What changed
The earlier bidding commitment and voluntary underwriting scheme (2001) is superseded. PDs now must meet a Minimum Underwriting Commitment (MUC) ensuring 50% aggregate coverage (e.g., about 3% each with 17 PDs), plus bid in Additional Competitive Underwriting auctions for the remainder. Liquidity support calculation methodology revised for stand-alone PDs.
What it means for you
Banks acting as PDs face a mandatory underwriting obligation regardless of size, increasing their risk exposure in primary auctions. The revised liquidity support formula may alter access to RBI funding for stand-alone PDs. PDs need to adjust bidding strategies for ACU auctions, as commission on MUC depends on ACU performance: 4% or more ACU success gets weighted average of all accepted ACU bids; others get weighted average of three lowest ACU bids.
What you must do
- Review and update internal underwriting policies to comply with MUC and ACU requirements.
- Ensure annual undertakings with RBI reflect the new MUC commitment.
- Prepare for ACU auctions by assessing market conditions and bidding strategies.
- Recalibrate liquidity support calculations based on the revised methodology.
- Train treasury teams on the new underwriting auction process and commission structure.
Who it affects
Stand-alone Primary Dealers, Scheduled commercial banks with PD departments, RBI's Financial Markets Department
What is the Minimum Underwriting Commitment (MUC) for each PD?
Each PD must underwrite a uniform percentage of the notified amount (e.g., about 3% with 17 PDs) to ensure aggregate MUC covers at least 50% of the issue. This is uniform for all PDs regardless of size.
How is commission on MUC determined?
PDs that succeed in ACU for 4% or more of notified amount get commission at the weighted average of all accepted ACU bids. Others get commission at the weighted average of the three lowest ACU bids.
When does the revised scheme take effect?
The scheme is effective from April 1, 2006, for the fiscal year 2006-07, superseding the earlier scheme from April 19, 2001, with immediate effect from April 4, 2006.