G-secs?

THE Reserve Bank of India has decided to allow small investors to bid at the auction for government securities (G-secs). This means that you and I can now buy G-secs in the primary market. Till now, we could invest in G-secs only through mutual funds. How can you buy G-secs and at what price?

You submit an application to one of the banks or primary dealers (PDs) in your city. Your application should state the amount to be invested, subject to a minimum of Rs 10,000. How much will you pay for the investment? Here, the RBI has made it very clear that you cannot quote the price at which you wish to buy G-secs, and not without reason! Why?

The RBI sells G-secs through auctions, where banks and PDs bid for the amount and the price at which they intend to buy. Suppose the auction is for a 10-year G-sec, and the RBI intends to collect Rs 5,000 crore (called the notified amount). A bank can make a bid for, say, Rs 400 crore at a price of Rs 103 (the face value of all G-sec is Rs 100). This is called a competitive bid as it contains the amount as well as the price at which the investor is interested in buying the G-sec.

Now, the problem is that small investors are not fully equipped to quote a price at which they want to buy the G-secs.

This is because quoting G-sec prices requires understanding how interest rates are likely to move in the future and whole lot of other things about the yield curve.

The RBI, therefore, allows you to make a non-competitive bid. That is, you can buy G-secs at the weighted-average price decided at the auction. Suppose the RBI collects 2,500 crore at Rs 102, Rs 1,000 crore at Rs 102.50, and Rs 1,500 crore at Rs 103, the weighted price is 102.4 (that is, 102 x 2500 + 1000 x 102.50 + 1500 x 103/5000). Your cost will, thus, be Rs 102.4 plus commission.