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Tepid response to buyback of gilts

New Delhi, July 19 (PTI): The Union government’s buyback scheme today received a lack-lustre response from banks and financial institutions (FIs) as the Centre received 131 offers amounting to Rs 14,434 crore against the target of Rs 1,00,438 crore.

The first auction for buyback of high-cost illiquid securities was completed by the Reserve Bank this afternoon.

“In all 131 offers were received, amounting to a total of Rs 14,434 crore face value. As these were above the minimum discount of 7.5 per cent, they have been accepted by the government,” an official release said.

The market value of these securities bought back by the Centre was Rs 19,394 crore.

In exchange of the high-cost securities, the government has issued four liquid securities of an equivalent face value of Rs 14,434 crore to the banks that have bid successfully in the voluntary auction.

This is the first open online electronic auction that the finance ministry and RBI carried out to restructure government’s internal debt.

The government had targeted to buy back 19 costly illiquid securities worth Rs 1,00,438 crore from banks and financial institutions as part of its efforts to reduce interest outgo and bridge the fiscal gap.

Although the multi-securities auction was held today, the settlement of buyback transactions and issue of new securities will take place on July 22.

The premium on the securities bought back by the government will be paid in cash.

Banks and FIs can treat the premium received from the buyback process as “business income” and get tax exemptions if it is used for provisioning non-performing assets as announced by finance minister Jaswant Singh in this year’s budget.

The government, in turn, will be able to reduce its interest outgo as it would pay about 6.65 to 7.46 per cent on the four new securities that would be issued in exchange of illiquid bonds carrying coupon rates of 8.0 to 13.85 per cent.

The buyback of securities from banks along with prepayment of costly foreign loans and debt swap scheme for states were announced in the budget to reduce interest outgo of the Centre, now at over Rs 1,23,000 crore.

The scheme, drawn up by the finance ministry and the RBI, was deferred last month as the government raised its target from Rs 84,000 crore to Rs 1,00,438 crore while restricting it to 19 securities instead of the earlier list of 24.

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