Govt dolls out extra dealer commissions in bond market

Spooked by the flight of overseas investments in Indian securities, the government started dolling out bounties on primary bond dealers (PDs) whose commissions have zoomed manifold. This is aimed at building confidence while protecting them from any possible loss if yields rise after the bond auctions, sources told moneycontrol.com.

Saikat Das
moneycontrol.com

Spooked by the flight of overseas investments in Indian securities, the government started dolling out bounties on primary bond dealers (PDs) whose commissions have zoomed manifold. This is aimed at building confidence while protecting them from any possible loss if yields rise after the bond auctions, sources told moneycontrol.com.

Bond auctions and role of PDs

The Reserve Bank of India (RBI) conducts auctions for government securities (G-Secs) for which PDs bid for underwriting such bond issues. In money market parlance, an underwriter is a dealer who assists government entities bring bond issues to market. It buys bonds from the issuer and then re-sells them to investors. In case of any devolvement non-subscription, a PD has to subscribe it of its own.

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Raining commissions

PDs get commission from the government in doing so. RBI carries out auctions on weekly basis. On June 27, the government bonds with interest rate of 8.32 percent maturing in 2032 earned an underwriting commission of 15.01 paise (or Re 0.1501) for every Rs 100 compared with 0.34 paise (Re 0.0034) on auctions dated June 6. While bonds worth Rs 3,000 crore were auctioned on June 27, it was at Rs 2,000 crore in the earlier auction.

This means, PDs earned a total commission of Rs 68 lakh on bonds worth Rs 2,000 crore as against fees of Rs 4.53 crore on Rs 3,000 crore (or Rs 3 crore on proportionate basis).

"Commission is directly linked to appetite of bonds investment in a particular time," said Moses Harding, an independent treasury expert with 32 years of banking experience.

"The demand for the auction may not be sufficient. Higher fees will help absorb PD's post auction losses arising out of rising bond yields. However, bond prices rally post the auction, if the auction is good. This is to de-risk the underwriters for post auctions," he said.

Inflation indexed bonds (IIBs)

RBI introduced inflation indexed bonds (IIBs), for which it has conducted two auctions so far on June 3 and June 24 respectively. Those bonds are of 10-year maturity. In the first auction of Rs 1,000 crore bonds, the government offered underwriting commission of 3.34 paise (Re 0.0334) per Rs 100 that is Rs 33.40 lakh in total.

However, PDs bagged much better deal later at the rate of 29.00 paise (Re 0.2900) per Rs 100 in the auction of similar quantity bonds on June 24.

"The government wants to woo PDs in a troubled time. It is already battling with the menace of exchange rate volatility. Without their participation, the government will not be able to run the show. With this, PDs too are encouraged to build G-sec issuances. Viability of government market is also a key to economic revival," said a market participant on conditions of anonymity.

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