Page 60 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 4: Indian Capital Market

a view to reducing the roll over risk and other market risks in the debt stock, although this Notes
may entail higher debt service costs in the short run.
4. The supply of government securities in the government securities market is generally
exogenous to the market, determined essentially by the fiscal policy of the government.
The demand for government securities from banks, insurance companies, pension funds
and other is fragmented into several components implying that the demand curve is not
uniformly downward slopping but is rather kinked. For instance, the demand by investors
such as insurance companies and superannuation funds is in the nature of "buy and hold"
as the revenue streams from government securities generally match with their liability
payment stream. These investors may have very few substitutes and hence, their demand
is less price-sensitive. Mandated investments in government securities by banks and other
institutions would also fall into the category of "buy and hold". The demand from other
investors in government securities is more for active trading and portfolio management.
These investors may have many substitutes for government securities and hence, their
demand is generally more price elastic. The overall demand elasticity is, therefore,
determined by the balance between these groups of investors. Increased volume of
government securities may increase concerns of a default by the government which may
affect the risk characteristics of the instrument. This may result in a fall in prices as yields
steepen. At the other end of the spectrum, very limited supply of government securities
may generate concerns over liquidity. Illiquidity premium can then drive down the prices,
although there could be some resistance to the downward bias, if "buy and hold" investors
dominate the market.

5. The government securities market in India deals in government securities of three kinds,
viz., inscribed stock, or stock certificate, promissory note and bearer bond. In inscribed
stock, the holder of stock is issued a certificate to the effect that he/she is registered in the
books of Public Deposit Office of the RBI. This certificate is sent to the applicant directly by
registered post by the PDO. The inscribed stock is not transferable by mere endorsement
as the execution of a transfer deed is necessary for its transfer. Stock can be held jointly by
more than one person but these will have to be transferred by all the surviving joint
holders. These certificates are the only form of government security which can be held by
trustees of specified trusts or holders of offices other than public offices.

Through Promissory Note Form (PN) of government securities, the government-central/
state-promises to a person named therein to pay a specified amount at a specified date and
to pay interest at a fixed rate at periodical intervals at a particular office of the RBI. The PN
is a negotiable instrument payable to the order of a specified person. The title of the PN is
transferable by endorsement and delivery.
A bearer bond is that kind of government bond that certifies that the bearer is entitled to
specified sum stipulated in rupees on the date indicated in accordance with the terms of a
particular loan to which the bond relates. Printed coupons for interest payable to the
bearer are attached to the bond. The interest is paid to the holder of the coupon and the
bond is discharged on the due date of the debt to which it relates by physical presentation
of the bearer. A change of ownership is effected by simple delivery of bonds by the
transferor to the transferee.
Among the three forms of government securities, the stock certificates are most
advantageous from the point of view of security and convenience of bid holders of
government debt. As between PN and bearer bonds, the former is more secure while the
latter is more convenient to transfer and getting interest and repayment with the least
difficulty. Despite all the advantages, stock certificate has not been popular because of the
problems involved in respect of transferability and negotiability. Stock certificates are
generally bought by investors like LIC, PF, etc., while banks prefer PNs.

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