held by the gilt funds as at the end of the previous working day.

ii.

SGL and current accounts: The Reserve Bank opens one subsidiary general ledger (SGL)
account and one current account for gilt funds' own transactions at all centers of the
Reserve Bank wherever desired by the gilt funds.

iii.

Funds transfer facility: The gilt funds are given the facility of transfer of funds from one
center to another under the Remittance Facility Scheme of the Reserve Bank. The gilt funds
are also given the facility of clearing of cheques arising out of government securities
transactions, tendered at the Reserve Bank counters.

iv.

Access to call market: Gilt funds can access the call money market as lenders.

v.

Ready forwards: The Reserve Bank of India will also recommend to the Government of India
to permit the gilt funds to undertake ready forward transactions in Government securities
market.

Liquidity Support
Eligibility
All gilt funds - public and private sector, open-ended or close- ended - are eligible to avail liquidity
support and other facilities from the Reserve Bank of India. The gilt funds schemes should, however,
have the approval of the Securities and Exchange Board of India. It would be prudent for the gilt
funds to submit an advance copy of the draft offer document to the Reserve Bank of India for
preliminary scrutiny at the time of submitting the draft offer document to the Securities and Exchange
Board of India. This is to enable the Reserve Bank to satisfy itself that the scheme proposed to be
floated by the gilt funds is in conformity with the Reserve Bank's guidelines for availing liquidity

support from the Reserve Bank of India.

Conditions
The Reserve Bank of India provides liquidity support by way of reverse repos subject to the following
terms and conditions:
i.

Re-purchase agreements (reverse repos) with the Reserve Bank are in eligible
central government dated securities and treasury bills of all maturities.

ii.

The prices of the securities for reverse repo transactions are determined by the
Reserve Bank of India, at its discretion.

iii.

The securities tendered by the gilt funds for reverse repos by the Reserve Bank are
in multiples of Rs. 10 lakh (face value).

iv.

Gilt funds can avail the reverse repo facility for a maximum period of 14 days at a
time.

v.

The repo rate is the Bank Rate.

vi.

Liquidity support is made available at Mumbai only. The gilt funds, however, are free
to transmit the funds to other centers of the Reserve Bank under its Remittance
Facility Scheme.

vii.

The gilt funds cannot use the funds raised through the reverse repos facility for onlending in the call/notice money market.

viii.

The Reserve Bank reserves the right to partially accept or reject any application for
liquidity support without assigning any reason.

ix.

The Reserve Bank can call for all relevant information from gilt funds in regard to
their operations and the gilt funds are required to provide it.

Drawal
For drawing the liquidity support from the Reserve Bank, gilt funds are required to:
i.

make an application to the Chief General Manager, Internal Debt Management Cell,
Reserve Bank of India, Central Office, Mumbai.

ii.

submit the filled up form to the Internal Debt Management Cell before noon on the
day the liquidity support is desired to be availed.

iii.

return the duplicate copy of the acceptance-cum-deal confirmation advice issued by

the Reserve Bank duly signed in token of having accepted the deal and also arrange
to lodge the SGL transfer form with the Securities Department of the Reserve Bank,

Mumbai Office.
iv.

authorise the Reserve Bank of India to debit its current account on the expiry of the
repo period, by the amount indicated in the acceptance-cum-deal confirmation
advice; and

v.

arrange to lodge SGL transfer form for repurchase of securities.

vi.

receive, the amount of liquidity support as direct credit to its current account
maintained at the Reserve Bank, Mumbai, on the day of the drawal.

Government Securities - Investment Opportunities for Provident Funds

FAQs: Investment Opportunities for Provident Funds
Why G-secs?
Provident funds, by their very nature, need to invest in risk free securities that also provide them a reasonable return.
Government securities, also called the gilt edged securities or G-secs, are not only free from default risk but also provide
reasonable returns and, therefore, offer the most suitable investment opportunity to provident funds.
What are G-secs?
The Government securities comprise dated securities issued by the Government of India and state governments as also,
treasury bills issued by the Government of India.Reserve Bank of India manages and services these securities through its
public debt offices located in various places as an agent of the Government.
Treasury Bills

Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing
short-term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day,
182-day and 364-day. There are no treasury bills issued by State Governments.

Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a
discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS).
Auctions
While 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364-day T-bills are auctioned every alternate
week on Wednesdays. The Reserve Bank of India issues a quarterly calendar of T-bill auctions which is available at the Banks
website. (URL:http://www.rbi.org.in). It also announces the exact dates of auction, the amount to be auctioned and payment

dates by issuing press releases prior to every auction.

Type of

Day of

Day of

T-bills

Auction

Payment*

91-day

Wednesday

Following Friday

182-day

Wednesday of non-reporting week

Following Friday

364-day

Wednesday of reporting week

Following Friday

* If the day of payment falls on a holiday, the payment is made on the day after the holiday.
Payment
Payment by allottees at the auction is required to be made by debit to their/ custodians current account.
Participation
Provident funds can participate in all T-bill auctions either as competitive bidders or as non-competitive bidders. Participation
as non-competitive bidders would mean that provident funds need not quote the price at which they desire to buy these bills.
The Reserve Bank allots bids to the non-competitive bidders at the weighted average price of the competitive bids accepted in
the auction. Allocations to non-competitive bidders are in addition to the amount notified for sale. In other words, provident
funds do not face any uncertainty in purchasing the desired amount of T-bills from the auctions.
Where to purchase from?
T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the
system. Non-competitive bids are routed through the respective custodians or any bank or PD which is an NDS member.
Dated Securities
Government paper with tenor beyond one year is known as dated security. At present, there are Central Government dated
securities with a tenor up to 30 years in the market.
Auction/Sale
Dated securities are sold through auctions. Fixed coupon securities are sometimes also sold on tap that is kept open for a few

days. Of late, the issuance of Central/state Government dated securities are being done through auctions.
Announcement
A half yearly calendar is issued in case of Central Government dated securities, indicating the amounts, the period within which
the auction will be held and the tenor of the security, which is made available on Reserve Banks website. The Government of
India and the Reserve Bank also issue a press release to announce the sale, a few days (normally a week) before the auction.
The press release is widely reported in the print media and wire agencies. The government of India also issues an
advertisement in the leading financial newspapers. The announcement of auctions/sales and their results are published on the
Reserve Bank website (URL:http://www.rbi.org.in)

Subscriptions can be for a minimum amount of Rs.10,000 and in multiples of Rs.10,000.

Where are the sales held?
Auctions are conducted electronically on PDO-NDS system. The bids are submitted by the members on PDO-NDS system
both on their own behalf as well as on behalf of their clients Provident funds can submit their bids competitive/non-competitive
to their respective custodian or to any bank/PD who is an NDS member.
Payment
The payment by successful bidders is made on the issue date, as specified in the auction notification, usually the working day
following the auction day.
State Government Securities
These are securities issued by the state governments and are also known as State Development Loans (SDLs). The issues
are also managed and serviced by the Reserve Bank of India.
The tenor of state government securities is normally ten years. State government securities are available for a minimum
amount of Rs.10,000 and in multiples of Rs.10,000. These are available at a fixed coupon rate. The auctions for State
Government securities are held electronically on PDO-NDS module.
Availability of G-secs
Apart from purchasing government securities in the primary issuance, i.e. through auctions/sales, all types of government
paper can also be purchased from the secondary market. Primary Dealers also purchase and sell securities. Provident Funds
can bid under Non-competitive bidding facility in primary auction of G-Secs under which they can place a single bid of up to
Rs. two crore (face value) (minimum Rs. 10,000/-) through their custodian (bank/PD). The allotment is made at the weighted
average cut-off yield/price of the competitive bids accepted in the auction

Non-competitive Bidding Facility

for Dated Government Securities
To enable medium and small investors to participate in the auction process without taking the price risk in auctions, the
Reserve Bank of India has introduced a facility of non-competitive bidding in dated government securities auctions for select
set of investors. Non-competitive bidding means that a person would be able to participate in the auctions of dated government
securities without having to quote the yield or price in the bid. Thus, he will not have to worry about whether his bid will be on

or off-the-mark; as long as he bids in accordance with the scheme, he will be allotted securities fully or partially.
1. Who can participate in the Scheme?
Participation in the Scheme of non-competitive bidding is open to any person including firms, companies, corporate bodies,
institutions, provident funds, trusts and any other entity as prescribed by RBI. As the focus is on the small investors lacking
market expertise, the Scheme will be open to those who do not have current account (CA) or Subsidiary General Ledger
(SGL) account with the Reserve Bank of India. As an exception, Regional Rural Banks (RRBs) and Urban Cooperative Banks
(UCBs) can also apply under this Scheme in view of their statutory obligations.
2. What are the advantages of the non-competitive bidding facility?
1. The non competitive bidding facility will encourage wider participation and retail holding of government securities.
2. It will enable individuals, firms and other mid segment investors who do not have the expertise to participate in the auctions.
3. Such investors will have a fair chance of assured allotments at the rate which emerges in the auction.
3. Will non-competitive bidding be allowed in all dated securities auctions?
Generally, it is available in all auctions of dated securities. The availability of non-competitive bidding facility in an auction will
be announced along with the respective press release and the information is made available on Reserve Banks website.
4. Is the Scheme available for auctions of Treasury Bills?
This Scheme is not applicable to auctions of Treasury Bills. However, even in the case of Treasury bills, a different type of noncompetitive bidding is permitted, only for State Governments, eligible provident funds, select foreign central banks and the
custodian of Enemy Property.
5. Is the Scheme available in the auctions of State Government Securities?
Yes, this scheme is available in the auctions of State Government Securities with effect from August 25, 2009. In the case of
State Government securities, maintaining a gilt account is not compulsory for participation of non-competitive bidding
6. What would be the amount offered for non-competitive bidding?
In the specified auctions of Government of India dated securities, non-competitive bids up to 5 per cent of the notified amount
will be allowed within the notified amount. That is, if the notified amount is Rs.1,000 crore, the amount reserved for noncompetitive bidders would be Rs.50 crore and the remaining Rs.950 crore will be put up for competitive auctions in case of
Central
Government
Securities.
In case of specified auctions of State Government Securities, non-competitive bids up to 10 per cent of the notified amount will
be allowed within the notified amount. That is, if the notified amount is Rs.1,000 crore, the amount reserved for non-competitive
bidders would be Rs.100 crore and the remaining Rs.900 crore will be put up for competitive auctions
7. How can the eligible investors participate in the auctions?
Eligible investors cannot participate directly. They have to necessarily come through a bank or Primary Dealer (PD) for auction.
Each bank or PD will, on the basis of firm orders, submit a single bid for the aggregate amount of non-competitive bids on the
day of the auction. The bank or PD will furnish details of individual customers, viz., name, amount, etc. along with the
application.
8. What is the minimum/ maximum bidding amount?

The minimum amount for bidding will be Rs.10,000 (face value) and in multiples in Rs.10,000. The maximum amount for a
single non-competitive bid should not exceed Rs.2,00,00,000 (face value) in the auctions of GOI dated securities and not more
than 1% of the notified amount in the auctions of State Government securities.
9. How many bids can an investor make under this scheme?
An investor can make only a single bid through a bank or PD under this scheme in each specified auction. The bank or PD
through whom the investor bids will obtain and keep on record an undertaking to the effect that the investor is not making a bid
through any other bank or PD.
10. Is there an application form?
Yes. This is available on the RBI website. The bank/PD through whom the application is made will assist the investor to obtain
the form.
11. At what rate will the non-competitive bidders get the allotment?
The allotment to the non-competitive segment will be at the weighted average rate of all allotments to competitive bidders.
12. How will the RBI allot the bids to non-competitive bidder?
The RBI will allot the bids under the non-competitive segment to the bank or PD which, in turn, will allocate to the bidders.
13. If non-competitive bidding amount is more than the amount reserved, how will the RBI allot the non-competitive

In case the aggregate amount bid is more than the reserved amount through non-competitive bidding, allotment would be
made on a pro rata basis.
Example:
Suppose, the amount reserved for allotment in non competitive basis is 10 crore. The total amount of bids for Non competitive
segment is 12 crore. The partial allotment percentage is =10/12=83.33%. That is, each bank or PD who has submitted noncompetitive bids received from eligible investors will get 83.33% of the total amount submitted by him. It may be noted that the
actual allotment may vary slightly at times from the partial allotment ratio due to rounding off with a view to ensuring that the
allotted amounts are in multiples of 10,000/-.
14. And if the amount bid through non-competitive bidding is less than the reserved amount?
In case the aggregate amount bid is less than the reserved amount all the applicants will be allotted in full and the shortfall
amount will be added to the amount available for competitive auction.
15. How will the bank or PD make partial allotment?
It will be responsibility of the bank or PD to appropriately allocate securities to their clients in a transparent manner.
16. How much does the investor pay for taking possession of the security?
The investor pays the weighted average price of all accepted competitive bids. In case of a yield based auction, the weighted
average yield in the auction will be used to arrive at the allotment price for non-competitive bids.

17. What if the payment for the securities is made to the bank/PD after the date of issue of the security ?
Since the bank/PD has to make payment on the date of issue itself, in case payment is made by the client after date of issue of
the security, the consideration amount payable by the client to the bank or the PD would include accrued interest. For example,
if for security 7.59% GOI 2016, the payment is made three days after the date of issue, the accrued interest component will
amount to (7.59/100) x (3/360) = Rs.0.0632 per Rs.100 face value.
For example, if the weighted average price is Rs.100.21, the total amount payable by the investor for acquiring securities worth
Rs.10,000 after three days will be Rs. 10, 021 + Rs. 6.32 = Rs.10, 027.32 (if not rounded off) .
18. What will be position in respect of price based auctions?
The non competitive bidders will pay the weighted average price which will emerge in the auction. In addition, they have to pay
interest accrued from the last coupon payment date to the date of issue of the security.
19. In how many days will the investor receive the security?
The transfer of securities to the clients should be completed within five working days from the date of the auction. This is the
responsibility of the bank/PD.
20. How will the securities be issued?
RBI will issue securities only in demat (SGL) form. It will credit the securities to the CSGL account of the bank/PD. The
bank/PD will in turn credit the securities to the dematerialised securities account of the investor.
21. How will the investor make payment for the security?
The non-competitive bidder will make payment to the bank or the PD through which he has put the bid and receive his
securities from them.
22. Will the bank or the PD charge for this service?
The bank or the PD can recover upto six paise per Rs.100 as commission for rendering this service to their clients. The bank
or the PD can build this cost into the sale price or it can recover separately from the clients. In case of State Government
securities, such costs may be recovered and accounted for separately from the clients and should not be built into the price.
The bank or the PD is not permitted to build any other cost, such as funding cost, into the price.
23. How will the non-competitive bidder know the modalities of payment?
Modalities for obtaining payment from clients towards the cost of securities, accrued interest, wherever applicable and
commission will have to be worked out by the bank or the PD and clearly stated in the contract made for the purpose with the