RBI hinders excessive bidding by bond houses

The Reserve Bank of India (RBI) on Thursday (November 15) announced that from now on, the minimum bidding under the additional competitive underwriting route will be equal to the amount of the minimum bidding requirement for all primary dealers, reports Economic Times.

The move may also help the central bank to save on paying commissions for excess underwriting bids submitted by bond houses.

Underwriting commitment for primary dealers (PDs) comprises two components: one being the minimum underwriting commitment (MUC) and the other is the additional competitive underwriting. The MUC is calculated in such a way that 50% of the subscription to a bond issue is taken care of by all primary dealers collectively, while bond houses can subscribe to the remaining portion of the issue by bidding through the additional competitive route.

RBI now said that under the revised scheme of underwriting commitment and liquidity support, the minimum bidding requirement for each PD during a bond auction will be equivalent to the amount the PD will have to bid for as per the minimum underwriting commitment.

With favorable liquidity conditions and good supply of papers, most bond houses place aggressive bids. As a result, the cut-offs and commissions do not represent a true picture of the underlying market conditions. Furthermore, aggressive bidding results in one or two major players dominating the market. Under these new guidelines, bidding for government bonds will now become more transparent and realistic. Large bond houses, too, will not be in a position to corner a larger portion of the bond issuances.

The existing guidelines also gave way for excessive bidding, which in turn, saw RBI paying commissions to bond houses even for the extra bids placed. Thus, from the regulatory point of view, the central bank can now cut down on the excess commissions they ended up paying.