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Revised underwriting sceheme for primary dealers

Written by: Staff

Mumbai, Apr 4 (UNI) Reserve Bank of India (RBI) has introduced a revised scheme of underwriting commitment and liquidity support for all Primary Dealers (PDs) in Government Securities Market and scheduled commercial banks undertaking PD business departmentally in light of the Central Bank's withdrawal from participation in the primary issues of Government securities with effect from April 1.

Under the revised scheme, which wil be applicable with effect from April 1, a RBI notification today said, PDs will be required to meet underwriting committment instead of the earlier requirements of bidding commitment and voluntary underwriting.

The underwriting commitment will be divided into two parts-- Minimum Underwriting Commitment (MUC) and Additional Competitive Underwriting (ACU).

The MUC of each PD will be computed to ensure that at least 50 per cent of each issue is mandatorily covered by the aggregate of all MUCs. For example, with the current number of PDs at 17, each PD will be deemed to underwrite about 3 per cent of the notified amount of each auction as MUC.

The MUC will be uniform for all PDs, irrespective of their capital or balance sheet size.

Since the MUC would not be through a bidding process, the same would be incorporated in the Undertaking given by the PDs to RBI, every year to enable compulsory minimum underwriting for each auction.

Under ACU, the remaining portion of the notified amount will be open to competitive underwriting through underwriting auctions. Each PD would be required to bid for a minimum of 3 per cent of notified amount.

The auctions could be either uniform price-based or multiple price-based depending upon the market conditions and other relevant factors, which will be announced before the underwriting auction for each issue. All successful bidders in the ACU auction will get commission as per auction rules.

Following the discontinuance of bidding commitment as one of the obligations of Primary Dealers, RBI felt that the methodology for calculating limits for Primary Dealers under the RBI's Liquidity Support Scheme has also been revised. The revised methodology for computing the extent of liquidity support applicable to stand-alone Primary Dealers is enclosed.

Of the total liquidity support, half of the amount will be divided equally among all the stand-alone PDs. The remaining half (50 pc) will be divided in the ratio of 1:1 based on market performance in primary market and secondary market.

The PD-wise quantum of liquidity support will be revised every half-year (April-September and October-March) based on the market performance of the PDs in the preceding six months.


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