MAHARASHTRA NATIONAL LAW UNIVERSITY, MUMBAI

COMPANY LAW

SYNOPSIS

TOPIC- GOVERNMENT BONDS

Submitted to: Submitted by:

Prof. (Dr.) Kiran Rai Praharsh Verma

Enrollment No- 2015_031

INTRODUCTION

An efficient and well-functioning government bond market is often considered important to the
smooth functioning of financial markets more generally. High liquidity in a government bond
market can smooth the use of the market for hedging positions in other markets, facilitating
issuance and secondary market trading in such markets. The creditworthiness of a government
bond market, combined with liquidity, can make the market a benchmark for risk-free rates and
for pricing instruments in other markets. Such characteristics also make government bonds a key
store of value, especially during times of market turmoil. A well-functioning market also
facilitates the low-cost financing of government expenditures and the implementation of
monetary policy, which is often carried out through the market.

The Indian government bond market is particularly worthy of study. For one, there is its large
and growing size and high liquidity. Within Asia, India has the fourth largest government bond
market after Japan, China, and South Korea with 569 billion USD of outstanding government
bonds as of March 2014 (Asian Development Bank, 2014). The annual turnover of the secondary
market for government of India bonds – over four times the debt outstanding – is comparable to
that of Japan and South Korea, and much higher than that of China.1

In India, the RBI operates the government bond market and acts as monetary authority as well as
debt manager. It also acts as the regulator of the government bond market and its key participants
PDs and banks. Other participants are regulated by SEBI, the Insurance Regulatory and
Development Agency (IRDA), or the Provident Fund regulator. The government bond market
has no doubt developed steadily with increased supply of bonds, market reforms and
infrastructure developments, but the mounting pressure of fiscal deficit in India since the
beginning of reform in 1992s remained the key driver for the growth of government debt market.
It has been the primary source of government borrowing to finance India’s fiscal deficit which is
projected to be 5% of GDP in 2012–2013. A large number of illiquid issuance with small
outstanding values, strict statutory requirements on captive investors, absence of interest rate
derivative trading and a large proportion of successful electronic trading (~90%) are the
dominant features of government debt market in India.

1
https://rbi.org.in/scripts/FAQView.aspx?Id=79 Date of Access- 21/01/2018
RESEARCH OBJECTIVE AND SCOPE OF THE STUDY

This paper will try to study the Indian government bond market with a view to better
understanding how it functions, how it has changed over time, and what factors help explain
some of its features. The study aims to articulate the evolution of financial development of
government debt market in India, its challenges and the path forward. Later this paper will try to
analyze the government bond working in both the sectors i.e., primary and secondary sectors.

RESEARCH QUESTION

1. How are the Government bonds issued?

2. What are the benefits of issuing government bonds and the potential of the government
bond market in India?
3. How does local and foreign investor demand affect the size and currency structure of
government bonds?

RESEARCH METHODOLOGY

The researcher would be relying on secondary sources through data available in the books, laws,
articles and will try to analyze them. Web portals will also be used by the researcher as it
provides some technical information which proved to be useful in giving this paper a firm
structure.

TENTATIVE CHAPTERIZATION

1. Introduction
2. Government bond: Meaning and Types
3. Importance of Government Bond
4. Government bond market: Global Scenario
5. Government bond market in India
6. Conclusion
REVIEW OF LITERATURE

The literature on India’s bond market is not plentiful; some studies are still worth mentioning.
(Mohan, 2004) talks about the reforms and the recent developments of government security
markets in India. (Nair, 2007) and (Securities and Exchange Board of India, 2008) articulate the
developments and the path ahead of corporate debt market in India. (Wells and Schou-Zibell,
2008) discuss the reforms and the road ahead of India’s government and corporate debt market.

Return on bond investment is source of income for the investors who allocate their money to buy
a retail bond/corporate bond/government bond. One of the important thing that is to be
considered before they decide to invest in bond is the amount of bond yield as a measurement
tool to know the annually rate of return. (Fabozzi, 2000)

The Bond market in India started developing in earnest only since liberalization began in the
1990s, when finally interest rates were deregulated, and an active market in government
bonds slowly emerged. Between 1994 and 2004, the growth in the overall bond market in India,
relative to GDP (CAGR of 5.5 percent) has been almost exclusively driven by that of
government bonds (CAGR of 6 percent), with practically no growth in the corporate bond
market. (Rajesh Chakrabarti, 2010)

Apart from the Central Government, Government securities are also issued by State
Governments and some municipal bodies. However yields on the paper issued by most of the
state Governments do not match up with yields of Central Government bonds, e.g., in the month
of October 2002 Gujarat State Electricity Board was offering 11.25 -11.75% for a period ranging
7-12 years. Rajasthan Rajya Vidyut was offering 11.04% for a period of 7 years, while the yield
on a 10 year Central Government bond was 7.1% during the same period. In other words the
yields of State Bonds as compared to central bonds are higher by 3.5 % - 4.5%. However the
irony is that even these high yields have failed to attract the investors and the reason for this is
near bankruptcy situation for most of these Governments. (Rakesh Shahni, 2008)

The Indian sovereign capital market is comprised of government bonds and public sector bonds.
Within the government bond category, one may distinguish between central government
obligations and state government obligations. Central government obligations include central
government bonds issued directly by the government and sold to the market, as well as central
government guaranteed bonds issued by entities which are owned and guaranteed by the central
government. (Erik Banks, 1994)

Individual investors like you and I cannot invest directly in government bonds. Instead, we must
purchase these through banks, provident funds and insurance companies like the LIC. Major
participants in a government securities market include banks, insurance companies, mutual
funds, financial institutions, Indian corporates, foreign institutional investors (FIIs), PFs and the
RBI. There are two types of central government securities in India – short term treasury bills and
long term government bonds. (Reenita Malhotra, 2015)

BIBLIOGRAPHY

ARTICLES

1. Ashok K. Nag, and Sudip K. Ghose. "Yield Curve Analysis for Government Securities in
India." Economic and Political Weekly35, no. 5 (2000): 339-48.
2. Barro, Robert J. "Are Government Bonds Net Wealth?" Journal of Political Economy 82,
no. 6 (1974): 1095-117.
3. EPW Research Foundation. "Government Securities Dominate Market." Economic and
Political Weekly 35, no. 11 (2000): 869-75.
4. Grant, Dwight, and Robert Whaley. "Transactions Costs on Government Bonds: A
Respecification." The Journal of Business51, no. 1 (1978): 57-64.
5. Mohan, R. (2004) A Decade of Reforms in Government Securities Market in India and
the Road Ahead, Reserve Bank of India Bulletin, November, Mumbai.
6. Rangarajan, C. "Government Securities Market in a Mixed Economy: A Study of
India." Economic and Political Weekly 6, no. 11 (1971): 620-32.
7. Rosewater, Victor. "Tax Exemption of Government Bonds." The American Economic
Review 17, no. 1 (1927): 52-54.
8. Rowe, W. H. "The Burden of Tax Exemption of Government Bonds." The American
Economic Review 16, no. 4 (1926): 653-59.
9. Securities and Exchange Board of India (2008) Developments in the Corporate Bonds
and Securitisation Markets – An Update, August, Mumbai.
 10. Wells and Schou-Zibell (2008) ‘India’s bond market-development and challenges ahead’,
December, Asian Development Bank: Working Paper Series on Regional Economic
Integration No. 22.

BOOKS

1. Chakrabarti, Rajesh, and Sankar De. Capital markets in India. New Delhi, India:
Response Books, 2010.
2. Banks, Erik. Emerging asian fixed income markets. Place of publication not identified:
Palgrave Macmillan, 2014.
3. Developing government bond markets: a handbook. Washington, D.C.: World Bank,
2001.

WEB LINKS

1. http://web.worldbank.org/archive/website00894A/WEB/PDF/GOVERNME.PDF
2. https://www.sebi.gov.in/sebi_data/DRG_Study/FIIGBM.pdf
3. https://rbi.org.in/scripts/FAQView.aspx?Id=79
4. https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr622.pdf