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The Reserve Bank of India has ensured 100% subscription cover for the government's Rs 28,000 crore bond sale, after completing an Additional Competitive Underwriting (ACU) auction and setting commission rates for Primary Dealers. The move guarantees that the entire notified amount will be picked up even if investor demand falls short in Friday's main auction.

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Underwriting Process Explained

According to the RBI release, two long-dated securities were underwritten: Rs 17,000 crore of 6.68% Government Security maturing in 2040 and Rs 11,000 crore of 7.43% Government Security maturing in 2076.

Primary Dealers (PDs) are first required to meet a Minimum Underwriting Commitment (MUC). For the 6.68% GS 2040, the MUC was Rs 8,505 crore, or about half the issue size. For the 7.43% GS 2076, MUC was Rs 5,502 crore.

Beyond this mandatory portion, RBI invited competitive bids for Additional Competitive Underwriting (ACU), where PDs quote the commission they want for guaranteeing additional amounts. RBI accepted Rs 8,495 crore of ACU bids for the 2040 bond and Rs 5,498 crore for the 2076 bond. That takes the total underwritten amount to Rs 17,000 crore and Rs 11,000 crore, respectively, fully covering both issues.

Commission and Risk Assessment

The ACU commission cut-off was set at 0.39 paise per Rs 100 for the 6.68% GS 2040 and 0.68 paise per Rs 100 for the 7.43% GS 2076. In absolute terms, that works out to roughly Rs 3.3 crore in underwriting fees for the 2040 paper and about Rs 3.7 crore for the 2076 paper. The higher rate on the 2076 bond reflects the additional duration risk PDs take on for a 50-year security.

Ensuring a Successful Borrowing Programme

"Total Amount underwritten" now matches the "Notified Amount" for both securities, RBI said, meaning the entire borrowing is backstopped before the actual sale. The auction for the sale of securities to investors was held on Friday.

Underwriting auctions are a routine risk-management step. They ensure the government's borrowing programme isn't derailed by poor demand, with PDs stepping in to buy any unsold stock. The sub-1 paise commissions indicate Primary Dealers see limited risk of devolvement and are comfortable taking on the inventory, even at the long end of the curve. (ANI)