Explained: Auction of Government Securities

Government Security (G-Sec) is a tradable instrument issued by the Central Government or the State Governments. The Government concerned acknowledges the Government’s debt obligation. G-Secs is a collective term for T-bills (Treasury Bills) and bonds or dated securities. The instrument’s maturities of less than 1 year are called T-bills and those of more than one year are called bonds. Dated Securities are long-term government securities issued by the government with a fixed maturity period, typically 5 to 40 years. They pay regular interest to investors, known as coupon payments, and return the principal amount at maturity. The interest rates may be fixed or floating, paid on half-yearly on the face value of the investment. In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). RBI announces a half-yearly auction calendar for auctions of G-Secs, which is also available on their website.

Government securities are normally sold through an auction process although they can also be sold on tap or through OMO (Open Market Operations). An auction is a process of calling bids to arrive at the market price. It is a price discovery mechanism. There are several variants of auctions. Auction can be price-based or yield-based. RBI conducts auctions of Government Securities. In the securities market, we come across the below-mentioned auction methods.

French Auction System: All auctions under the competitive bidding are multiple prices or multiple yield auctions, with scrip being allotted to the highest bidder downwards in terms of price, or lowest yield upwards in terms of yields, whichever is applicable, up to the pre-determined notified amounts. Yield-based auction is generally conducted when a new Government security is issued. Investors bid in yield terms up to two decimal places (for example, 8.29 per cent, 8.30 per cent, etc.).

Dutch auction Price: The Dutch auction Price is identical to the French auction system. The only difference is that the concept of premium does not exist. In other words, all winning bids are at cut-off price/yield and successful bidders need not pay any premium. This type of auction is also known as Uniform Price Auction.

Private Placement: If on account of some special circumstances, the Government/ Reserve Bank of India decides to issue a new security, or further issue an existing security to expand the outstanding quantum, the government can privately place the security with RBI. The RBI in turn may sell these securities at a later date through their open market window albeit at a different yield.

On-tap issue: Under the On-tap issue scheme of arrangements after the initial primary placement of security, the issue remains open to yet further subscriptions. The period for which the issue remains open may be sometimes time-specific or volume-specific. Even the primary issue can be on tap.

RBI also has a non-competitive bidding facility for retail investors to purchase Dated Government Securities. Non-competitive bids are accepted up to 5 per cent of the notified amount in the specified auctions of dated securities.

The RBI, in consultation with the Government of India, issues an indicative half-yearly auction calendar which contains information about the amount of borrowing, the range of the tenor of securities, and the period during which auctions will be held. A Notification and a Press Communique giving exact particulars of the securities, viz., name, amount, and type of issue and procedure of auction are issued by the Government of India about a week before the actual date of auction and also issues advertisements in leading English and Hindi newspapers. Auction for dated securities is conducted on Friday for settlement on a T+1 basis (i.e. securities are issued on the next working day i.e. Monday). The investors are thus given adequate time to plan for the purchase of G-Secs through such auctions.

Auctions are conducted on the electronic platform called the E-Kuber, the Core Banking Solution (CBS) platform of RBI. The major participants in these auctions in India are the Commercial banks, scheduled UCBs, Primary Dealers, insurance companies, and provident funds, who maintain funds accounts (current account) and securities accounts (Subsidiary General Ledger (SGL) account) with RBI, are members of this electronic platform. Banks and insurance companies participate actively in the auctions to meet their statutory requirements while primary dealers participate in the auction for market making and positioning the securities for further sale in the secondary market. Auction data reveal the competitive behaviour of various investor groups in terms of success ratios, bid shading, the total amount of bonds demanded, bid amount distribution as against respective bid prices, dispersion as well as the concentration of bids around multi-modal bids that could be expected within a heterogeneous cluster of bidders.

All members of E-Kuber can place their bids in the auction through this electronic platform. The results of the auction are published by RBI at the stipulated time (For Treasury bills at 1:30 PM and for GoI-dated securities at 2:00 PM or half-hourly intervals thereafter in case of delay). All non-E-Kuber members including non-scheduled UCBs can participate in the primary auction through scheduled commercial banks or PDs (called Primary Members-PMs). For this purpose, the UCBs need to open a securities account with a bank / PD – such an account is called a Gilt Account. A Gilt Account is a dematerialized account maintained with a scheduled commercial bank or PD. The proprietary transactions in G-Secs undertaken by PMs are settled through the SGL account maintained by them with RBI at PDO. The transactions in G-Secs undertaken by Gilt Account Holders (GAHs) through their PMs are settled through Constituent Subsidiary General Ledger (CSGL) account maintained by PMs with RBI at PDO for its constituent (e.g., a non-scheduled UCB).

The Reserve Bank of India conducts auctions usually every Wednesday to issue T-bills of 91-day, 182-day, and 364-day tenors. Settlement for the T-bills auctioned is made on T+1 day i.e. on the working day following the trade day. The Reserve Bank releases a quarterly calendar of T-bill issuances for the upcoming quarter in the last week of the preceding quarter. e.g. calendar for the April-June period is notified in the last week of March. The Reserve Bank of India announces the issue details of T-bills through a press release on its website every week.

Similar to T-bills, Cash Management Bills (CMBs) are also issued at a discount and redeemed at face value on maturity. The tenor, notified amount, and date of issue of the CMBs depend upon the temporary cash requirement of the Government. The tenors of CMBs are generally less than 91 days. The announcement of their auction is made by the Reserve Bank of India through a Press Release on its website. The non-competitive bidding scheme has not been extended to CMBs. However, these instruments are tradable and qualify for a ready-forward facility. Investment in CMBs is also reckoned as an eligible investment in G-Secs by banks for SLR purposes under Section 24 of the Banking Regulation Act, 1949.

The State Development Loans (SDL) auctions are held generally on Tuesdays every week. As in the case of Central Government securities, the auction is held on the E-Kuber Platform. 10% of the notified amount is reserved for the retail investors under the non-competitive bidding.

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