Different types of auctions used for issue of securities

Prior to the introduction of auctions as the method of issuance, the interest rates were administratively fixed by the government. With the introduction of auctions, the rate of interest (coupon rate) gets fixed through a market-based price discovery process.

An auction may be either yield-based or price-based.

Yield-Based Auction

A yield-based auction is generally conducted when a new government security is issued. Investors bid in yield terms up to two decimal places (for example, 8.19 percent, and 8.20 percent and so on). The bids are arranged in ascending order, and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction. The cut-off yield is taken as the coupon rate for the security. Successful bidders are those who have bid at or below the cut-off yield. Bids that are higher than the cut-off yield are rejected.

Price-Based Auction: A price-based auction is conducted when the Government of India re-issues securities issued earlier. The bidders quote in terms of price per ` 100 of the face value of the security (e.g., ` 102.00, ` 101.00, ` 100.00, ` 99.00, etc. per ` 100). The bids are arranged in descending order, and the successful bidders are those who have bid at or above the cut-off price. Bids that are below the cut-off price are rejected.

Multiple Price-Based

In a Uniform Price auction, all the successful bidders are required to pay for the allotted quantity of securities at the same rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them. On the other hand, in a Multiple Price auction, the successful bidders are required to pay for the allotted quantity of securities at the respective price/yield at which they have bid.