There’s a government bond auction today for Rs. 16,000 cr. for which primary dealers (mostly banks) will be paid underwriting commissions. These commissions are “bid” for; that is, banks bid for how much they will underwrite (they have to underwrite at least half the auction, they bid for the rest), and how much they want to be paid. If the auction succeeds they will be paid the commission anyhow. If the auction is not fully subscribed, then whatever part is undersubscribed is “devolved” upon the underwriting primary dealers. Meaning, they have to buy the bonds if no one else does. Typically this is easy money since everyone wants government bonds. So commissions are of the order of 0.005% or less. That is 500 rupees per crore, so even a 16,000 cr. auction will probably net the whole primary dealer system only about Rs. 50 lakh. This is not much by banking standards, but it’s there to keep incentives in place.… (Read On…)
[via Capital MindCapital Mind]
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