The Government of India issues securities in order to borrow money from the market. One way in which the securities are offered to investors is through auctions. The government notifies the date on which it will borrow a notified amount through an auction. The investors bid either in terms of the rate of interest (coupon) for a new security or the price for an existing security being reissued. Since the process of bidding is somewhat technical, only the large and informed investors, such as, banks, primary dealers, financial institutions, mutual funds, insurance companies, etc generally participate in the auctions. This left out a large section of medium and small investors from the primary market for government securities which is not only safe and secure but also give market related rates of return.

The Reserve Bank of India has announced a facility of non-competitive bidding in dated government securities on December 7^th 2001 for small investors.

Participation in the Scheme of non-competitive bidding is open to individuals, HUFs, firms, companies, corporate bodies, institutions, provident funds, trusts and any other entity prescribed by RBI. As the focus is on the small investors lacking market expertise, the Scheme will be open to those who

1. do not have current account (CA) or Subsidiary General Ledger (SGL) account with the Reserve Bank of India
2. do not require more than Rs.one crore (face value) of securities per auction

Non-competitive bidding means the bidder 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. 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 bid competitively in the auctions.
3. Such investors will have fair chance of assured allotments at the rate which emerges in the auction.

Non-competitive bids will be allowed upto 5 percent of the notified amount in the specified auctions of dated securities.

Yes. The reserved amount will be within the notified amount.

To begin with, non-competitive bidding will be allowed only in select auctions of dated Government of India securities which will be announced as and when proposed to be issued.

No. The scheme is not applicable for Treasury Bills.

Eligible investors cannot participate directly. They have to necessarily come through a Bank or Primary Dealer (PD) for auction.

The minimum amount for bidding will be Rs.10,000 (face value) and in multiples in Rs.10,000.

An investor can make only a single bid through any 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 making only a single bid.

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.

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 ).

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.

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.

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.

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 x10,000=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.

RBI will issue securities only in demat (SGL) form. It will credit the securities to the CSGL account of the bank/PD .

SGL or CSGL are a demat form of holding government securities with the RBI. Just as an investor can hold shares in demat form with a depository participant, he can also hold government securities in an account with a bank or a PD. Securities kept on behalf of customers by banks or PDs are kept in a segregated CSGL A/c with the RBI. Thus, if the bank or the PD buys security for his client, it gets credited to the CSGL account of bank or PD with the RBI.

No. It will not be mandatory for the retail investor to maintain a constituent subsidiary general ledger (CSGL) account with a bank or a primary dealer (PD) through whom it proposes to participate in the auction. It will, however, be convenient for the investor to have such an account.

Yes, the PD/ bank through whom the application is made must clearly indicate such mode of crediting the securities.

Yes. At the instance of the investor, subsequent conversion to the physical form is allowed.

RBI will issue the securities to the bank or PD that has bid on behalf of non-competitive bidder against payment made by the bank or PD on the date of issue itself.

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.

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.

No. The bank or the PD is not permitted to build any other cost, such as funding cost, into the price. In other words, the bank or the PD cannot recover any other cost from the client other than accrued interest as indicated in Q21 and Q23 and commission(Q31)

PDs and banks will furnish information relating to the Scheme to the Reserve Bank of India as and when called for. RBI can also review the guidelines. If and when the guidelines are revised, RBI will notify the modified guidelines.

December 15, 2001