Retailing of Government Securities - Auction Process

The RBI will allot the bids under the non-competitive segment to the bank or PD which, in turn, will allocate to the bidders.

In case the aggregate amount bid is more than the reserved amount through non-competitive bidding, allotment would be made on a pro rata basis. Example: Suppose, the amount reserved for allotment in non competitive basis is 10 crore. The total amount bid at the auction for Non competitive segment is 12 crore. The partial allotment percentage is =10/12=83.33%. The actual allocation in the auction will be as follows:

It may be noted that the actual allotment may vary slightly at times from the partial allotment ratio due to rounding off with a view to ensuring that the allotted amounts are in multiples of 10,000.

In case the aggregate amount bid is less than the reserved amount all the applicants will be allotted in full and the shortfall amount will be taken to the competitive portion.

It will be responsibility of the bank or PD to appropriately allocate securities to their clients in a transparent manner.

Each bank or PD will, on the basis of firm orders, submit a single bid for the aggregate amount of non-competitive bids on the day of the auction. The bank or PD will furnish details of individual customers, viz., name, amount, etc. along with the application.

This will be notified at the time of announcement of the specific auction for which non competitive bids will be invited.

The Government of India notifies the auction of government securities. It also notifies the amount and whether it will be a new loan or reissue of an existing loan. It also announces whether the bidders have to bid for the price or the coupon (interest rate). The competitive bidders put in competitive bids for the price or the coupon. The cutoff price or the coupon is then announced by RBI on the basis of the bids received. All successful bidders will be allotted the security auctioned either in full or in part.

Example: Recently, an auction was held for government of India's 11 year Government Stock in which the notified amount was Rs.5,000 crore. The coupon rate for cut-off yield was 9.40 per cent. The weighted average yield was, however, 9.36 per cent since allotments were made to different successful bidders at the rates quoted by them at or below the cut off rates (i.e. multiple price auction system).

The allotment to the non-competitive segment will be at the weighted average rate that will emerge in the auction on the basis of competitive bidding. (Please see answers to Q14 & Q17).

In the illustration of Question 14 above, where the auction was yield based, the cut off rate that emerged in the auction was 9.40 per cent; while the weighted average cut off rate was 9.36 per cent. At the weighted average rate of 9.36 per cent the price of the security works out to Rs.100.27. Therefore, under the Scheme, the investor will get the security at Rs.100.27. Hence, price payable for every Rs.100 (face value) is Rs. 100.27. Therefore, for securities worth Rs.10,000, he will have to pay (Price x Face value/100) = 100.27 x 10,000/100 = Rs.10,270

Since the bank/PD has to make payment on the date of issue itself, in case payment is made by the client after date of issue of the security, the consideration amount payable by the client to the bank or the PD would include accrued interest. For example, if for security 9.40% GOI 2015, the payment is made three days after the date of issue, the accrued interest component will amount to 9.40/100x3/360x10,000 = Rs.7.83. Hence, if the security price is Rs.100.27, the total amount payable by the investor for acquiring securities worth Rs.10,000 after three days will be Rs. 10, 270 + Rs. 7.83 = Rs.10, 277. 83 (if not rounded off).

The non competitive bidders will pay the weighted average price which will emerge in the auction.

For example, on December 5, 2001 RBI held a price based auction of an existing security 10.71% GOI 2016 maturing on 19 April, 2016. The cut off price emerged in the auction was Rs. 121.92. The weighted average price was Rs. 121.99. Thus the non competitive bidders will pay the weighted average price of Rs. 121.99. In addition, they have to pay accrued interest as indicated below.

Price payable for every Rs.100 (face value) is Rs.121.99. Therefore, for securities worth Rs.10,000, he will have to pay (Price x Face value/100) = 121.99 x 10,000/100=Rs.12,199. Since the coupon on dated GOI securities are payable half yearly, the coupon payment dates for the security are 19 April/ 19 October.

Now if the security was paid for (settled) on December 6, 2001, the accrued interest from the last coupon date to the date of settlement viz. from 19 October, 2001 to December 6, 2001, i.e. for 47 days will be 10.71/100 x 47/360x10000=Rs 139.83.

Hence, the amount payable by the investor will be price plus accrued interest, i.e. Rs12199 +139.83=12,338.83 (if not rounded off).

If the payment is not made on December 6, 2001 but, say, on December 9, 2001, the accrued interest component will be for 50 days instead of 47 days (i.e.3 days more) and it will work out to 10.71/100x50/360 x 10,000 = Rs.148.75 .The total amount payable by the investor will then be 12,199+148.75 = 12,347.75 (if not rounded off).

The transfer of securities to the clients should be completed within five working days from the date of the auction.