Government Securities - Investment Opportunities for Provident Funds
FAQs: Investment Opportunities for Provident Funds
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 (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).
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.
Wednesday of non-reporting week
Wednesday of reporting week
|* If the day of payment falls on a holiday, the payment is made on the day after the holiday.|
Payment by allottees at the auction is required to be made by debit to their/ custodian’s current account.
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.
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.
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.
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 Bank’s 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.
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
Government Securities - Investment Opportunities for Provident Funds Reviewed by sambasivan srinivasan on 12:30:00 PM Rating: