In order to meet their budgetary requirements, State Governments borrow from the market by issuing dated securities called State Development Loans(SDLs). SDLs have all characteristics similar to that of CGs.
The RBI has entered into agreements with 29 State Governments and one Union Territory (UT of Puducherry) to manage their public debt. The State Governments have to get authorisation from the Centre for any borrowing in case there is any outstanding loan that they have from the Centre. Servicing of interest at half-yearly intervals and the repayment of principal on the maturity date is carried out by the RBI on behalf of the states.
Like Central Government dated securities, SDLs also qualify for SLR. They are eligible as collaterals for borrowing through repo and Liquidity Adjustment Facility (LAF). In the recent years, State Governments have also issued special securities under “Ujjwal Discom Assurance Yojna” (UDAY) Scheme. However, these UDAY bonds do not have SLR status.
Issuance and bidding:
RBI, in consultation with State Governments, announces the indicative quantum of borrowing on a quarterly basis. Market borrowings are raised by the RBI on behalf of the State Governments as approved by the Ministry of Finance in consultation with the Planning Commission. The primary market auctions for SDLs are held on Tuesdays every week on the E-Kuber Platform as per the RBI press release for the same. The auction may either be yield based or price based. The bidding and allotment procedure is similar to that of CGs. The aggregate amount reserved for the purpose of Non-Competitive bidding in the case of SDLs is 10% of the notified amount subject to a maximum limit of 1% of notified amount for a single bid per stock. Unlike CGs, there is no underwriting auction in case of SDLs.
In the secondary market, the trading takes place electronically on RBI /CCIL managed NDS-OM and the OTC market which is again reported on the NDS-OM platform in the same manner as it happens for CGs.
Who can invest:
Similar to CGs, all entities registered in India like banks, financial institutions, Primary Dealers, Cooperative Banks, Regional Rural Banks. Firms, Companies, Corporate Bodies, Partnership Firms, Institutions, Mutual Funds, Insurance Companies, Foreign Institutional Investors, State Governments, Provident Funds, Trusts, Research Organizations and individuals are eligible to purchase/sell and participate in SDLs in both primary and secondary markets.
Why invest in SDLs:
- Like CGs, they provide fixed and stable returns in the form of coupon and active market related returns as well.
- SDLs provide good diversification benefits and are available in a wide range of maturities to suit the varied liability structures of various institutions.
- No short selling in these securities enables lower pressure on such securities as compared to CGs during an upward swing in yields.
- State Development Loans (SDLs) provide a higher spread over CGs.
- They qualify as SLR.