Government Securities | Meaning | Forms | Characteristics

What are Government securities?

The securities issued by the central, state and quasi-governments are known as Government securities or gilt edged securities. On the other hand, Government guaranteed securities are those securities the income and capital of which are guaranteed by the Government.

Government Securities
Government Securities – Meaning, Forms, Characteristics

So, a Government-guaranteed security is a claim on the Government. The rates of interest on these securities are relatively lower because of their high liquidity and safety. Government securities in India have a large market.

Forms of Government Securities

Promissory notes and stock certificates are the important forms of Government securities.

1. Promissory Notes

Promissory notes are the popular form of Government securities. Promissory notes are highly liquid in nature and they are purchased by banks. Promissory notes are negotiable securities which are freely transferred either by mere delivery or through endorsement.

The promissory notes are basically registered promises of the Government and are entered in a register meant for entering promissory notes. The investor, on the presentation of the promissory note at the office of purchase, can receive interest income.

2. Stock certificates

The Life Insurance Corporation of India and Provident Funds are the biggest purchasers of Stock certificates. They purchase Stock certificates for two important reasons —

  1. There is a legal compulsion on them to invest in Government securities out of the investable surplus for the year; and
  2. They have large resources at their disposal even after fulfilling the maximum limits permissible for investment in private sector.

Funds mobilized through the issue of Government securities are utilized for the development of the country in line with the planned priorities of the Government.

Characteristics of Government Securities

The basic characteristics of the Government securities are understood as follows:

1. Issuing authority

Government securities are issued only by the Central Government, State Governments and quasi-Government authorities. In India, Gold bonds, National Defense Bonds, Rural Development Bonds etc., are the securities issued by the Central Government. Apart from these, the Central Government also issues Treasury bills, special Rupee securities, etc.

Local Government authorities, city corporations, municipalities, Port trusts, state Electricity Boards, Public Sector undertakings issue bonds. Financial institutions like IDBI, IFCI Land Development Banks and Housing Boards usually issue bonds and debentures.

2. Purpose of issue of Government Securities

Government securities are mainly issued for mobilizing funds for the implementation of priority programmes and for meeting deficit budgets of Central and State Governments. As Government securities have high liquidity, they largely influence the stock market.

3. Government securities and Commercial Banks

Commercial Banks in India invest a part of their funds in Government securities. Commercial banks holding Government securities approach the Reserve Bank India for financial accommodation. Thus, the commercial banks can raise loans by offering the Government securities as collateral security.

4. Rate of interest

Generally, the rate of interest on Government securities is lower than any other form of investment. The lower rate of interest is due to the fact that the Government securities are the safest form of investment. The Government never fails in payment of interest and principal to the investors of the Government securities.

5. Tax concessions

Government securities carry tax concessions under the Income Tax Act, 1961. For example, Rs. 12,000 is deductible from the Gross total income of the individual investors in respect of interest from Government securities under section 80L. Further, interest on notified bonds such as Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 is exempt from tax.

6. Underwriting

Government securities are issued by the Debt Once of the Reserve Bank of India. The issue and subscription are open to investors for two to three days. The sale of Government securities is usually effected through the Over the Counter market (OTC). These securities are not generally underwritten and brokers do not want to deal with the Government securities.