PDs to underwrite 3% of gilt auctions

Bidding commitment and voluntary underwriting system scrapped.

The Reserve Bank of India (RBI) today issued guidelines requiring primary dealers to underwrite approximately 3 per cent of the notified amount of government bond auctions as a minimum underwriting commitment (MUC).

The MUC of each PD has been computed in such a way that at least 50 per cent of each issue gets covered by the aggregate of all MUCs. There are 17 primary dealers in the system. The central bank has said the commitment will be uniform for all PDs, notwithstanding their capital or balance sheet size.

RBI has categorised underwriting commitments of primary dealers under minimum underwriting and additional competitive underwriting commitments, against the earlier practice of bidding commitment and voluntary underwriting.

As the MUC would not be decided through a bidding process, the RBI has decided to incorporate the MUC limits within the undertaking given by PDs, on an annual basis, to enable compulsory minimum underwriting limits for each auction. The balance portion of the notified amount will be kept open for additional competitive underwriting (ACU) through auctions.

The RBI has revised the earlier practice of PDs' bidding commitment and voluntary underwriting following the central bank's withdrawal from participation in primary issues of government securities with effect from April 1, 2006, except under exceptional circumstances, as per the Fiscal Responsibility and Budget Management (FRBM) Act. Hitherto, the unsubscribed portion of auctions would devolve on the RBI and the auction would sail through.

The revised scheme allows for liquidity support to be provided only to stand-alone PDs only, who can now have an access to the liquidity adjustment facilities.

According to the RBI guidelines, 50 per cent of the total liquidity support would be allotted on an equated basis among the stand-alone PDs. The remaining half would be divided in a 1:1 ratio, based on market performance in the primary and secondary markets, the guidelines pointed out.

As far as the commission payable to PDs are concerned, the RBI has stated that PDs succeeding in the ACU for 4 per cent and above of the notified amount of the issue, will get commission on their MUC (3 per cent) at the weighted average of all the accepted bids in the ACU.

The rest of the participants would be given a commission on the 3 per cent in MUC at the weighted average rate of the three lowest bids in the ACU. However, the RBI has stressed that a single primary dealer cannot bid for more than 30 per cent of the notified amount.

For the auction for government securities, the central bank has made it mandatory for each PD to bid for an amount not less than the amount successful in the ACU and MUC.

If two or more issues are floated on the same day, the minimum bid amount will be applied to each issue separately, the central bank clarified.

Under cases of devolvement, the RBI has said that PDs would be permitted to set-off accepted bids in the auction against their underwriting commitment accepted by the RBI.

Only in the context of treasury bills, the RBI has decided to maintain the existing stipulations with regard to separate bidding commitment, as a percentage of the notified amount for each auction.

The internal technical group on central government securities market has recommended restructuring of the current institutional process of bidding commitments by introducing a revised methodology for Primary Dealers' obligations in the primary issuance process.