PRIMARY DEALERSHIP AND PRIMARY DEALERSHIP AND AUDIT OF PRIMARY AUDIT OF PRIMARY DEALERSHIPDEALERSHIP

MEANINGMEANING

A primary dealer is a firm which 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 BEGINNING……………THE BEGINNING……………

1995 by the RBI in G-Sec Markets

2006-07, banks (departmentally) were

included in order to broaden the scope

and system of operation

Standalone PD’s were permitted

diversification into other business activities-

subject to conditions

As on June 2012- 8 standalone PD’s

13 banks (departmentally)

OBJECTIVESOBJECTIVES

Strengthen the infrastructure in G-Sec market in order to make it vibrant, liquid and broad based;

Ensure development of underwriting and market making capabilities for G-Sec outside the RBI;

Improve secondary market trading system, which would contribute to price discovery, enhance liquidity and turnover and encourage voluntary holding of G-Sec amongst a wider investor base; and

Make PDs an effective conduit for open market operations (OMO).

Diversification of activities by Diversification of activities by standalone PDsstandalone PDs

May bifurcate their operations into

core and non-core activities

CORE ACTIVITIESCORE ACTIVITIES

Dealing in:

Government of India Securities (G-SEC)

State Government Securities (SG)

Treasury Bills (T-Bills)

Call Money Market

Interest rate swaps (IRS).

Collateralised Borrowing & Lending

Options (CBLO)

CORE ACTIVITIES……CORE ACTIVITIES……

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,

Investments in NCDs, and

Dealing in Credit Default Swaps for corporate bonds, subject to guidelines.

OTHER NONOTHER NON--PD ACTIVITIESPD ACTIVITIES

Dealing in Bonds, Commercial Paper

(CP), Debentures, Certificate of

Deposits (CD) and Discounted

Instruments.

Debt Capital Market (DCM) Activity: fee

based and consists of arranging,

underwriting and handling other

modalities of debt instrument issues on

behalf of corporate clients.

NONNON--CORE ACTIVITIESCORE ACTIVITIES Activities which are expected to

consume capital

Services which do not consume capital or

require insignificant capital outlay

distribution of insurance products

NOT allowed to undertake broking in

equity, trading / broking in commodities,

gold and foreign exchange.

The exposure to non-core activities shall

be subject to the guidelines on regulatory

and Prudential norms for diversification of

activities by standalone PDs

ELIGIBILTYELIGIBILTY INSTITUTIONS:

a. Subsidiary of scheduled commercial

bank/s and all India Financial institutions

b. Subsidiaries/ joint ventures set up in India

by entities incorporated abroad.

c. Company incorporated under the

Companies Act, 1956 and do not fall

under (a) and (b)

d. Banks which do not have a partly or

wholly owned subsidiary undertaking PD

business and intend to undertake PD

business departmentally

Role and Role and obligationsobligations of the of the PD’sPD’s

Support to Primary Market

Market making in G-Sec

Maintain adequate physical infrastructure

and skilled manpower

Efficient internal control system

Allow RBI to access all records, books,

information and documents

Satisfy the minimum criteria of PD’s

investment on a daily basis in G-Sec,

including T-Bills and CMBs

Role and Role and obligationsobligations of the of the PD’s….PD’s….

Maintain the annual turnover criteria

Submission of periodic returns, as

prescribed by the RBI

Operations of the PDs are subject to

prudential and regulatory guidelines

issued by the RBI

Facilities from Facilities from RBI, RBI, subject to review, subject to review,

depending upon the market conditions anddepending upon the market conditions andrequirementsrequirements

access to Current Account facility with

RBI

access to Subsidiary General Ledger

(SGL) Account facility with RBI

permission to borrow and lend in the

money market

memberships of electronic dealing,

trading and settlement systems (NDS

platforms/ INFINET/ RTGS/ CCIL);

Facilities from RBI……Facilities from RBI……

access to the Liquidity Adjustment

Facility (LAF) of RBI;

access to liquidity support from RBI

under a scheme separately notified for

standalone PDs

access to OMO by RBI.

Regulations and CompliancesRegulations and Compliances

Requirement to meet registration and other

requirements as stipulated by (SEBI), if they

undertake any activity regulated by SEBI.

Join Primary Dealers Association of India

(PDAI) and Fixed Income Money Market

and Derivatives Association (FIMMDA) and

abide by their code of conduct and such

other actions as initiated by them in the

interest of the securities markets.

Regulations and Regulations and Compliances… Compliances…

In respect of transactions in G-Sec, have

a separate desk and maintain separate

accounts in respect of its own position

and customer transactions and subject

them to external audit

Any change in the shareholding pattern

/ capital structure needs prior approval

of RBI. Report any other material

changes such as business profile,

organization, etc. affecting the

conditions of licensing as a PD to RBI

immediately

Regulations and Compliances… Regulations and Compliances…

RBI reserves the right to cancel the Primary Dealership if, in its view, the concerned institution has failed to adhere to the terms of authorization or any other guidelines

Should bring to the attention of RBI any major complaint against it or action initiated/taken against it by authorities such as the Stock Exchanges, SEBI, CBI, Enforcement Directorate, Income Tax Department, etc.

Supervision by RBISupervision by RBI

Off-site supervision

On-site inspection

Role of PDs in the Primary Role of PDs in the Primary MarketMarket

Underwriting of Dated G-Sec

o Dated securities of Central

Government

o Dated securities of State

Governments

Bidding in Primary auctions of T-

Bills/CMBs

‘When-Issued’ transactions in Central G-

Sec

Role of PDs in the Primary Role of PDs in the Primary Market…….Market…….

Submission of non-competitive bids

Sale of securities allotted in primary

issues on the same day

Submission of client bids in the primary

auctions

Settlement of primary auctions

Secondary Market Transactions - Short-

selling

PDs’ operations PDs’ operations -- Sources and Sources and Application of fundsApplication of funds

Permitted to borrow funds from

call/notice/term money market and

repo

Eligible for liquidity support from RBI

Limits on borrowing and lending are

subject to periodic review by RBI

Liquidity Support from RBI

Inter-Corporate Deposits (ICDs)

PDs are prohibited from placing funds in

ICD market

FCNR (B) loans

PDs’ operations PDs’ operations -- Sources and Sources and Application of Application of funds…..funds…..

Not permitted to raise funds through

External Commercial Borrowings

Issuance of Non-Convertible

Debentures (NCDs)

Reporting Requirements

Investment GuidelinesInvestment Guidelines

Frame and implement, a Board approved, investment policy and operational guidelines on securities transactions

Hold their investments in G-Sec portfolio in SGL with RBI

Hold all other investments such as CPs, bonds and debentures (privately placed or otherwise) and equity instruments, only in demat form.

All problem exposures, not backed by any security or backed by security of doubtful value, should be fully provided for.

Investment Investment Guidelines……….Guidelines……….

The profit and loss account should

reflect the problem exposures

Should formulate, within the above

parameters, their own internal

guidelines on security transactions in

both primary and secondary markets,

with the approval of their Board of

Directors

HTM Portfolio

Guidelines on investments in non-G-Sec

Exposure Norms

Prudential Systems/ControlsPrudential Systems/Controls Internal Control System in respect of

securities transactions

Purchase/Sale of securities through SGL

transfer forms

Bank Receipt or similar receipt in respect

of transactions in G-Sec

Accounting Standards for securities

transactions

Reconciliation of holdings of G-Sec

Transactions on behalf of Constituents

Failure to complete delivery of

security/funds in an SGL transaction

OTHER GUIDELINESOTHER GUIDELINES

Interest Rate Derivatives

Declaration of dividend

Corporate Governance

Prevention of Money Laundering Act,

2002 - Obligations of NBFCs

Violation/Circumvention of Instructions

Disclosure of Penal Actions

Exit / Termination procedure

THANK YOU