PRIMARY DEALERSHIP AND AUDIT OF PRIMARY DEALERSHIP

MEANING

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
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 PDs were permitted diversification into other business activitiessubject to conditions As on June 2012- 8 standalone PDs 13 banks (departmentally)

OBJECTIVES
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 GSec amongst a wider investor base; and Make PDs an effective conduit for open market operations (OMO).

Diversification of activities by standalone PDs

May bifurcate their operations into core and non-core activities

CORE 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
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 NONNON-PD 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 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

ELIGIBILTY

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 obligations of the PDs

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 PDs investment on a daily basis in G-Sec, including T-Bills and CMBs

Role and obligations of the PDs.

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 RBI, subject to review,

depending upon the market conditions and requirements

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

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 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 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

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 RBI

Off-site supervision On-site inspection

Role of PDs in the Primary Market

Underwriting of Dated G-Sec o Dated securities of Central Government o Dated securities of State Governments Bidding in Primary auctions of TBills/CMBs When-Issued transactions in Central GSec

Role of PDs in the Primary 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 - Shortselling

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

Not permitted to raise funds through External Commercial Borrowings Issuance of Non-Convertible Debentures (NCDs) Reporting Requirements

Investment 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 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/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 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

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