Devolvement Sans Notified Amount!

How can there be a devolvement in an auction of government paper if there is no notified amount specified?

This was the question that cropped up when there was a devolvement of Rs 25 crore on the primary dealers in the auction of 364-day treasury bills held on Wednesday.

The Reserve Bank of India (RBI) does not specify a notified amount in the case of the 364-day treasury bill. At the auction held on Wednesday, the apex bank raised Rs 397.03 crore from 8 competitive bidders and there was devolvement on the primary dealers to the extent of Rs 25 crore. The RBI is reported to have given the six primary dealers the option of underwriting Rs 100 crore at the auction in return for a commission of 38 paise for every successful bid worth Rs 100.

The primary dealers who have successfully bid for underwriting are also expected to bid at the auction by the Reserve Bank of India. If the quantum of successful bids tendered by the primary dealers at auction is less than the quantum that they have underwritten, then there will be devolvement of the extent of the difference. For example, suppose the Reserve Bank of India offers Rs 100 crore for underwriting and assume that the underwriting bids of some or all six primary dealers are accepted.

Also suppose that they successfully bid only to the extent of Rs 75 crore. Then, irrespective of the response of other competitive bidders, there will be a devolvement on the primary dealers to the extent of Rs 25 crore. By adopting this strategy, the RBI ensures that it manages to get a firm commitment from the primary dealers on the amount it can raise at the auction. Under the earlier scheme of things the primary dealers used to get commissions on all their successful bids as well as the securities that devolved on th e mat auctions. The RBI replaced this system with the scheme of offering commissions linked to the underwriting bids.

If the quantum of successful bids tendered by the primary dealers at auction is less than the

quantum they have underwritten, then there will be devolvement of the extent of the difference