FISM Notes

1. Primary Market -
The place where the new securities are created. Globally, Government
issuances are done using Auctions while Corporate sector typically does Private
Placement.
Government typically issues by reopening an existing securities:
6.10% GS 2031 was issued on 12/Jul/2021 - It announced on July 5 for 14000 cr
to be raised. Again on 23/Jul/2021, it further raised 14000cr. This process is
called RE-OPENING of the Issue or Reissuance of an existing Security. At present
it has an Outstanding of 83000CRORES. This security is a 10-year benchmark
security and all other securities are typically priced over this security.
Against this mechanism, Corporate sector always issues a new security
whenever it wants to raise funds. It has large number of small issues (so also
State Governments)
Government has to decide how much to borrow: 12Lakh crores (approx) => an
outcome from the annual Budget (all revenues - all expenses) = Balance is
deficit which is to be funded by the market (almost 99% of the deficit is funded
by borrowing)
Govt. informs RBI (Merchant banker for the Govt. as per the Act) about the
shortage to be borrowed.
1.
RBI divides the amount into 2 parts - H1 (max borrowing 60-65%) and H2
(remaining)
2.
H1 => RBI announced an Auction Calendar for the first 6 months (Apr-Sep) -
in advance, RBI tells the market about date of borrowing, amount of
borrowing, maturity of the security.
3.
724 (H1) + 503 (H2) =12,27,000Crores announcement of Issuance Calendar
4.
Date: All G-Sec Auctions take place on Friday (if holiday, it is issued on the
previous Business Day)
5.
Auction Notification (Typically Friday / Monday): is an extension of Issuance
Calendar with exact specification: (a) Exact Security, (b) Exact Date and ©
Exact Amount.
6.
Green Shoe Option - Right of the Issuer to retain an additional amount at the
Cut-off price / yield duly giving prior notice (this is typically used when
market has high demand and excess liquidity)
7.
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Sunday, October 24, 2021 11:45 AM
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2. market has high demand and excess liquidity)
Uniform price method for 4.26% GS 2023, 5.63% GS 2026, 6.67% GS 2035 (in
this method, all will pay the Cut-off price irrespective of their Quote) and
multiple price method for 6.67% GS 2050 (each one will pay the price it
quotes)
GOI 6.10% GS 2031 => 14000CR (Notice)
a.
It will be using Price Based Auction
b.
The security is already in existence and its coupon is already known and
hence, we can sell/buy it by quoting the price
c.
A New Security would require the Yield / Coupon to be explored and
hence it will go for Yield based Auction (On Date of issue Yield = Coupon)
SBI 1500CR 98.15
i.
PNB 3500CR 98.22
ii.
Citi 1500CR 98.18
iii.
HDFC 2500CR 98.19
iv.
STANC 4500CR 98.22
v.
CANBANK 2500CR 98.22
vi.
BOB 9000 98.26
Uniform Method (Cut-off 98.22)
BOB 9000
a)
5000 CR to be allocated to 3 on the basis of their application
b)
= 4500+3500+2500 = 10500
c)
PNB = (3500/10500)*5000 = 1666.6667
d)
STANC = (4500/10500)*5000 = 2142.8571
e)
CANBANK = (2500/10500)*5000 = 1190.4762
These 3 Banks will get Partial allocation and will pay the same
Price 98.22 (BOB gained even though it wanted to pay higher)
i)
f)
1)
Multiple Price
BOB will pay 98.26 as it Bid for that price
a)
Other 3 banks will get the same security at lower price (Winner's
curse)
b)
2)
Green Shoe Option for additional 2000CRores may be used as there
is higher demand for the security
3)
vii.
d.
8.
Competitive Bidding - You have to Quote both Price and Quantity (all
institutional buyers are to go through this route)
9.
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3. institutional buyers are to go through this route)
Non-competitive bids (retail => 5% of the Issue is reserved) => it has to only
quote the Amount / Quantity and it would be allocated at Cut-Off.
10.
As per Auction Rules, each Primary Dealer would compulsorily underwrite at
least 50% (all combined) of the issue amount notified => 21 PDs => each one
will underwrite (Minimum Underwriting Commitment is 2.5% of the issues
size) and Primary Dealers do not get any Underwriting Fees for the MUC. If
they propose to Underwrite Additional amount beyond this Minimum, they
would be eligible to get Underwriting Fees.
11.
Underwriting of the Additional Competitive Underwriting (ACU) - Fees will be
decided by the Auction system where on the Day of the Auction, all Primary
Dealers will submit their ACU bids to RBI for the issuance (9 to 9.30AM) and
RBI will announces the successful Underwriters and the cut-off fees.
12.
When Issued Market
13.
Yield Based and Price Based
14.
Repurchase Eligibility
15.
Issuance Needs and Issuance Policy
Auctions including When Issued Market
Rollovers
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