Table of Contents
Chapter 11: Special Services - Debt Instruments and Government Securities
The depository framework in India accommodates not only corporate equities but also the complete spectrum of money market papers, corporate debt securities, and sovereign obligations. Holding debt instruments in dematerialised electronic form provides institutional liquidity, transparency, automated interest servicing, and eliminates default risks associated with physical paper transfers.
Workflow & Structure Diagram
+-----------------------------------------------------------------------------------+
| SPECTRUM OF FIXED INCOME & DEBT INSTRUMENTS |
+-----------------------------------------------------------------------------------+
| |
| +-----------------------+-----------------------+ |
| | | | |
| v v v |
| +-----------------+ +-----------------+ +-----------------+ |
| | MONEY MARKET | | CORPORATE DEBT | | SOVEREIGN DEBT | |
| | (Short-Term) | | (Medium-Long) | | (Risk-Free) | |
| | - Commercial | | - Non-Convert | | - Treasury | |
| | Papers (CPs) | | Debentures | | Bills (T-Bills| |
| | - Certificates | | - Infrastructure| | - Central G-Secs| |
| | of Deposit | | Bonds / NCDs | | - State Dev. | |
| | (CDs) | | - Green Bonds | | Loans (SDLs) | |
| +-----------------+ +-----------------+ +-----------------+ |
+-----------------------------------------------------------------------------------+
1. Commercial Papers (CPs)
A Commercial Paper (CP) is an unsecured, short-term money market promissory note issued by highly rated corporate borrowers, primary dealers, and all-India financial institutions to raise working capital:
- Statutory Requirement: Under RBI guidelines, all Commercial Papers must be issued, held, and settled exclusively in dematerialised form through NSDL or CDSL.
- Denomination and Tenor: Issued in minimum denominations of ₹5 Lakhs and multiples thereof, with tenors ranging between a minimum of 7 days and a maximum of up to one year from the date of issue.
- Issuing and Paying Agent (IPA): A scheduled commercial bank acts as the Issuing and Paying Agent (IPA), verifying corporate credit ratings, net worth certificates, and board resolutions before coordinating with the depository to credit CPs to institutional investor accounts.
2. Certificates of Deposit (CDs)
A Certificate of Deposit (CD) is a negotiable money market debt instrument issued by scheduled commercial banks and approved financial institutions against deposits:
- Maturity Profile: Minimum maturity of 7 days and maximum of up to one year for commercial banks (up to 3 years for financial institutions).
- Dematerialisation Mandate: All CDs must be issued in dematerialised form, carrying individual ISINs. Secondary market transfers settle via depository book entries on a T+1 basis.
Corporate debt securities represent medium- to long-term borrowing by companies:
- Debenture Trustee Oversight: SEBI mandates that every public or listed NCD issue must have an independent SEBI-registered Debenture Trustee who monitors asset security cover, creates security charges on corporate assets, and safeguards debenture holder rights.
- Electronic Credit & ISIN Capping: To prevent market fragmentation, SEBI imposes strict limits on the number of ISINs a corporate issuer can have open simultaneously for debt securities.
- Servicing Corporate Debt:
- Interest Payouts: The issuer extracts the debenture holder BENPOS on the Record Date and credits interest payments directly to investors' bank accounts.
- Redemption / Maturity: On maturity date, the issuer transfers redemption funds directly to investors' bank accounts. Simultaneously, the depository executes a corporate action debiting and extinguishing the NCDs from investors' demat accounts.
Government Securities (G-Secs), Treasury Bills (T-Bills), and State Development Loans (SDLs) represent sovereign debt obligations issued by the Reserve Bank of India on behalf of the Government of India and State Governments:
Workflow & Structure Diagram
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| GOVERNMENT SECURITIES DUAL SYSTEM |
+-----------------------------------------------------------------------------------+
| |
| +-------------------------------------------------------+ |
| | RESERVE BANK OF INDIA | |
| | (Maintains SGL System & E-Kuber) | |
| +---------------------------+---------------------------+ |
| | |
| +-----------------------+-----------------------+ |
| | | |
| v Primary Institutional v Custodial Entry |
| +--------------------+ +--------------------+ |
| | BANKS & PIs | | NSDL / CDSL CSGL | |
| | Maintain Direct | | Constituent SGL | |
| | SGL Accounts with | | Account with RBI | |
| | RBI E-Kuber | +---------+----------+ |
| +--------------------+ | |
| v Electronic Demat |
| +--------------------+ |
| | RETAIL & CORP DEMAT| |
| | Demat account with | |
| | regular NSDL / CDSL| |
| | Depository Partic. | |
| +--------------------+ |
+-----------------------------------------------------------------------------------+
1. SGL vs CSGL Accounts
- Subsidiary General Ledger (SGL) Account: Maintained directly with the RBI by scheduled commercial banks, primary dealers, and institutions to hold government securities.
- Constituent Subsidiary General Ledger (CSGL) Account: Depositories (NSDL and CDSL) maintain CSGL accounts with the RBI. This enables ordinary individual retail investors, corporations, and trusts to hold sovereign G-Secs, T-Bills, and Sovereign Gold Bonds (SGBs) in their standard demat accounts through regular DPs.
2. Primary Auctions and Retail Direct
- Retail investors can participate in primary G-Sec and T-Bill auctions via the non-competitive bidding facility offered on stock exchange platforms or the RBI Retail Direct portal, with successful allotments credited directly to their demat accounts.
- Secondary Market Trading: G-Secs trade on the exchange debt segment and settle under T+1 through depository book entries. Interest (half-yearly coupon) is credited directly to the investor's linked bank account based on the CSGL BENPOS record.
The depository network provides institutional and retail access to specialized sovereign and state-level debt instruments:
1. State Development Loans (SDLs)
- Definition: Medium-to-long term debt papers issued by individual State Governments through RBI auctions to fund state budgetary capital expenditures.
- Credit Quality: Although issued by State Governments, SDLs carry an implicit sovereign guarantee because debt servicing is managed directly by the RBI through automatic debits from the respective State Government's Consolidated Fund.
- Depository Holding & Settlement: SDLs are assigned dedicated ISINs and credited to investors' demat accounts via the CSGL depository window. Secondary trades clear on a T+1 DvP basis.
2. Sovereign Gold Bonds (SGBs) in Dematerialised Form
- Structure: Government securities denominated in grams of gold issued by the RBI under the Sovereign Gold Bond Scheme.
- Benefits of Holding SGBs in Demat Accounts:
- Eliminates physical storage risks, theft, and locker costs.
- SGBs held in demat form are freely tradable on the cash segment of NSE and BSE, providing liquidity prior to the 8-year sovereign maturity.
- Interest of 2.50% per annum (payable half-yearly) is credited directly to the investor's linked bank account based on the depository BENPOS.
- Can be pledged electronically as collateral for bank loans through standard depository pledge workflows.
To eliminate manual data entry errors and settlement latency in fixed-income operations, institutional debt transactions rely on Straight Through Processing (STP):
- STP Flow: When an institutional fund manager agrees to purchase corporate debentures from a primary dealer, the trade details are entered into an electronic STP messaging network.
- ISO 15022 / ISO 20022 Protocols: The trade confirmation, custodian affirmation, clearing instruction, and depository debit/credit mandates are transmitted electronically using standardized financial messaging protocols.
- CCIL Interface: For interbank G-Sec trades, the Clearing Corporation of India Limited (CCIL) operates the Negotiated Dealing System - Order Matching (NDS-OM) platform and acts as Central Counterparty, guaranteeing settlement on a DvP-III multilateral net basis.
The evolution of Indian fixed-income markets has expanded depository custody to encompass municipal infrastructure and sustainable debt instruments:
1. Municipal Bonds
- Issuance Framework: Regulated under the SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015. Urban Local Bodies (ULBs) and municipal corporations issue bonds to fund water supply, sewerage, transportation, and smart city infrastructure.
- Depository Processing: Municipal debt securities are issued mandatorily in electronic demat form. The ULB maintains an Escrow Account with a designated scheduled commercial bank to ring-fence tax revenues (e.g., property taxes, user fees) dedicated to servicing half-yearly interest and principal redemption based on depository BENPOS records.
2. Green Debt Securities and Sustainable Financing
- Under SEBI regulations, Green Debt Securities are corporate or municipal bonds whose proceeds are strictly earmarked for environmentally sustainable projects:
- Clean and renewable energy (solar, wind, hydroelectric generation);
- Clean transportation and electric vehicle infrastructure;
- Sustainable water management and sewage treatment plants;
- Pollution prevention and energy efficiency initiatives.
- Depositories maintain specialized green bond classification tags on ISIN records, enabling environmental, social, and governance (ESG) institutional funds to track and report their holdings accurately.
3. Securitised Debt Instruments (SDIs) and Pass-Through Certificates (PTCs)
- Securitised debt instruments involve pooling financial assets (such as residential mortgages, vehicle loans, or microfinance receivables) into a Special Purpose Vehicle (SPV) structured as a trust.
- The SPV issues Pass-Through Certificates (PTCs) to institutional investors, which represent beneficial ownership claims on future cash flows generated by the underlying loan pool.
- Under SEBI regulations, PTCs must be issued in dematerialised form, assigned individual ISINs, and settled through depository accounts to ensure institutional liquidity and legal clarity.
Depository Participants adhere to specific procedural guidelines when processing commercial debt papers:
- Issuing and Paying Agent (IPA) Reconciliation: For Commercial Papers, the IPA submits an electronic confirmation through the depository terminal confirming receipt of valid corporate credit ratings (minimum rating of A3 under SEBI credit rating scale) and investor funds prior to authorizing electronic CP allotment into the institutional buyer's demat account.
- ISIN Deactivation on Maturity: On the redemption maturity date, the issuing company transfers redemption funds directly to the debenture holders' bank accounts. Upon receiving payout confirmation from the Debenture Trustee, the depository deactivates and extinguishes the debt ISIN from all beneficiary demat accounts, preventing any subsequent trading.