RBI plans to reward PDs for higher G-sec underwriting

MUMBAI: The Reserve Bank of India has decided to reward the bond houses that are willing to underwrite a bigger slice of the government debt auctions. This is part of a new plan introduced by the central bank to minimise hiccups in the government���s borrowing programme.

The new norm comes ahead of the twin government bond auctions for Rs 8,000 crore on April 10. It aims to reward higher underwriting commitments by PDs (primary dealers). The underwriting plan for FY07 is effective April 1. The introduction of the underwriting plan comes in the backdrop of the end of RBI���s role in primary auction of G-secs.

As per the Fiscal Responsibility and Budget Management (FRBM) Act ���03, RBI���s participation in primary auctions stands withdrawn with effect from April 1. PDs will have a bigger role in the primary auctions, and the new plan has been devised to provide more responsibilities to PDs.

The underwriting commitment will be in two parts ��� minimum underwriting commitment (MUC) and additional competitive underwriting (ACU). While MUC will be a compulsory commitment to participate in auctions, ACU will be competitive and determine commissions for PDs.

The MUC of each PD will be computed to ensure that at least 50% of each issue is compulsorily covered by the total of all MUCs assigned to all PDs. A PD cannot bid for more than 30% of the notified amount. For example, with the current number of PDs at 17, each PD will be deemed to underwrite about 3% of the notified amount of each auction as MUC.

The MUC will be uniform for all PDs, irrespective of their capital or balance sheet size. This implies that the total MUCs of all PDs will cover 51% of the primary issue. The plan also ensures a compulsory minimum underwriting for each auction by all PDs.

The remaining part (49%) of the notified amount will be open to competitive underwriting through underwriting auctions. Each PD would be required to bid for a minimum of 3% of notified amount. The auctions could be either on uniform or multiple price, depending upon the market conditions.

All successful bidders in the ACU auction will get commission as per auction rules. Those PDs who succeed in the ACU for 4% and above of the notified amount will get commission on their MUC (3%) at the weighted average of all the accepted bids in the ACU.

Others will get commission on the 3% in MUC at the weighted average rate of the three lowest bids in the ACU. RBI said that half of the liquidity support will be divided equally among all stand-alone PDs. The remaining half (i.e. 50%) will be divided in the ratio of 1:1 based on market performance in primary market and secondary market.