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Government bond
auctions
What was
the need for bond auctions?
As the country started reforming its financial markets in the 90s, the need was
felt to put an end to “automatic monetisation” of fiscal deficit — the practice
of printing more money when government expenses overshot revenues. The abolition
of monetisation led to significant increases in market borrowings of the
government. Putting in place a systematic process for auction of government
securities (G-sec) was the central bank’s next challenge.
What was the system that was put in place?
Today, everytime the government needs money, RBI announces the auction of
government securities through a press notification, and invites bids. The sealed
bids (bids received electronically as well as physically) are opened at an
appointed time, and the allotment is based on the cutoff price decided by RBI.
Successful bidders are those that bid at a higher price, exhausting the accepted
amount at the cutoff price. For the past one year, RBI has followed a uniform
price auction method where all successful bidders pay a uniform price, which is
usually the cut-off price (yield). (Earlier it followed the discriminatory price
auction, in which all successful bidders paid the actual price (yield) they bid
for.)
Are government bonds available in demat?
Government bonds are largely issued in the demat form. But unlike other bonds,
their records are not maintained in either NSDL or CDSL. Records of G-secs are
maintained in the subsidiary general ledger — a demat account maintained by RBI.
Banks and primary dealers hold bonds in the demat form in SGL while other
entities need to open a constituent account with banks through which they can
hold the bonds. It is also possible to hold the bonds in a physical form.
What is the role played by primary dealers in auctions?
Taking lessons from the US, RBI instituted a system of primary dealers in the
90s — STCI and DFHI were the first PDs in the country. These bond houses
underwrite bond auctions , which means they agree to buy securities if not fully
sold, in lieu of small commissions . One day prior to the auction, bids are
received from PDs, indicating the amount they are willing to underwrite and the
fee expected.
The auction committee of RBI then examines the bid on the basis of the market
condition and takes a decision on the amount to be underwritten and the fee to
be paid. Today G-secs , State Development Loans & Treasury-Bills are regularly
sold by RBI through periodic public auctions . PDs like ICICI Securities,
Nomura, Morgan Stanley, STCI underwrite auctions.
Can retail investors participate in G-sec auctions?
Individuals can participate in the auctions on ‘non-competitive’ basis,
indirectly through a scheduled bank or a primary dealer offering such services.
Here, allocation of the securities is at a price not higher than the weighted
average price arrived at on the basis of the competitive bids accepted at the
auction. FIIs are not allowed to buy G-secs in auctions (primary market ), but
can buy them later in the secondary market.
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