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Prior to introduction of auctions as the method of issuance, the interest rates were administratively fixed by the Government. With the introduction of auctions, the rate of interest (coupon rate) gets fixed through a market based price discovery process.
An auction may either be yield based or price based.
Yield Based Auction: A yield based auction is generally conducted when a new G-Sec is issued. Investors bid in yield terms up to two decimal places (e.g., 8.19%, 8.20%, etc.). Bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction. The cut-off yield is then fixed as the coupon rate for the security. Successful bidders are those who have bid at or below the cut-off yield. Bids which are higher than the cut-off yield are rejected. An illustrative example of the yield based auction is given below:
Yield based auction of a new security
* January 9 and 10 being holidays (Saturday and Sunday), settlement is done on January 11, 2016 (T+1 settlement).
|Details of bids received in the increasing order of bid yields|
|Bid No.||Bid Yield||Amount of bid
|Price* with coupon as 8.22%|
|The issuer would get the notified amount by accepting bids up to bid at sl. no. 5. Since the bid number 6 also is at the same yield, bid numbers 5 and 6 would get allotment on pro-rata basis so that the notified amount is not exceeded. In the above case each of bidder at sl. no. 5 and 6 would get ₹ 50 crore. Bid numbers 7 and 8 are rejected as the yields are higher than the cut-off yield.|
Price Based Auction: A price based auction is conducted when Government of India re-issues securities which have already been issued earlier. Bidders quote in terms of price per ₹100 of face value of the security (e.g., ₹102.00, ₹101.00, ₹100.00, ₹ 99.00, etc., per ₹100/-). Bids are arranged in descending order and the successful bidders are those who have bid at or above the cut-off price. Bids which are below the cut-off price are rejected. An illustrative example of price based auction is given below:
Price based auction of an existing security 8.24% GS 2018
* January 9 and 10 being holidays (Saturday and Sunday), settlement is done on January 11, 2016 under T+1 cycle.
|Details of bids received in the decreasing order of bid price|
|Bid no.||Price of bid||Amount of bid
|Implicit yield||Cumulative amount
|The issuer would get the notified amount by accepting bids up to 5. Since the bid number 6 also is at the same price, bid numbers 5 and 6 would get allotment in proportion so that the notified amount is not exceeded. In the above case each of bidders at sl. no. 5 and 6 would get securities worth ₹ 50 crore. Bid numbers 7 and 8 are rejected as the price quoted is less than the cut-off price.|
Depending upon the method of allocation to successful bidders, auction may be conducted on Uniform Price basis or Multiple Price basis. In a Uniform Price auction, all the successful bidders are required to pay for the allotted quantity of securities at the same rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them. On the other hand, in a Multiple Price auction, the successful bidders are required to pay for the allotted quantity of securities at the respective price / yield at which they have bid. In the example under (ii) above, if the auction was Uniform Price based, all bidders would get allotment at the cut-off price, i.e., ₹100.20. On the other hand, if the auction was Multiple Price based, each bidder would get the allotment at the price he/ she has bid, i.e., bidder 1 at ₹100.31, bidder 2 at ₹100.26 and so on.
An investor, depending upon his eligibility, may bid in an auction under either of the following categories:
i. Competitive Bidding: In a competitive bidding, an investor bids at a specific price / yield and is allotted securities if the price / yield quoted is within the cut-off price / yield. Competitive bids are made by well informed institutional investors such as banks, financial institutions, PDs, mutual funds, and insurance companies. The minimum bid amount is ₹10,000 and in multiples of ₹10,000 in dated securities and minimum ₹ 25,000 in case of T-Bills and in multiples of ₹ 25,000 thereafter. Multiple bidding is also allowed, i.e., an investor may put in multiple bids at various prices/ yield levels.
ii. Non-Competitive Bidding (NCB): With a view to providing retail investors, who may lack skill and knowledge about G-Sec market or who have low demand and to enable them to participate in the auction directly, the scheme of NCB in dated securities was introduced in January 2002. NCB is open to individuals, HUFs, RRBs, co-operative banks, firms, companies, corporate bodies, institutions, provident funds, and trusts. Under the scheme, eligible investors apply for a certain amount of securities in an auction without mentioning price/yield. Such bidders are allotted securities at the weighted average price/yield of the auction. In the illustration given under 4.1 (ii) above, the notified amount being ₹1000 crore, the amount reserved for NCB will be ₹ 50 crore (5% of the notified amount). Non-competitive bidders will be allotted at the weighted average price which is ₹100.26 in the given illustration. The participants in NCB are, however, required to hold a gilt account with a bank or PD. RRBs and co-operative banks which hold SGL and Current Account with the RBI can also participate under the scheme of NCB without holding a gilt account. The amount reserved for NCB is 5% of the notified amount in case of GoI dated securities auctions,10% of the notified amount in case of SDL auctions and 20% of the notified amount in case of auction of Inflation Indexed Bonds (IIBs). Banks/PDs are required to consolidate the individual requirements of their clients and allowed to submit only a single bid under NCB.
In every auction of GoI dated securities, a maximum of 5% of the notified amount is reserved for such non-competitive bids. In the case of auction for Treasury Bills, the amount accepted for non-competitive bids is over and above the notified amount and there is no limit placed. However, NCB in Treasury Bills is available only to State Governments, eligible Provident Funds, select foreign central banks and is not available to the co-operative banks for proprietary bids. Only one bid is allowed to be submitted by an investor either through a bank or PD. For bidding under the scheme, an investor has to fill in an undertaking and send it along with the application for allotment of securities through a bank or a PD. The minimum amount and the maximum amount for a single bid is ₹10,000 and ₹2 crore respectively in the case of an auction of dated securities. A bank or a Primary Dealer can charge an investor up to a maximum of 6 paise per ₹100 of application money as commission for rendering their services. In case, the total applications received for non-competitive bids exceed the ceiling of 5 per cent of the notified amount of the auction for dated securities, the bidders are allotted securities on a pro-rata basis.
NCB scheme has been introduced in SDLs from August 2009. The aggregate amount reserved for the purpose in the case of SDLs is 10% of the notified amount (eg. ₹100 Crore for a notified amount of ₹1000 Crore) subject to a maximum limit of 1% of notified amount for a single bid per stock. The bidding and allotment procedure is similar to that of G-Secs
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