Gilt funds, as they are conveniently called, are mutual fund schemes floated by asset management companies with exclusive investments in government securities. The schemes are also referred to as mutual funds dedicated exclusively to investments in government securities. Government securities mean and include central government dated securities, state government securities and treasury bills. The gilt funds provide to the investors the safety of investments made in government securities and better returns than direct investments in these securities through investing in a variety of government securities yielding varying rate of returns gilt funds, however, do run the risk.. The first gilt fund in India was set up in December 1998.
Facilities from Reserve Bank of India
The Reserve Bank provides liquidity support and other facilities, such as, SGL and current accounts, transfer of funds through the Reserve Bank's Remittance Facility Scheme and access to call money market to dedicated gilt funds. These facilities are provided to encourage gilt funds to create a wider investor base for government securities market. The facilities provided to gilt funds include:
- Liquidity support: The objective of extending liquidity support to dedicated gilt funds is to support short-term liquidity requirements of such mutual funds. The Reserve Bank of India provides liquidity support to gilt funds by way of reverse repurchase agreements (reverse repos). Reverse repos are done in government of India dated securities eligible for repo transactions and treasury bills of all maturities. The quantum of liquidity support on any day is up to 20 per cent of the outstanding stock of government securities, including treasury bills, held by the gilt funds as at the end of the previous working day.
- SGL and current accounts: The Reserve Bank opens one subsidiary general ledger (SGL) account and one current account for gilt funds' own transactions at all centers of the Reserve Bank wherever desired by the gilt funds.
- Funds transfer facility: The gilt funds are given the facility of transfer of funds from one center to another under the Remittance Facility Scheme of the Reserve Bank. The gilt funds are also given the facility of clearing of cheques arising out of government securities transactions, tendered at the Reserve Bank counters.
- Access to call market: Gilt funds can access the call money market as lenders.
- Ready forwards: The Reserve Bank of India will also recommend to the Government of India to permit the gilt funds to undertake ready forward transactions in Government securities market.
All gilt funds - public and private sector, open-ended or close- ended - are eligible to avail liquidity support and other facilities from the Reserve Bank of India. The gilt funds schemes should, however, have the approval of the Securities and Exchange Board of India. It would be prudent for the gilt funds to submit an advance copy of the draft offer document to the Reserve Bank of India for preliminary scrutiny at the time of submitting the draft offer document to the Securities and Exchange Board of India. This is to enable the Reserve Bank to satisfy itself that the scheme proposed to be floated by the gilt funds is in conformity with the Reserve Bank's guidelines for availing liquidity support from the Reserve Bank of India.
The Reserve Bank of India provides liquidity support by way of reverse repos subject to the following terms and conditions:
- Re-purchase agreements (reverse repos) with the Reserve Bank are in eligible central government dated securities and treasury bills of all maturities.
- The prices of the securities for reverse repo transactions are determined by the Reserve Bank of India, at its discretion.
- The securities tendered by the gilt funds for reverse repos by the Reserve Bank are in multiples of Rs. 10 lakh (face value).
- Gilt funds can avail the reverse repo facility for a maximum period of 14 days at a time.
- The repo rate is the Bank Rate.
- Liquidity support is made available at Mumbai only. The gilt funds, however, are free to transmit the funds to other centers of the Reserve Bank under its Remittance Facility Scheme.
- The gilt funds cannot use the funds raised through the reverse repos facility for on-lending in the call/notice money market.
- The Reserve Bank reserves the right to partially accept or reject any application for liquidity support without assigning any reason.
- The Reserve Bank can call for all relevant information from gilt funds in regard to their operations and the gilt funds are required to provide it.
For drawing the liquidity support from the Reserve Bank, gilt funds are required to:
- make an application to the Chief General Manager, Internal Debt Management Cell, Reserve Bank of India, Central Office, Mumbai.
- submit the filled up form to the Internal Debt Management Cell before noon on the day the liquidity support is desired to be availed.
- return the duplicate copy of the acceptance-cum-deal confirmation advice issued by the Reserve Bank duly signed in token of having accepted the deal and also arrange to lodge the SGL transfer form with the Securities Department of the Reserve Bank, Mumbai Office.
- authorise the Reserve Bank of India to debit its current account on the expiry of the repo period, by the amount indicated in the acceptance-cum-deal confirmation advice; and
- arrange to lodge SGL transfer form for repurchase of securities.
- receive, the amount of liquidity support as direct credit to its current account maintained at the Reserve Bank, Mumbai, on the day of the drawal.