Prior to introduction of auctions as the method of issuance, the interest rates were administratively fixed by the Government. With the introduction of auctions, the rate of interest (coupon rate) gets fixed through a market-based price discovery process.

4.1 An auction may either be yield based or price based.

i. Yield Based Auction: A yield-based auction is generally conducted when a new G-Sec is issued. Investors bid in yield terms up to two decimal places (e.g., 8.19%, 8.20%, etc.). Bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction. The cut-off yield is then fixed as the coupon rate for the security. Successful bidders are those who have bid at or below the cut-off yield. Bids which are higher than the cut-off yield are rejected. An illustrative example of the yield-based auction is given below:

ii. Price Based Auction: A price based auction is conducted when Government of India re-issues securities which have already been issued earlier. Bidders quote in terms of price per ₹100 of face value of the security (e.g., ₹102.00, ₹101.00, ₹100.00, ₹ 99.00, etc., per ₹100/-). Bids are arranged in descending order of price offered and the successful bidders are those who have bid at or above the cut-off price. Bids which are below the cut-off price are rejected. An illustrative example of price based auction is given below:

4.2 Depending upon the method of allocation to successful bidders, auction may be conducted on Uniform Price basis or Multiple Price basis. In a Uniform Price auction, all the successful bidders are required to pay for the allotted quantity of securities at the same rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them. On the other hand, in a Multiple Price auction, the successful bidders are required to pay for the allotted quantity of securities at the respective price / yield at which they have bid. In the example under (ii) above, if the auction was Uniform Price based, all bidders would get allotment at the cut-off price, i.e., ₹100.00. On the other hand, if the auction was Multiple Price based, each bidder would get the allotment at the price he/ she has bid, i.e., bidder 1 at ₹100.19, bidder 2 at ₹100.14 and so on.

4.3 An investor, depending upon his eligibility, may bid in an auction under either of the following categories:

Competitive Bidding: In a competitive bidding, an investor bids at a specific price / yield and is allotted securities if the price / yield quoted is within the cut-off price / yield. Competitive bids are made by well-informed institutional investors such as banks, financial institutions, PDs, mutual funds, and insurance companies. The minimum bid amount is ₹10,000 and in multiples of ₹10,000 in dated securities and minimum ₹ 10,000 in case of T-Bills and in multiples of ₹ 10,000 thereafter. Multiple bidding is also allowed, i.e., an investor may put in multiple bids at various prices/ yield levels.

Non-Competitive Bidding (NCB):

With a view to encouraging wider participation and retail holding of Government securities, retail investors are allowed participation on “non-competitive” basis in select auctions of dated Government of India (GoI) securities and Treasury Bills. Participation on a non-competitive basis in the auctions will be open to a retail investor who (a) does not maintain current account (CA) or Subsidiary General Ledger (SGL) account with the Reserve Bank of India; and (b) submits the bid indirectly through an Aggregator/Facilitator permitted under the scheme. Retail investor, for the purpose of scheme of NCB, is any person, including individuals, firms, companies, corporate bodies, institutions, provident funds, trusts, and any other entity as may be prescribed by RBI. Regional Rural Banks (RRBs) and Cooperative Banks shall be covered under this Scheme only in the auctions of dated securities in view of their statutory obligations and shall be eligible to submit their non-competitive bids directly. State Governments, eligible provident funds in India, the Nepal Rashtra Bank, Royal Monetary Authority of Bhutan and any Person or Institution, specified by the Bank, with the approval of Government, shall be covered under this scheme only in the auctions of Treasury Bills without any restriction on the maximum amount of bid for these entities and their bids will be outside the notified amount. Under the Scheme, an investor can make only a single bid in an auction.

Allocation of non-competitive bids from retail investors except as specified above will be restricted to a maximum of five percent of the aggregate nominal amount of the issue within the notified amount as specified by the Government of India, or any other percentage determined by Reserve Bank of India. The minimum amount for bidding will be ₹10,000 (face value) and thereafter in multiples in ₹10,000 as hitherto. In the auctions of GoI dated securities, the retail investors can make a single bid for an amount not more than Rupees Two crore (face value) per security per auction.

In addition to scheduled banks and primary dealers, specified stock exchanges are also permitted to act as aggregators/facilitators. These stock exchanges submit a single consolidated non-competitive bid in the auction process and will have to put in place necessary processes to transfer the securities so allotted in the primary auction to their members/clients.

Allotment under the non-competitive segment will be at the weighted average rate of yield/price that will emerge in the auction on the basis of the competitive bidding. The Aggregator/Facilitator can recover up to six paise per ₹100 as brokerage/commission/service charges for rendering this service to their clients. Such costs may be built into the sale price or recovered separately from the clients. It may be noted that no other costs, such as funding costs, should be built into the price or recovered from the client. In case the aggregate amount of bid is more than the reserved amount (5% of notified amount), pro rata allotment would be made. In case of partial allotments, it will be the responsibility of the Aggregator/Facilitator to appropriately allocate securities to their clients in a transparent manner. In case the aggregate amount of bids is less than the reserved amount, the shortfall will be taken to competitive portion.

The updated Scheme for Non-Competitive Bidding Facility in the auctions of Government Securities and Treasury Bills is issued by RBI vide IDMD.1080/08.01.001/2017-18 dated November 23, 2017.

4.4 NCB scheme has been introduced in SDLs from August 2009. The aggregate amount reserved for the purpose in the case of SDLs is 10% of the notified amount (e.g. ₹100 Crore for a notified amount of ₹1000 Crore) subject to a maximum limit of 1% of notified amount for a single bid per stock. The bidding and allotment procedure is similar to that of G-Secs.

Conversion (Switch) of Government of India Securities through auction

RBI has from April 22, 2019 started conducting the auction for conversion of Government of India securities on third Monday of every month. Bidding in the auction implies that the market participants agree to sell the source security/ies to the Government of India (GoI) and simultaneously agree to buy the destination security from the GoI at their respective quoted prices. The source securities along with notified amount and corresponding destination securities are provided in the press release issued before the auction. The market participants are required to place their bids in e-kuber giving the amount of the source security and the price of the source and destination security expressed up to two decimal places. The price of the source security quoted must be equal to the FBIL closing price of the source security as on the previous working day.