UP allows retail investors to bid for govt bonds on non-competitive basis

They can specify the amount they want to buy, without quoting yield or price; allotment will be on weighted average price/yield of institutional buyers

The Uttar Pradesh government has allowed retail investors to participate in the auction of bonds floated by the state, through registered aggregators and facilitators such as stock exchanges.

Normally, government bonds and securities are issued through a competitive bidding process conducted by the Reserve Bank of India (RBI), with participation from banks, primary dealers and other financial institutions.

However, to encourage retail participation in such auctions, five per cent of the notified amount has been reserved by RBI for small investors on a non-competitive bidding basis.

The proposal of the state finance department to allow the registered stock exchanges to act as facilitators/aggregators on the behalf of scores of retail investors looking to invest in government bonds through the non-competitive route was recently cleared by the Yogi Adityanath cabinet.

“After the proposal was approved by the state cabinet, we issued a notification to this effect,” UP additional chief secretary (finance) Sanjiv Mittal told Business Standard.

Mittal said the decision was taken in the light of the RBI recommendation aimed at encouraging retail participation in government securities. Apart from UP, several other state governments had also followed suit concurring to the RBI norms.

According to the UP Annual Budget 2019-20, the state government market borrowings are estimated at about Rs 2.8 trillion, or 17.7 per cent of the Gross State Domestic Product (GSDP) pegged at Rs 15.8 trillion. Besides the projected market borrowings in the current financial year are almost 18 per cent higher than the revised estimated figure in 2018-19, at about Rs 2.38 trillion.

RBI notifies on government securities auction/bidding on a weekly basis. For retail investors, five per cent of the notified amount in such auctions is reserved for retail investors through a non-competitive bidding process. Under this route, investors are required to specify the amount without quoting the yield or price. Later, the bidders are allotted securities at the weighted average price/yield of the auction.

Both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) offer exclusive platforms for retail investors to participate in these primary market instruments. The securities that are allotted in the primary market can be sold by investors on the stock exchanges they are listed.

In July 2019, the Adityanath cabinet had allowed the municipal corporations of Lucknow and Ghaziabad to float municipal bonds totalling Rs 350 crore to fund their respective infra projects.

While, Lucknow Municipal Corporation (LMC) will float bonds worth Rs 200 crore, Ghaziabad Municipal Corporation (LMC) will float the same for Rs 150 crore. Some other major towns are also exploring the possibility of harnessing this route to raise funds.

The bonds, to be listed on bourses, would be floated for 10 years with annual returns of 8½-9%. The funds would be invested in projects having the viability of generating enough returns for repayment to investors.