State loan auctions opened for retail play

MID-TERM MONETARY POLICY 2008-09/ Policy & Markets

The Reserve Bank of India (RBI) proposes to broadbase the market for state development loans (SDL) by opening up the auction for retail participants such as individuals, funds and trusts from December-end.

This will be done by reserving 5 per cent of the allotment for retail participants who take part in the auction under the "non-competitive bidding process". Non-competitive bidding process means that the participants will get an allotment at a rate fixed by RBI after the auction, irrespective of the quoted price.

SDL is a paper or security against which the state governments borrow funds from the public for covering expenditure.

Bankers explained that these participants shy away from the normal competitive bidding auction since accessing the institutional platform is a cumbersome process. Moreover, the lot size (the minimum amount of subscription) is very high. Thus, retail participation in accessing SDL through the existing route is thin.

Currently, SDLs are auctioned only to institutional participants such as banks, financial institutions and insurance companies.

In a move to streamline government securities' transactions, the central bank has now decided to settle the primary auction of government papers under the screen-based anonymous electronic dealing system — NDS or negotiated dealing system.

Till date, the secondary market transactions in the government securities get settled on the NDS screen. This would ensure transparency in the primary auction process, starting from bidding to allotment.

Currently, the facility is available for primary auction only for banks and primary dealers who maintain accounts for direct clearing facility with RBI, otherwise known as Constituent Subsidiary Ledger Account (CSGL).