Primary Dealers in Government Securities

Government securities market in India is narrow and unlike other countries inactive. The general investors do not buy these securities. The Reserve Bank of India and financial institutions are the main investors of government securities.

The government securities market in India supports the capital market and has no negative effect on it. The funds that it collects are mainly for minimizing the cost of servicing and for the planned priorities of the economy.

Government securities have been employed by the Reserve Bank of India in such a way that it is able to maintain some clear pattern of yield and a proper maturity distribution policy. It has also been considered safe by Reserve Bank to purchase securities before maturity in order to maintain stability.

The Reserve Bank of India has used open market operations to provide inexpensive finance for government and has tried to maintain funds with the view of achieving stability in the future.

The Reserve Bank of India has also used the techniques of maintaining the reserve ratio and the statutory liquid ratio and the technique of moral suasion. This it has done for controlling bank liquidity and for achieving the objectives of debt management.

Prices and Yields on Government Securities:

The prices of government securities remain stable, although the bank rate has been increasing. In India usually the bank rate influences the security prices inversely and in opposite direction.

But the Reserve Bank of India has tried to stabilize the prices of government securities. Thus, it has been able to do by refraining from making any change in the purchasing and selling rates of the different loans which are placed on its list.

It has also tried to manipulate the selling rate of Treasury Bills of government. The Reserve Bank of India has many a times mopped up the surplus funds by lowering the rate of sale of Treasury Bills. This is an indication that the Reserve Bank of India was concerned with the rate of term loans and wanted to continue with its stability.

The yields on securities can be studied if the investor holds the security continuously. An investor can then observe year to year changes in the coupon rate, running yield and redemption yield.

It is common practice in India that the government securities are sold far below the face value. This itself shows that the redemption yield is higher than the bond rate because the redemption yield is equal to the face value when the bond is purchased at the face value or par value.

In India, government securities have continuously increased the rate of return. Also, there has been no ceiling rate on government securities.

However, government securities show that even with the continuous increase in interest over the years, coupled with price stability, the rates given by government are far below than what the investor would hope to gain if he invested his funds in industrial securities. The government securities, therefore, are not an attractive form of investment.

In India, government securities have been an important or useful part of the monetary management and fiscal policy. The Reserve Bank of India has executed the interest rate of government selling, borrowing, purchasing and lending and has also influenced the prices and yields. It has also played an important role in maintaining a statutory liquidity ratio with the commercial banks in the country.

This has the effect of reducing or improving the liquidity position of the bank. As has been pointed earlier, government securities have not made a market for themselves. They have generally been issued for the reason of monetary, fiscal and debt management and for using the funds for the planned priorities of the country.

Government securities in India are invested by financial institutions and commercial banks. Although it comprises a larger segment than the industrial securities market in India, very little knowledge is presently available about its operation to the common man.

Dealer

A primary dealer is a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities. The government may regulate the behaviour and number of its primary dealers and impose conditions of entry. Some governments sell their securities only to primary dealers; some sell them to others as well. Governments that use primary dealers include Australia, Belgium, Brazil, Canada, China, France, Hong Kong, India, Italy, Japan, Singapore, Spain, the United Kingdom, and the United States.

A Primary Dealer will be required to have a standing arrangement with RBI based on the execution of an undertaking and the authorisation letter issued by RBI covering inter-alia the following aspects:

(i) A Primary Dealer will have to commit to aggregative bid for Government of India dated securities on an annual basis of not less than a specified amount and auction Treasury Bills for specified percentage for each auction. The agreed minimum amount/ percentage of bids would be separately indicated for dated securities and Treasury Bills.

(ii) A Primary Dealer would be required to achieve a minimum success ratio of 40 per cent for dated securities and 40 per cent for Treasury Bills.

(iii) Underwriting of Dated Government Securities: Primary Dealers will be collectively offered to underwrite up to 100% of the notified amount in respect of all issues where the amounts are notified.

(iv) Treasury bill issues are not underwritten. Instead, Primary Dealers are required to commit to submit minimum bids at each auction. The commitment of Primary Dealer’s participation in treasury bills subscription works out as follows:

(a) Each Primary Dealer individually commits, at the beginning of the year, to submit minimum bids as a fixed percentage of the notified amount of treasury bills, in each auction.

(b) The minimum percentage of the bids for each Primary Dealer is determined by the Reserve Bank through negotiation with the Primary Dealer so that the entire issue of treasury bills is collectively apportioned among all Primary Dealers.

(c) The percentage of minimum bidding commitment determined by the Reserve Bank remains unchanged for the entire financial year or till furnishing of undertaking on bidding commitments for the next financial year, whichever is later. In determining the minimum bidding commitment, the Reserve Bank takes into account the offer made by the Primary Dealer, its net owned funds and its track record.

(v) A Primary Dealer shall offer firm two-way quotes either through the Negotiated Dealing System or over the counter telephone market or through a recognised Stock Exchange of India and deal in the secondary market for Government securities and take principal positions.

(vi) A Primary Dealer shall maintain the minimum capital standards at all points of time.

(vii) A Primary Dealer shall achieve a sizeable portfolio in government securities before the end of the first year of operations after authorisation.

(viii) The annual turnover of a Primary Dealer in a financial year shall not be less than 5 times of average month end stocks in government dated securities and 10 times of average month end stocks in Treasury Bills.

Of the total, turnover in respect of outright transactions shall not be less than 3 times in respect of government dated securities and 6 times in respect of Treasury Bills. The target should be achieved by the end of the first year of operations after authorisation by RBI.

(ix) A Primary Dealer shall maintain physical infrastructure in terms of office, computing equipment, communication facilities like Telex/Fax, Telephone, etc. and skilled manpower for efficient participation in primary issues, trading in the secondary market, and to advise and educate the investors.

(x) A Primary Dealer shall have an efficient internal control system for fair conduct of business and settlement of trades and maintenance of accounts.

(xi) A Primary Dealer will provide access to RBI to all records, books, information and documents as may be required,

(xii) A Primary Dealer shall subject itself to all prudential and regulatory guidelines issued by RBI.

(xiii) A Primary Dealer shall submit periodic returns as prescribed by RBI.

(xiii) A Primary Dealer’s investment in G-Secs and Treasury Bills on a daily basis should be at least equal to its net call borrowing plus net RBI borrowing plus net owned funds of Rs 50 crore.