Ref.No.IDMC.2418 /08.02.20/2001-02

November 17, 2001

All Scheduled Commercial Banks excluding RRBs/
All State Co-operative Banks/All Scheduled Primary
(Urban) Co-operative Banks /All Financial Institutions/
All Primary & Satellite Dealers in Government Securities Market.

Dear Sirs,

Issue of Government of India Floating Rate Bonds, 2006

Government of India have offered to sell Floating Rate Bonds, 2006 vide Notification No.4(7)-W&M/2001(i) dated November 15, 2001 for a notified amount of Rs 2,000 crore (nominal) by auction. The auction will be conducted by Reserve Bank of India at its Mumbai Office, Fort, Mumbai on Wednesday, November 21, 2001. The salient features of the auction and the terms and conditions governing the issue of the Bonds are given in the Notification (copy enclosed), which should be read along with the General loan Notification F.No.4(2)-W&M/97 issued by Government on April 1, 1997, as amended by Government notification F. No. 4(7)-W&M/99 dated 5th April, 1999.

2. In this connection, we wish to draw your attention, in particular, to the following :

1. The Floating Rate Bonds ('The Bonds') will be issued at par (i.e. at Rs 100.00 per cent) for a minimum amount of Rs.10,000/- (nominal) and in multiples of Rs.10,000/- thereafter.
2. The Bonds will be of 5-years tenure. The bonds will be issued on November 22, 2001 and repaid at par on November 22, 2006.
3. Interest on the Bonds will be paid half yearly. The Bonds will carry an interest rate, which is calculated by adding a 'markup' to a variable base rate. The 'mark up' will be decided in the auction to be conducted by Reserve Bank of India and will remain unchanged during the currency of the Bond. The variable base rate will be the average rate of the implicit yields at cut-off prices emerging in the immediate previous six auctions of ‘Government of India 364 day Treasury Bills’ held prior to the relative half-year coupon period. The implicit yield will be computed by reckoning 364-day year.
4. The base rate for calculation of interest for the first coupon period commencing from November 22, 2001 to May 21, 2002 as per the aforesaid formula is 7.06 per cent (Please see illustration enclosed).
5. The base rate for the subsequent half yearly coupon periods, worked out as per the aforesaid formula, will be announced by RBI on or before the commencement of the relative half yearly coupon period.
6. In the unlikely event of 364-day Treasury Bill auctions being discontinued during the currency of the Floating Rate Bonds, the applicable variable base rate will be the average of the Yield to Maturity (YTM) rate prevailing for one year Govt. of India Security as on last six reporting Fridays prior to the commencement of the relative half-yearly coupon period, worked out in consultation with the Fixed Income Money Market and Derivatives Association of India (FIMMDA). This rate will be announced by RBI on or before the commencement of the relative half yearly coupon period.
7. There will be no floor or cap on the interest rate on the Floating Rate Bonds.
8. The Floating Rate Bonds are being issued by the Government of India, on auction basis for the first time. The bonds provide hedge against interest rate risk, offering returns linked to short term yield.

3. The auction will be conducted by the Reserve Bank of India (RBI) at Fort, Mumbai Office on Wednesday, November 21, 2001. The important features of the auction are given below

1. The bids should be submitted in the prescribed form of application given in Annexure, before 2.30 p.m. on November 21, 2001 in sealed covers superscribed 'Tender for GOI Floating Rate Bonds, 2006- Auction dated November 21, 2001' and deposited in the appropriate tender box kept for the purpose at Reserve Bank of India, Fort, Mumbai Office. The nominal value of the Bonds applied for, and the 'mark-up' expected by them (up to two decimal places) over the base rate should be clearly indicated in the application form.
2. On the basis of bids received, RBI will determine the maximum mark-up, at which offers will be accepted.
3. The auction will be conducted by using the Uniform Price method where bids offered up to and including the maximum mark-up as determined by Reserve Bank of India will be accepted at the maximum rate of mark-up so determined. Bids quoted higher than the mark-up rate so determined by Reserve Bank of India will be rejected.
4. The results of the auction will be announced on November 21, 2001 and payment by successful bidders will be during the banking hours on November 22, 2001. Successful bidders will be required to deposit with the Reserve Bank of India, Public Debt Office, Fort, Mumbai, the amount payable for the Government Stock allotted to them in cash or by cheque on their account with Reserve Bank of India, Mumbai or by Banker's Pay Order, along with a covering letter on November 22, 2001 before 2.30 p.m. In case of Current account holders, the amount payable will be debited to their respective Current accounts maintained with the Reserve Bank of India.
5. An investor can submit more than one bid at different 'mark-up's but a separate application should be submitted for each bid. The aggregate amount of bids submitted by a person should not exceed the notified amount of loan.
6. Reserve Bank of India has full discretion to accept or reject any or all bids either wholly or partially without assigning any reason.
7. The Bonds will be issued by credit to Subsidiary General Ledger Account (SGL) of parties maintaining such account with Reserve Bank of India or in the form of Stock Certificate to others.

4. The Floating Rate Bonds will qualify for the Ready Forward facility.

Yours faithfully,

Sd/-
(A.S.Rao)
General Manager

Illustration: Base rate and rate of interest payable on Floating Rate Bonds 2006 Calculation of Base Rate applicable for half year ending May 21, 2002

Serial No.	Date of Auction	Cut-off Price	Implicit yield @ at cut-off price
1	05-Sep-01	93.37	7.1008
2	19-Sep-01	93.18	7.3192
3	03-Oct-01	93.36	7.1123
4	17-Oct-01	93.31	7.1696
5	31-Oct-01	93.58	6.8604
6	13-Nov-01	93.62	6.8148
		Total	42.3771
		42.3771
	Base Rate =	----------------------- =	7.0629
		6
Rounded off to two decimal places			7.06
If the Mark-up decided in the auction is			0.35
			(Only an example)
Interest rate applicable for half year
November 22, 2001 to May 21, 2002			7.41	(Percent per annum)
	@ annualised for 364 day year