Special Services- Debt Instruments & Government Securities

Special Services- Debt Instruments & Government Securities (Part 1)

• Definition: A Debt Security is a written agreement to repay a loan, usually with interest, within a given time frame. It is also referred to as a Debt Instrument.
• Details: Debt instruments can be classified into different categories like bonds, debentures, commercial paper, government securities, treasury bills, etc.

Key Concepts

• Debt Instrument Classification: Debt instruments can be classified based on features like tenure, interest rate, etc. or category of the Issuers.
• Dematerialisation: Any type of debt instrument can be admitted in the depository system. Instruments like bonds, debentures, commercial paper, certificates of deposit, etc., can be dematerialised.
• Instrument Descriptor: The instrument descriptor in the depository system indicates the Name of the Issuer, Coupon/Interest Rate, Security name, Redemption date, and Face Value.

Debt Instrument Features

• Identification: Each debt security is given a unique identification in the depository system, which is linked to the special features of the security, through an ISIN and a descriptor.
• Mode of Operation: The manner of operation of debt instrument in the depository is identical to that which is followed for the equity segment.
• Key Features:
  • Identification of right ISIN while processing demat/remat requests.
  • Differentiating between the Letter of Allotment (LOA) and Debenture Certificates.
  • Time value of money: Debt instruments bear interest.
  • Redemption date: On redemption, the ISIN associated with the instrument is de-activated in the depository system.

Certificate of Deposit (CD)

• Definition: A Certificate of Deposit (CD) is a debt instrument that can be held in a separate account or all its holdings in one account.
• Dematerialisation: Currently, Certificate of Deposits are issued only in dematerialized form with depositories.
• Settlement: The seller authorizes its DP through Delivery Instructions to debit his account and transfer the security into the account of Buyer.
• Redemption: CD’s will be extinguished directly from the beneficial owner accounts of Investors through corporate action for the purpose of redemption.

Commercial Paper (CP)

• Definition: A Commercial Paper (CP) is a debt instrument that can be subscribed to with a minimum of Rs. 5,00,000 or multiples thereof.
• Dematerialisation: Allotment of Commercial Paper can be made directly in dematerialised form with the Depositories.
• Settlement: Buyer and seller decide upon price and quantity of securities to be transacted.
• Redemption: As per the Reserve Bank of India (RBI) Commercial Paper Directions, 2017, for redemption of commercial paper, investors will no longer be required to transfer commercial paper held in their beneficial owner accounts to Issuing and Paying Agents (IPAs).

Government Securities

• Definition: Government securities means a securities created and issued by the Central Government or a State Government for the purpose of raising a public loan.
• Types: There are various types of Government Securities issued by RBI, including Dated Securities, Treasury Bills, Sovereign Gold Bonds, Floating Rate Bonds, and Inflation Indexed Bonds.
• Activities: All the activities relating to issue of government securities (G-Secs) - issue management, settlement of trade, distribution of interest and redemption - are handled by the Reserve Bank of India through its Public Debt Office (PDO).

Special Services- Debt Instruments & Government Securities (Part 2)

• Introduction to Government Securities: Although only corporate and institutional investors subscribe to government securities, individual investors have also been permitted to subscribe to these securities. An investor in government securities has the option to have securities issued either in physical form or in book-entry form (commonly known as SGL form).
• SGL Facilities: There are two types of SGL facilities, viz., Primary SGL and Secondary SGL.
  • Primary SGL: The account is opened with the RBI directly. Only entities that fulfill all the eligibility criteria prescribed by RBI are permitted to open Primary SGL account. Primary SGL facility can be used only for own investments of the account holder.
  • Secondary SGL: This facility is used to keep accounts of the constituent investors. In other words, Secondary SGL is used to route investments of clients who are not eligible to directly open Primary SGL accounts.

Account Opening and Dematerialisation

• Account Opening: The depositories in India have been given permission to maintain Constituent SGL accounts of investors through its DPs. Any client account opened with a DP may be used for dealing in government securities.
• Dematerialisation of Government Securities: Government securities, like other securities, may be held either in physical form or as electronic entries in an SGL account. They are held in the depository system:
  • On account of dematerialisation of physical securities
  • On account of transfer from SGL accounts maintained by other eligible entities
  • On fresh issue of securities in dematerialised form
• Dematerialisation of Physical Certificates: The physical certificates are registered in the name of the holder with any one of the PDOs of RBI. The DP will accept request for dematerialisation from registered holders only.

Procedure for Dematerialisation

• Submission of Documents: The client has to submit a request to the DP in the DRF for G-Secs (DRF-GS) along with:
  • Physical certificates of securities to be dematerialised
  • Form of Transfer
• Verification by DP: The DP ensures that the client has filled the following on the DRF-GS:
  • Option exercised as 'Submitting Physical G-Sec to ………. (depository name)'
  • Account No.
  • Account Holder Name
  • Name of the Security
  • Face Value of Securities to be Dematerialised (in words and Figures)
  • Certificate Number
• ISIN Number: The ISIN number for a G-sec can be determined by relating the security description available on the physical certificate with ISIN description given by the depository.

Objections for Demat of Government Securities

• Role of Depository: The depository acts as a R&T Agent and discharges RTA functions for G-Secs. On receipt of physical certificates with the DRF-GS and the form of transfer, the G-Sec cell of the depository matches the details provided in the DRF-GS with the electronic message received by the depository’s system.
• Rejection of Demat Request: In case of a mismatch, the depositories G-Sec cell rejects the demat request generated in the system and sends a physical certificates along with letter to the DP intimating them of the mismatch.

Procedure for Transferring Government Securities in SGL Form to Depository account

• Submission of Request: The client has to submit a request (DRF-GS) along with a SGL credit advice and a request letter for ‘Value free transfer’.
• Verification by DP: The DP must ensure that the client has filled the following details in the DRF-GS including:
  • Entered the option exercised as "Transfer of SGL securities to ……. (depository name)" (Not applicable to CDSL)
  • Account No.
  • Account Holder Name
  • Name of the Security
  • Face Value of Securities to be Transferred (in words and Figures)
• Transfer Process: The DP has to fill in details of ISIN and Loan Code on the DRF-GS. If the documents are in order, the DP issues an acknowledgement slip duly signed and stamped to the client. The DP then releases the request to depository module.

Special Services- Debt Instruments & Government Securities (Part 3)

• Settlement of Depository Trades: The procedure for transfer of government securities within the depository is similar to that of transfer of equity shares.
• Settlement of RBI Trades: The procedure for purchase or sale of government securities when the counterparty has government security balances in book entry form with any other SGL entity involves several steps, including:
  • Purchase by Depository Client: The buying client submits inter-SGL trade purchase instructions to the DP, who executes a dematerialization instruction and forwards the purchase instruction form to the depository.
  • Sale by Depository Client: The selling client submits Inter-SGL Trade Sale Instruction to the DP, who executes a rematerialization instruction and forwards the sale instruction form to the depository.
• Facility for Demat Account Holders: A facility is available to demat account holders of bank participants who are SGL account holders and direct members of NDS-OM and CCIL, allowing them to purchase or sell government securities through the NDS-OM system.
• Inter-Depository Transfers for Government Securities (GSec): Inter-depository transfers are eligible for Value Free Transfer (VFT) if they arise out of trades in exchanges between demat account holders of different depositories.
• Corporate Benefits with respect to Government Securities: The DP must ensure that changes in the beneficial owner's accounts are updated well in advance of the due date of interest payment and/or redemption payment due date.
• Rematerialisation of Government Securities: An investor in government securities holding electronic balances in the depositories' Constituent SGL account can convert them into physical certificates or to book entry form by the process of rematerialization.
• Key Terms:
  • Dematerialization: The process of converting physical securities into electronic form.
  • Rematerialization: The process of converting electronic securities into physical form.
  • SGL Account: A Subsidiary General Ledger account maintained by the Reserve Bank of India for holding government securities.
  • NDS-OM: The Negotiated Dealing System - Order Matching system, an electronic platform for trading government securities.
  • CCIL: The Clearing Corporation of India Limited, a clearing house for government securities and other financial instruments.