Primary Dealers (PDs): Definition, Type and functions of PDs

Primary Dealers (PDs): Definition, Type and functions of PDs

Definition: Primary dealers are registered entities with the RBI who have the license to purchase and sell government securities.  They are entities who buys government securities directly from the RBI (the RBI issues government securities on behalf of the government), aiming to resell them to other buyers. In this way, the Primary Dealers create a market for government securities.

  •  The Primary Dealers system in the government securities market was introduced by the RBI in 1995.
  •  The PDs are thus created to promote transactions in government securities market. A facilitating arrangement is essential for selling of government securities as government is the single largest borrower in the market who borrows through the issue of its securities – treasury bills and bonds.
  •  The RBI instructs PDs to have a minimum turnover ratio, bidding ratio, underwriting ratio, secondary market participation etc to ensure that they are active in supporting the trade in government securities. PDs are active in the stock market also for enhancing the trading of government securities.

Types of Primary Dealers

There are two types of primary dealers, viz. Standalone Primary Dealers and Bank Primary Dealers.

Standalone Primary Dealers:

Most of these PDs are subsidiaries of scheduled commercial banks established as NBFCs. The other standalone PDs are subsidiaries/joint ventures entities incorporated abroad or the companies incorporated in India. These PDs are registered as NBFCs and got license from RBI to deal in government securities. Operations of the PDs are subject to prudential and regulatory guidelines issued by RBI from time to time.

Bank Primary Dealers:

In addition to standalone PDs, banks which do not have a partly or wholly owned subsidiary may also departmentally undertake PD business with the RBI license. Licenses are issued to banks to departmentally undertake PD business subject to prudential and regulatory guidelines issued by RBI. This type of departmentally undertaken PD business by the banks is known as bank PDs.

Role and Functions of Primary Dealers

The role of Primary Dealers is to:

  • Commit participation as Principals in Government of India issues through bidding in auctions
  • Provide underwriting services
  • Offer firm buy – sell / bid ask quotes for T-Bills & dated securities
  • Development of Secondary Debt Market

PDs are performing an exceptional role in giving marketability to government securities. the RBI has elaborated the role of PDs in the following words “PDs are expected to play an active role in the G-Sec market, both in its primary and secondary market segments through various obligations like participating in Primary auction, market making in G-Sec, predominance of investment in G-Sec, achieving minimum secondary market turnover ratio, maintaining efficient internal control system for fair conduct of business etc. A PD is required to have a standing arrangement with RBI based on the execution of an undertaking and the authorization letter issued by RBI every three years. Undertaking will be based on passing of a fresh Board resolution by the PD every three years.”

Most of the PDs are started by scheduled commercial banks and are registered as NBFCs. Operations of the PDs are subject to prudential and regulatory guidelines issued by RBI from time to time.

Business activities of Primary Dealers:

As a core business, the Primary Dealers (PDs)   deal with the primary issues of dated securities of Central Government and State Government and Treasury Bills of Central Government. In addition to their existing business of Government securities, the Stand-alone Primary Dealers (PDs) are permitted to diversify their activities, as considered appropriate. The following activities by standalone PDs are permitted by RBI.

  • Dealing and underwriting in Government securities
  • Dealing in Interest Rate Derivatives
  • Providing broking services in Government securities
  • Dealing and underwriting in Corporate / PSU / FI bonds/ debentures
  • Lending in Call/ Notice/ Term/ Repo/ CBLO market
  • Investment in Commercial Papers
  • Investment in Certificates of Deposit,
  • Investment in Security Receipts issued by Securitization Companies/ Reconstruction companies, Asset Backed Securities (ABS), Mortgage Backed Securities (MBS),
  • Investment in debt mutual funds where entire corpus is invested in debt securities
  • Investment / trading in equity and equity derivatives market
  • Investment in units of equity oriented mutual funds
  • Underwriting public issues of equity
  • Professional Clearing Services,
  • Portfolio Management Services,
  • Issue Management Services
  • Merger & Acquisition Advisory Services
  • Private Equity Management Services
  • Project Appraisal Services
  • Loan Syndication Services
  • Debt restructuring services
  • Consultancy Services
  • Distribution of mutual fund unit
  • Distribution of insurance products

Facilities available to PDs:

Furthermore, to enable PDs to effectively fulfill their obligations, Reserve Bank has currently extended following facilities to them:

  • Access to Current Account facility with RBI.
  • Access to Subsidiary General Ledger (SGL) Account facility (for Government securities) with the RBI.
  • Permission to borrow and lend in the money market including call money market and to trade in all money market instruments.
  • Membership of electronic dealing, trading and settlement systems (NDS Platforms / INFINET/ RTGS/ CCIL).
  • Access to the Liquidity Adjustment Facility (LAF) of RBI.
  • Access to liquidity support from RBI under a scheme separately notified for Standalone PDs.
  • Favoured access to open market operations by Reserve Bank of India.
  • The nonstop growth in deposits by scheduled commercial banks and statutory requirement by institutions like PFs, Trusts, etc. to invest in g-secs envision a definite role to be played by PDs in giving marketability to government securities. Their participation in secondary ma        rket trading system has boosted the element of price discovery, enhanced liquidity and also encouraged voluntary holding of government securities amongst a wider investor base.

Eligibility Conditions for PDs

  1. Subsidiary of scheduled commercial bank/s and All India Financial Institutions
  2. Subsidiaries/ joint ventures set up in India by entities incorporated abroad.
  3. Company incorporated under the Companies Act, 1956 and does not fall under (a) or (b).

The applicant for PD should register as an NBFC for at least one year prior to the submission of application. Other conditions like net owned fund etc are mentioned by the RBI.

The decision to authorize PDs will be taken by RBI based on its perception of market needs, suitability of the applicant and the likely value addition to the system. Some other functions besides trading in government securities are also assigned to them.

List of Primary dealers in India- Click here

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