Security Forms of Financial Investment
We know that the recipient of money in a financial investment issues a document or a piece of paper to the investor (supplier of money), evidencing the liability of the former to the latter to provide returns. This document also outlines the rights of the investor to certain prospects and/or property and sets the conditions under which the investor can exercise his/her rights. This document is variously called 'Security Certificate', 'Note' and so on.
The term 'security' is a generic term used generally for those documents evidencing liabilities that are negotiable - that can be bought and sold in the stock market. The security form of investment has received great impetus since 1980 following the Central Government's liberal policy towards foreign investments-direct and portfolio, streamlining of licensing, capital issues, and other procedural formalities to facilitate faster capital formation; providing incentives for exports; and encouraging private sector to tap the primary market for meeting their long-term capital requirements.
There are different types of securities conferring different sets of rights on the investors and different sets of conditions under which these rights can be exercised. They are gilt-edged securities, corporate debentures, preference shares and equity shares. The important characteristic features of these securities are described below.
Gilt-Edged Securities
The debt securities issued by the government and semi-government bodies are called gilt-edged securities. They comprise the treasury bills and the dated securities (also called bonds or dated loans) of the central government, state government, and semi-government bodies like Port Trusts and State Electricity Boards. They are the acknowledgments of debt incurred by the issuing government or semi-government body. Gilt-edged securities thus represent the public borrowings of the issuing government or semi-government bodies. Over the years, the central and state governments and the semi-government bodies have made an extensive use of these securities for meeting their short and long-term resource requirements.
Treasury Bills: These short-term securities are issued by the RBI on behalf of the Central Government. Currently, the T-Bills having a maturity of 91 and 364 days only are being traded. No interest is paid on these bills. Instead they are sold at a discount. In other words, the buyer pays a price less than the face value of the bill and receives the full face value on the last day of maturity. The difference between the discount price and face value represents the interest income to the investor.
Example: Suppose the 91-day treasury bills of Rs.100 each are sold for Rs.99 per bill. The buyer pays Rs.99 and will receive Rs.100 after 91-days from the Government of India for every bill he buys today. These bills are said to have been sold at
X 100 = 4.01% discount per annum. The rupee income, the buyer makes for 91-days investment is Re.1 per bill and the return on his investment works out to be
X 100 = 4.05% per annum. Rs.99
Since April 1st, 1996 the sale of treasury bills by Public Debt Office of the RBI had been stopped. Now it is carried out by the RBI by conducting auctions: weekly for 91 days T-bills and fortnightly for 364 days T-bills.
The discount rate on treasury bills being very low, the return to the investor is meager. However, they are the safest and the most liquid securities you can find in the market. They are a safe investment because the central government will never default on making payment when the bills mature. They are liquid because the commercial banks are ready to buy them at any time due to the facility of rediscounting with the RBI. There is however little public interest in treasury bills because of the availability of equally safe investment opportunities providing a better return and also because they are sold in large denominations. Frequent buyers of treasury bills are the commercial banks, state governments, and semi-government bodies. Due to rediscounting facility, the RBI generally ends up holding nearly 80 percent of the outstanding treasury bills at any given time.
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