Breaking from the established practice of borrowing from the market, the Uttar Pradesh government has allowed retail investors to participate in auction of bonds floated by the state, through registered aggregators and facilitators such as stock exchanges. 

For market borrowing, as per practice, the development bonds or government securities, are floated by the state governments and are subscribed by PSU (public sector undertaking) banks and Reserve Bank of India acts as facilitators. Financial institutions also participate in the process.

However, to encourage retail participation in such auctions, five per cent of notified amount has been reserved by the RBI for small investors on a non-competitive bidding basis.

The proposal of Finance department to allow the registered stock exchanges to act as facilitators/aggregators on behalf of scores of retail investors looking to invest in government bonds through non-competitive route was recently cleared by the state cabinet.

Sources in the Finance department said, “After the proposal was approved by the state cabinet, a notification to this effect was issued by the government.”

The sources said that the decision was taken in the light of RBI recommendation aimed at encouraging retail participation in government securities. 

Apart from UP, several other state governments have also followed suit, adhering to the RBI norms.

The RBI notifies on government securities’ auction/bidding on a weekly basis. For retail investors, five per cent of notified amount in such auctions is reserved for retail investors through a non-competitive bidding process. 

Under this route, investors are required to specify the amount without quoting the yield or price. Later, bidders are allotted securities at the weighted average price/yield of the auction.

Both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) offer exclusive platforms for retail investors to participate in these primary market instruments. Securities that are allotted in primary market can be sold by investors on the stock exchanges they are listed with.

In July 2019, the UP government had allowed the municipal corporations of Lucknow and Ghaziabad to float municipal bonds totalling Rs 350 crore to fund their respective infra projects. While, Lucknow Municipal Corporation (LMC) will float bonds worth Rs 200 crore, Ghaziabad Municipal Corporation (LMC) will float the same for Rs 150 crore. 

Some other major municipal corporations are also exploring the possibility of harnessing this route to raise funds.

The bonds, to be listed on bourses, would be floated for 10 years with annual returns of 8-1/2 to 8.5-9 per cent. The funds would be invested in projects having the viability of generating enough returns for repayment to investors.

The total debt on the UP government is likely to cross Rs 5 trillion mark by the end of 2019-20 fiscal, which is slightly higher than the budget size of the UP government. 

Though the fiscal deficit is within limits set by the FRBM Act (Fiscal Responsibility and Budget Management Act), the debt burden is heading towards the debt trap, where the government contracts fresh loans to repay old loans. 

The 15th Finance Commission which visited UP ahead of Diwali had raised concern over the rising debt burden on the state government and asked for immediate corrective measures to be taken to prevent the debt from ballooning.