To enable medium and small investors to participate in the auction process without taking the price risk in auctions, the Reserve Bank of India has introduced a facility of non-competitive bidding in dated government securities auctions for select set of investors. Non-competitive bidding means that a person would be able to participate in the auctions of dated government securities without having to quote the yield or price in the bid. Thus, he will not have to worry about whether his bid will be on or off-the-mark; as long as he bids in accordance with the scheme, he will be allotted securities fully or partially.
1. Who can participate in the Scheme?
Participation in the Scheme of non-competitive bidding is open to any person including firms, companies, corporate bodies, institutions, provident funds, trusts and any other entity as prescribed by RBI. As the focus is on the small investors lacking market expertise, the Scheme will be open to those who do not have current account (CA) or Subsidiary General Ledger (SGL) account with the Reserve Bank of India. As an exception, Regional Rural Banks (RRBs) and Urban Cooperative Banks (UCBs) can also apply under this Scheme in view of their statutory obligations.
2. What are the advantages of the non-competitive bidding facility?
1. The non competitive bidding facility will encourage wider participation and retail holding of government securities.
2. It will enable individuals, firms and other mid segment investors who do not have the expertise to participate in the auctions.
3. Such investors will have a fair chance of assured allotments at the rate which emerges in the auction.
3. Will non-competitive bidding be allowed in all dated securities auctions?
Generally, it is available in all auctions of dated securities. The availability of non-competitive bidding facility in an auction will be announced along with the respective press release and the information is made available on Reserve Bank’s website.
4. Is the Scheme available for auctions of Treasury Bills?
This Scheme is not applicable to auctions of Treasury Bills. However, even in the case of Treasury bills, a different type of non-competitive bidding is permitted, only for State Governments, eligible provident funds, select foreign central banks and the custodian of Enemy Property.
5. Is the Scheme available in the auctions of State Government Securities?
Yes, this scheme is available in the auctions of State Government Securities with effect from August 25, 2009. In the case of State Government securities, maintaining a gilt account is not compulsory for participation of non-competitive bidding
6. What would be the amount offered for non-competitive bidding?
In the specified auctions of Government of India dated securities, non-competitive bids up to 5 per cent of the notified amount will be allowed within the notified amount. That is, if the notified amount is Rs.1,000 crore, the amount reserved for non-competitive bidders would be Rs.50 crore and the remaining Rs.950 crore will be put up for competitive auctions in case of Central Government Securities.
In case of specified auctions of State Government Securities, non-competitive bids up to 10 per cent of the notified amount will be allowed within the notified amount. That is, if the notified amount is Rs.1,000 crore, the amount reserved for non-competitive bidders would be Rs.100 crore and the remaining Rs.900 crore will be put up for competitive auctions
7. How can the eligible investors participate in the auctions?
Eligible investors cannot participate directly. They have to necessarily come through a bank or Primary Dealer (PD) for auction. 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.
8. What is the minimum/ maximum bidding amount?
The minimum amount for bidding will be Rs.10,000 (face value) and in multiples in Rs.10,000. The maximum amount for a single non-competitive bid should not exceed Rs.2,00,00,000 (face value) in the auctions of GOI dated securities and not more than 1% of the notified amount in the auctions of State Government securities.
9. How many bids can an investor make under this scheme?
An investor can make only a single bid through a bank or PD under this scheme in each specified auction. The bank or PD through whom the investor bids will obtain and keep on record an undertaking to the effect that the investor is not making a bid through any other bank or PD.
10. Is there an application form?
Yes. This is available on the RBI website. The bank/PD through whom the application is made will assist the investor to obtain the form.
11. At what rate will the non-competitive bidders get the allotment?
The allotment to the non-competitive segment will be at the weighted average rate of all allotments to competitive bidders.
12. How will the RBI allot the bids to non-competitive bidder?
The RBI will allot the bids under the non-competitive segment to the bank or PD which, in turn, will allocate to the bidders.
13. If non-competitive bidding amount is more than the amount reserved, how will the RBI allot the non-competitive bids?
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.
Suppose, the amount reserved for allotment in non competitive basis is 10 crore. The total amount of bids for Non competitive segment is 12 crore. The partial allotment percentage is =10/12=83.33%. That is, each bank or PD who has submitted non-competitive bids received from eligible investors will get 83.33% of the total amount submitted by him. 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/-.
14. And if the amount bid through non-competitive bidding is less than the reserved amount?
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 added to the amount available for competitive auction.
15. How will the bank or PD make partial allotment?
It will be responsibility of the bank or PD to appropriately allocate securities to their clients in a transparent manner.
16. How much does the investor pay for taking possession of the security?
The investor pays the weighted average price of all accepted competitive bids. In case of a yield based auction, the weighted average yield in the auction will be used to arrive at the allotment price for non-competitive bids.
17. What if the payment for the securities is made to the bank/PD after the date of issue of the security ?
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 7.59% GOI 2016, the payment is made three days after the date of issue, the accrued interest component will amount to (7.59/100) x (3/360) = Rs.0.0632 per Rs.100 face value.
For example, if the weighted average price is Rs.100.21, the total amount payable by the investor for acquiring securities worth Rs.10,000 after three days will be Rs. 10, 021 + Rs. 6.32 = Rs.10, 027.32 (if not rounded off) .
18. What will be position in respect of price based auctions?
The non competitive bidders will pay the weighted average price which will emerge in the auction. In addition, they have to pay interest accrued from the last coupon payment date to the date of issue of the security.
19. In how many days will the investor receive the security?
The transfer of securities to the clients should be completed within five working days from the date of the auction. This is the responsibility of the bank/PD.
20. How will the securities be issued?
RBI will issue securities only in demat (SGL) form. It will credit the securities to the CSGL account of the bank/PD. The bank/PD will in turn credit the securities to the dematerialised securities account of the investor.
21. How will the investor make payment for the security?
The non-competitive bidder will make payment to the bank or the PD through which he has put the bid and receive his securities from them.
22. Will the bank or the PD charge for this service?
The bank or the PD can recover upto six paise per Rs.100 as commission for rendering this service to their clients. The bank or the PD can build this cost into the sale price or it can recover separately from the clients. In case of State Government securities, such costs may be recovered and accounted for separately from the clients and should not be built into the price. The bank or the PD is not permitted to build any other cost, such as funding cost, into the price.
23. How will the non-competitive bidder know the modalities of payment?
Modalities for obtaining payment from clients towards the cost of securities, accrued interest, wherever applicable and commission will have to be worked out by the bank or the PD and clearly stated in the contract made for the purpose with the client.