A Government security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price.
Non-SLR Papers include bonds issued by Public Sector Undertaking and other corporate bodies. PSU Bonds are debt instruments issued by various public sector units of the country.
These can be of two categories.
These can also be issued by State/Semi Government authorities including City Corporations, Municipalities, Port Trusts, Improvement Trusts, State Electricity Boards, Metropolitan Authorities and Public Sector Corporations. Other entities like IDBI, IFCI, Housing Boards and Public Sector Banks are also authorized to issue bonds.
Other features of PSU Bonds are as following:
Like any other fixed income security PSU Bonds are issued with fixed maturity, put or call option.
Secured bonds are those which are secured by some underlying asset. Unsecured bonds do create any charge over the assets of the issuer.
With effect from June 30, 2002 all entities are required to hold bonds in dematerialized form only. All bonds are now issued in compulsory demat form and cannot be converted into physical certificates.
Issuers get their bonds rated by rating agencies like ICRA, CRISIL etc. in order to attract investors and increase liquidity. It is prudent to invest only in bonds having high rating as rating signifies the safety of principal as well as interest.
Central/State Government may guarantee the principle and interest of bonds issued by certain institutions. Like recently SAIL issued bonds carrying a coupon of 10.25% maturing in 2007, which was guaranteed by Central Government.
The bond may carry call/put option. Put option gives a right to holder to get principle repayment after a definite period of time. Call option gives the issuer the right to redeem the bonds after a specified period of time.
Unlike Government securities, interest on bonds is calculated on 365 days basis or actual by actual. Factors to be considered while investing in PSU Bonds.
As mentioned above issuers get their bonds rated by an independent rating agency. However, before investing in PSU Bonds, the financial standing should be carefully analyzed. Balance Sheets, Annual Reports, issuer’s web site and Research Reports are reliable sources of information regarding financials.
Another important criteria for investment decision is the liquidity of the bond i.e. how easily bond can be off-loaded in the market without significant capital loss.