Manner of Issue of
Government Government
Securities Securities
Manner of issue of Government Securities:
As a part of reform in the financial sector a policy decision was taken to move towards market related interest rates for Government borrowing. Accordingly, with effect from June 1992 Government of India has started borrowing by issue of debt at market related rates determined by conducting auctions. Market related rates are evolved in the auctions for sale of dated securities or treasury bills.
The Government issues securities through the following modes:
i. Issue of securities through auction.
ii. Issue of securities with pre-announced coupon rates.
iii. Issue of securities through tap sale.
iv. Issue of securities through conversion.
The Securities can be issued through auction either on price basis or yield basis. The coupons on such securities are announced before the date of floation and the securities are issued at par. No aggregate amount is indicated in the notification in respect of the securities sold on tap. The holders of Treasury bills of certain specified maturities and holder of specified dated securities are provided an option to convert the respective Treasury bills or dated securities at specified prices into new securities offered for sale.
1) Issue of securities through auction.
Securities are issued through auction either on price basis or on yield basis. Where the issue is on price basis, the coupon is predetermined and the bidders quote price per Rs. 100 face value of the security, at which they desire to purchase the security. Where the issue is on yield basis, the coupon of the security is decided in an auction and the security carries the same coupon till maturity. On the basis of the bids received, RBI determines the maximum rate of yield or the minimum offer price as the case may be at which offers for purchase of securities would be accepted at the auction. The RBI has moved from yield based auction to price based auction in 1998, though it retains the flexibility to resort to yield based auctions and notify the same in the auction notification.
The auctions for issue of securities (on either yield basis or price basis) are held either on “Uniform price” (also known as Dutch auction) method or on “Multiple price” (also known as French auction) method.
Where an auction is held on a “Uniform price” method, competitive bids offered with rates up to and including the maximum rate of yield or the prices up to and including the minimum offer price, as determined by RBI, are accepted at the maximum rate of yield or minimum offer price so determined. Bids quoted higher than the maximum rate of yield or lower than the minimum price are rejected.
Where an auction is held on “Multiple prices” method, competitive bids offered at the maximum rate of yield or the minimum offer price, as determined by RBI, are accepted. Other bids tendered at lower than the maximum rate of yield or higher than the minimum offer price are accepted at the rate of yield or price as quoted in the respective bid. Bids
quoted higher than the maximum rate of yield or lower than the minimum price are rejected.
Individuals and specified institutions (retail investor) can participate in the auctions on “non-competitive” basis. Allocation of the securities to non-competitive bidders is made at the discretion of RBI and at a price not higher than the weighted average price arrived at on the basis of the competitive bids accepted at the auction or any other price announced in the specific notification. The nominal amount of securities that would be allocated to retail investors on non-competitive basis is restricted to a maximum percentage of the aggregate nominal amount of the issue, within or outside the nominal amount.
Sale of Government securities (except 91 days treasury bills) is held under Multiple Price Auctions; Uniform Price Auctions are held for sale of 91 days Treasury Bills. RBI has announced that it may conduct uniform price auctions for sale of dated securities on a selective and experimental basis. The notification for the respective auctions will specify the format to be used, viz., uniform price or multiple prices.
2) Issue of securities with pre-announced coupon rates.
The coupon on such securities is announced before the date of flotation and the securities are issued at par. In case the total subscription exceeds the aggregate amount offered for sale, RBI may make partial allotment to all the applicants. State Governments continue to issue securities at pre-announced coupon rates and prices. However, from
1998-99 onwards an option was given to the State Government to raise a small portion of their borrowing by conducting competitive auctions.
Several State Governments have availed of this facility.
3) Issue of securities through tap sale.
No aggregate amount is indicated in the notification in respect of the securities sold on tap. Sale of such securities may be extended to more than one day and the sale may be closed at any time on any day.
4) Issue of securities on conversion of maturing treasury bills/dated securities.
The holders of treasury bills of certain specified maturities and holders of specified dated securities are provided with an option to convert their holding at specified prices into new securities offered for sale. The new securities could be issued on an auction/pre-announced coupon basis.