OUR SPECIALITY
STATE DEVELOPMENT LOANS BONDS
STATE DEVELOPMENT LOANS BONDS
State Development Loans (SDLs) are issued by the State Governments and RBI coordinates the actual process of selling these securities. Each state is allowed to issue securities up to a certain limit each year. Generally, the coupon rates on State Development Loans are marginally higher than those of GOI-Secs issued for the same maturity.
The State Development Loans are normally sold through the auction process. All the auctions are multiple price auctions, through competitive bidding, conducted by Reserve Bank of India and allotment procedure is similar to that for GOI-Secs. Non-competitive bidding has been introduced in the auction of SDL. State Development Loans also qualify for SLR status. Interest payment frequency is half yearly and other modalities are similar to GOI-Secs. They are issued in dematerialized form. State Government Securities can be issued in the physical form (in the form of Stock Certificate) on separate request and are transferable. Like in the case of G-Secs no stamp duty is payable on transfer of State Development Loans also.
State Development Loans are eligible securities for Liquidity Adjustment Facility (LAF)-Repos. Schedule Commercial Bank (excluding RRBs) and Primary Dealers can offer State Development Loans as eligible securities to the RBI under LAF Repo.
SBI DFHI is a Primary Dealer and an active player in State Development Loans market. It also participates in the SDL auction. As a primary dealer SBI DFHI also participates in the underwriting of auction of SDLs. One day prior to the auction, bids are submitted by Primary Dealers (PD) to RBI indicating the amount they are willing to underwrite and the fee expected. RBI, along with State Govt representatives, then examine the bids on the basis of the market conditions and take a decision on the amount to be underwritten and the fee to be paid. State Development Loans are traded in secondary market but are much less liquid than GOI Secs. SBI DFHI is an active player in primary as well as secondary market.
Auctions:
Auctions for government securities are either multiple- price auctions or uniform price auction – either yield based or price based.
Yield Based:
In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned. The bidders submit bids in term of the yield at which they are ready to buy the security. If the Bid is more than the cut-off yield then its rejected otherwise it is accepted
Price Based:
In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned, as well as the coupon rate. The bidders submit bids in terms of the price. This method of auction is normally used in case of reissue of existing Government Securities. Bids at price lower then the cut off price are rejected and bids higher then the cut off price are accepted. Price Based auction leads to a better price discovery then the Yield based auction.
Underwriting in Auction:
One day prior to the auction, bids are received from the Primary Dealers (PD) indicating the amount they are willing to underwrite and the fee expected. The auction committee of RBI then examines the bid on the basis of the market condition and takes a decision on the amount to be underwritten and the fee to be paid. In case of devolvement, the bids put in by the PD’s are set off against the amount underwritten while deciding the amount of devolvement and in case the auction is fully subscribed, the PD need not subscribe to the issue unless they have bid for it.