T- bills are issued through bidding wherein the competitive bidders are primary dealers, financial institutions, mutual funds, and banks. Besides these, individuals, corporate bodies, institutions, and trusts have been allowed to bid in government securities. Bids can also be routed through both banks and primary dealers. Non Competitive bids are conducted to encourage participants who do not have sufficient expertise in bidding. The non-competitive bidders are state governments, municipalities, non-government provident funds, and other central banks. Non competitive bids are kept outside the notified amount so that the non competitive bidders do not face any uncertainty in purchasing the desired amount. Non competitive bidders are issued T- bills at the weighted average price determined in auction.
The uniform price auction method is in use for selling T- bills. In such an auction, all successful bidders pay a uniform price, which is usually the cut off price.
There exists a fixed calendar for auctions of all types of treasury bills and the auction is announced in advance through a public notification.
Government dated Securities:
The Government of India securities are medium to long term obligations by the Reserve bank on behalf of the government to finance the latter’s deficit and public sector development program.
Government securities are predominantly coupon bearing and the coupon is paid semi annually on a 30 / 360 days basis. However, there are floating rate or zero coupon securities also. No TDS is applicable. All government securities are SLR eligible. The central government securities are eligible for ready forward (Repo) facility, whereas state loans are not eligible for repos. These securities are highly liquid.
Primary Market Issuance of Government Securities:
Government securities are issued either (a) auction (b) sale, or (c) private placement with the Reserve Bank.
Auction: Auction is a form of allocative mechanism where by commodities and financial assets are allocated to individuals and forms, particularly in a market oriented economy. The government’s preference for the auction system for selling securities stems from the ability of auctions to reveal more information about price determination and improve the allocation process. Auctions are designed to generate higher volumes for meeting the target market requirement without recourse to underwriting and / or devolvement, broaden participation to ensure that bids are not concentrated or skewed and ensure efficiency through lowering the cost of borrowing for the government.
In June 1992, the government switched from the fixed price tender offer to the auction system for sale of government securities. The government, as a part of its annual budget exercise, announces the borrowing program for the financial year. The Reserve bank, acting in the capacity of merchant banker for the government’s borrowing program raises money on behalf of the government by auctioning securities from time to time depending on the government’s need for money, interest rates, and liquidity in the banking system.
The primary market for government securities starts wit an auction. A brief outline of the auction process is given below:
1) The Reserve bank announces the quantum, maturity and date of the auction
2) On the day of the auction, all the participants submit their bid to the Reserve bank. The bid includes the quantum and the yield at which they are biding.
3) The Reserves bank decides the cut off yield on the basis of the competitive bids it has received and its own view of the interest rates.
4) Once the cut off yield is decided, bids below the cut off yield are accepted and bids above the cut off yield are rejected.
5) If the amount for which the bids are received falls short of the total quantum for which the auction is conducted, the Reserve bank devolves the shortfall on itself or on the primary dealers (to the extent of their underwriting commitments).
6) The cut off yield becomes the coupon rate of that particular security.
7) Lately, in order to promote liquidity in a particular security and to reduce the number of different government securities, the Reserve bank has started issuing further tranches of existing securities in price based auction. Since the coupon rate and the maturity of the security are decided earlier, the bids are for the price. The auction procedure remains the same except that the bids higher than the cut-off price are accepted. Successful bidders are those that bid at a higher price, exhausting the accepted amount at the cut off price. This multiple price auctions are predominantly used in selling government securities. Since 1999-2000, most of the current primary issues of dated securities are through reissues and price based auctions, instead of yield based auctions to enable the consolidation of securities. Such consolidation is necessary is necessary for ensuring sufficient volumes and liquidity in any one issue, to facilitate emergence of benchmarks, and development of Separately Traded Registered Interest and Principal of Securities. The uniform price auction format for auctions, which was confined to the auction of 91 day treasury bills, was extended to the auction of dated securities in November 2001. The government securities auction held on April 4, 2002, was also based on uniform price auction.
The government auctioned for the first time on July 17, 2002, a bond with call and put features. The notified amount was Rs 3,000 core and the bond had a maturity of 10 years. On any coupon date on or after five years, the government can call the bond with two months notice. The investor also has the right to put the bond on the same terms.