The Government of India announces the conversion/switch of its securities through auction for an aggregate amount of >20,000 crore (face value). The security wise details of the conversion/switch are given in RBI web site as per details given below. Yes, believe it, the term of GOI securities range from 10 years to 40 years.

https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR202GOI6C0B24F7F4814510A950379CF77F6555.PDF

The auction took place on May 17, 2021. I have given below the details of one security each of which amounts to Rs 2000 Crores and the maturity period ranges from 10 years to 40 years (repeat 40 years). (I have quoted only a few entries from the announcement)

Source Securities Amount (FV) of Source Securities Destination Securities
8.08% GS 2022 2,000 crore 6.76% GS 2061
(Maturing on Aug 02, 2022) (Maturing on Feb 22, 2061)
6.84% GS 2022 2,000 crore 6.76% GS 2061
 (Maturing on Dec 19, 2022)  (maturing on Feb 22, 2061)
 5.09% GS 2022 2,000 crore GoI FRB 2033
(Maturing on Apr 13, 2022) (maturing on Sep 22, 2033)
7.32% GS 2024 2,000 crore  GoI FRB 2033
(Maturing on Jan 28, 2024) (maturing on Sep 22, 2033)

Let us look at the other formalities prescribed by RBI to apply for above bonds.

Switch module on e-kuber

The market participants were advised to bid in the switch auction through the Switch Transaction module provided in the e-kuber portal.

Bidding in a switch transaction

Bidding in the auction implied that the market participants agreed to sell the source security/ies to the Government of India (GoI) and simultaneously agreed to buy the destination security from the GoI at their respective quoted prices.

What about placing of bids?

Each bid should have specified the following details:

i. Amount of the source security (Face Value) that the participants are willing to sell.

ii. Price of the source security (expressed up to two decimal places).

iii. Choice of destination security and the price of the destination security (expressed up to two decimal places), at which the participants were willing to buy the destination security.

The participants could choose to bid for any/all the destination security/ies, but the aggregate amounts of bids for the source security should not exceed their holdings of the source security in face value terms.

Let us learn about the bid size.

Minimum bid size prescribed was > 10,000 and in multiples of >10,000 thereafter. The participants were allowed to submit multiple bids. However, the aggregate amounts of bids submitted were not to exceed the notified amount of source security/basket of source securities in the auction.

Now comes” Price of source security.”

Price of source security quoted should have been equal to the FBIL closing price of the source security as on the previous working day.

Bids for source security not as per the price mentioned above would have got rejected.

Price of destination security

Bids for the destination security were to be placed after taking into account the price of source security as mentioned above.

Method of auction

The auction was held in a multiple-price based auction, i.e. successful bids were to get accepted at their respective quoted prices for the source and destination securities.

Auction decision

The auction cut-off would have been decided based on the price of the destination security/ies.

Successful bidders were those who had placed their bids at or above the cutoff price. All bids lower than the cut-off price were rejected.

There was provision of pro-rata allotment, if there were more than one successful bid at the cut-off price.

Amount of destination security and dealing in odd amounts during switch auction

The switch ratio, which is the ratio of the price of the source security to the price of the destination security, would be rounded off at 8 decimal places.

The amount of destination security to be issued for each successful bid would have been computed by multiplying the allotted amount (FV) of the source security with the rounded-off switch ratio. The amount of destination security (FV) would be rounded-off to the nearest lower value in multiples of >10,000.

The odd amount of destination securities (less than > 10,000) which had been rounded-off, would be notionally allotted and bought back from the bidders at the quoted bid price of the destination security.

The net cash consideration to be paid to the bidder for such odd amounts would be the clean price of these securities (as the accrued interest received during notional allotment and paid during notional buyback offset each other).

Under the head “fund settlement” the following appeared under guidelines.

“Though the conversion would be broadly cash neutral, there will be fund settlement for the net accrued interest (accrued interest for the source security FV – accrued interest for the destination security FV) for each bid. Cash consideration (due to rounding-off of face value of destination security) computed for each bid would be added to the net accrued interest. Accordingly, fund settlement will be done for the final amount (Net accrued interest + cash consideration) for each bid.” Since the bids took place on 17th May, 2021, necessary action in terms of fund settlement would have taken place.

An example given under the guidelines amply explains the process involved. (reproduced from guidelines)

Note: An illustration for the calculation of cash consideration due to rounding-off of destination security face value is as given below:

Amount of Source Security (FV) 10,00,00,000.00
Price of Source Security 97.50
 Price of Destination Security 99.20
Switch Ratio (rounded-off at 8 decimals) 0.98286290
Destination Security FV before rounding off 9,82,86,290.00
Destination Security FV re-issued after rounding-off 9,82,80,000.00
Odd amount of rounded-off destination security (FV) 6290.00
Cash consideration due to rounding off (Clean Price calculated at the quoted price of destination security) 6240.00

I also collected some general information about Government of India securities from RBI Website as under:

https://m.rbi.org.in/Scripts/FAQView.aspx?Id=79

(Government Securities Market in India – A Primer)

The following caption amply explains the Primer from RBI note.

“This primer is yet another initiative of the Reserve Bank to disseminate information relating to the G-Secs market to the smaller institutional players as well as the public. An effort has been made in this primer to present a comprehensive account of the market and the various processes and operational aspects related to investing in G-Secs in an easy-to-understand, question-answer format. The primer also has, as annexes, a list of primary dealers (PDs), useful excel functions and glossary of important market terminology. I hope the investors, particularly the smaller institutional investors will find the primer useful in taking decisions on investment in G-Secs. Reserve Bank of India would welcome suggestions in making this primer more user-friendly.”

The above note is signed by Shri B P Kanungo, RBI Deputy Governor.

I have quoted below some of the chapters from RBI primer.

  • 32 chapters and 7 annexes explain the basics of government securities market in India.
  • I have reproduced some important justifications for investment under government securities.

“Why should one invest in G-Secs?

Holding of cash in excess of the day-to-day needs (idle funds) does not give any return. Investment in gold has attendant problems in regard to appraising its purity, valuation, warehousing and safe custody, etc. In comparison, investing in G-Secs has the following advantages:

  • Besides providing a return in the form of coupons (interest), G-Secs offer the maximum safety as they carry the Sovereign’s commitment for payment of interest and repayment of principal.
  • They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need for safekeeping. They can also be held in physical form.
  • G-Secs are available in a wide range of maturities from 91 days to as long as 40 years to suit the duration of varied liability structure of various institutions.
  • G-Secs can be sold easily in the secondary market to meet cash requirements.
  • G-Secs can also be used as collateral to borrow funds in the repo market.
  • Securities such as State Development Loans (SDLs) and Special Securities (Oil bonds, UDAY bonds etc) provide attractive yields.
  • The settlement system for trading in G-Secs, which is based on Delivery versus Payment (DvP), is a very simple, safe and efficient system of settlement. The DvP mechanism ensures transfer of securities by the seller of securities simultaneously with transfer of funds from the buyer of the securities, thereby mitigating the settlement risk.
  • G-Sec prices are readily available due to a liquid and active secondary market and a transparent price dissemination mechanism.
  • Besides banks, insurance companies and other large investors, smaller investors like Co-operative banks, Regional Rural Banks, Provident Funds are also required to statutory hold G-Secs as indicated below”.(From RBI only)

Conclusion

RBI published the primer which was totally covered in taxguru.in in 2016. Since then, RBI frequently undertakes conversion/switch of its securities through auction; now, under” Switch module on e-kuber”. With the growth of market for government securities which are the safest in India, it is time to know the present guidelines outlining the easiest and safest way to acquire the G-Secs, as they are called. I would request some professionals who are actually dealing with the above securities to actually explain their experience to help us understand and appreciate these modern technical developments in investment.

Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author/TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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