Pds To Underwrite 25% Govt Borrowing
The Reserve Bank of India plans to give the six primary dealers the option of underwriting up to 25 per cent of the Centre's borrowing programme and link commission to the underwriting commitments.
This will help in reducing the commission paid by RBI, because the commission payable to the primary dealers will be linked to the underwriting commitments and not the successful bids tendered by them as is the practice now. This can lead to a situation in which RBI will not have to pick any devolvement of government papers.
The primary dealers are expected to act as market makers in government securities. When the system of primary dealers was proposed, it was envisaged that at some point in future they would underwrite the entire borrowing programme of the Centre.
The six primary dealers are: Discount & Finance House of India, Securities Trading Corporation of India, Gilt Securities, ICICI Securities, PNB Gilts and SBI Gilts. The new guidelines, expected to be announced shortly, will be with prospective effect.
While RBI will cap the extent of underwriting commitment by the primary dealers, it is expected to prescribe individual limits for each. It is likely that a primary dealer will be allowed to underwrite either up to five times its net worth or the balance of the repo facility available with RBI, whichever is higher.
Under the existing format, too, the primary dealers are required to take on their books a portion of the devolvement in any issue. The percentage of devolvement on a primary dealer is fixed at the beginning of the year.
The new framework is different in the sense that a primary dealer will not have to achieve a specific underwriting target. Under the new dispensation, a primary dealer will decide before every auction the amount it wants to underwrite. The commission will not be at a pre-specified rate. Instead, the primary dealer will also quote the commission rates it wants for making the underwriting commitment. RBI will have the option of accepting or rejecting the underwriting bids.
As in the last financial year, the primary dealers will be required to commit a minimum amount in bids that they will tender at the auctions and a success ratio will be specified by RBI. The primary dealers will get refinance facilities from the RBI as a proportion of their bidding commitments. At present the extent of refinance is fixed at 10 per cent of the bidding commitment in case of treasury bills and 16.66 per cent in dated securities. Both the bidding limits as well as the refinance limits are expected to be revised upwards this year.
Under the current norms, the commission for every successful bid of Rs 100 is: 12.5 paise on
T-bills, 50 paise on 364-day T-bills and Re 1 on dated securities. Until the new norms come into effect, the primary dealers will continue to get commission on their successful bids at the current rates.