G-Secs Auctions by RBI
G-Secs are issued by the Reserve Bank of India on behalf of the Government of India. These form a part of the borrowing program approved by the parliament in the ‘union budget’. G-Secs are normally issued in dematerialized form (SGL) but can be issued in the physical form (in the form of Stock Certificate) on request. When issued in physical form or otherwise, they are issued in the multiples of Rs. 10,000/-. Dated Government Securities (along with SDLs) are Securities usually bearing a fixed interest rate with interest payable semi-annually and principal as per schedule on due date of redemption. The tenor of these instruments can extend upto 30 years.
Government securities are normally sold through an auction process although they can also be sold on tap or through OMO (Open Market Operations). Auction is a process of calling of bids with an objective of arriving at the market price. It is basically a price discovery mechanism. There are several variants of auction. Auction can be price based or yield based. RBI conducts auction of Government Securities. In securities market, we come across below mentioned auction methods.
French Auction System : All auctions under the competitive bidding are multiple price or multiple yield auctions, with scrips being allotted to the highest bidder downwards in terms of price, or lowest yield upwards in terms of yields, whichever is applicable, upto the pre-determined notified amounts.
Dutch Auction Price : This is identical to the French auction system as defined above. The only difference being that the concept of premium does not exist. This means that 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 decide 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 this scheme of arrangements after the initial primary placement of a 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. Actually, even the primary issue can be on tap.
RBI also has a non-competitive bidding facility for retail investors for purchasing Dated Government Securities. Non-competitive bids are accepted upto 5 per cent of the notified amount in the specified auctions of dated securities. RBI announces a half yearly auction calendar for auctions of G-Secs, which is also available on their website.