by 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,[1] Belgium, Brazil,[2] Canada, China, France, Hong Kong, India, Italy, Japan, Singapore, Spain, the United Kingdom, and the United States.
Role of Primary Dealers in the government securities market are:
PDs are expected to play an active role in primary the government securities market, both in its primary and secondary segments. 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.
A Primary Dealer can offer to underwrite an amount not exceeding five times of its net owned funds. The amount so arrived at should not exceed 30% of the notified amount of the issue. If two or more issues are floated at the same time, the limit of 30% is applied by taking the notified amounts of both the issues together.
In the case of devolvement, allotment of securities will be at the competitive cut-off price/yield decided at the auction or at par in the case of pre-determined coupon floatation. Obligations under items (i) to (iii) above would be confined for the present only to Central Government dated securities and obligations under items (i) to (ii) to Treasury Bills.
(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.
The Reserve Bank would extend the following facilities to PDs to enable them to effectively fulfill their obligations: (i) Access to Current Account facility with Reserve Bank Of India, (ii) Access to Subsidiary General Ledger (SGL) Account facility (for Government securities), (iii) Permission to borrow and lend in the money market including call money market and to trade in all money market instruments, (iv) Access to liquidity support through Repo operations with RBI in Central Government dated securities and Auction Treasury Bills up to the limit fixed by RBI. The Scheme is separately notified every year, (v) Access to Liquidity Adjustment Facility (LAF) of Reserve Bank of India, (v) Favoured access to open market operations by Reserve Bank of India.
RBI will have access to records and accounts of an authorised Primary Dealer and the right to inspect its books. A Primary Dealer will be required to submit prescribed returns to RBI, IDM Cell a daily report on transactions and market information, monthly report of transactions in securities, risk position and performance with regard to participation in auctions, quarterly return on capital adequacy, an annual report on its performance together with annual audited accounts and such other statements and returns as are prescribed either specifically or generally by Reserve Bank of India vide any of its institutions/circulars/ directives.
Further, PDs are required to meet such registration and other requirements as stipulated by Securities and Exchange Board of India (SEBI) including operations on the Stock Exchanges. Authorised PDs are expected to join self-regulatory organisations (SROs) like Primary Dealers Association of India (PDAI) and Fixed Income Money Market and Derivatives Association (FIMMDA) and abide by the code of conduct framed by them and such other actions initiated by them in the interests of the securities markets.
In respect of transactions in government securities, a Primary Dealer should have a separate desk and should maintain separate accounts and have an external audit of annual accounts. The Primary Dealer should maintain separate accounts in respect of its own position and customer transactions.
A Primary Dealer should bring to the RBI’s attention any major complaint against it or action initiated/taken against it by authorities such as the Stock Exchanges, SEBI, CBI, Enforcement Directorate, Income Tax, etc.
Reserve Bank of India reserves the right to cancel the Primary Dealership if, in its view, the concerned institution has not fulfilled any of the prescribed performance criteria contained in the authorisation letter. Reserve Bank of India reserves its right to amend or modify these guidelines from time to time, as may be considered necessary.
