Role of Primary Dealers (PDs) in India

Primary dealers are registered entities with the RBI who have the license to purchase and sell government securities. Primary Dealers can also be referred to as Merchant Bankers for the Government of India as only they are allowed to underwrite primary issues of government.

RBI issues government securities of the Government. A primary dealer buys government securities directly from the Reserve Bank of India to resell them to others, thus acting as a market maker of government securities.

PDs are required to support auctions for the issue of government-dated securities and Treasury Bills as per the minimum norms for underwriting commitment, bidding commitment, and success ratio as prescribed by RBI from time to time. PDs are expected to play an active role in the government securities market, both in its primary and secondary market 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 each year. The major roles and obligations of PDs are as below:

 (i) Commit participation as Principals in Government of India issues through bidding in auctions.

(ii) Provide underwriting services

(iii) Offer firm buy–sell / bid-ask quotes for T-Bills & dated securities

(iv)Development of Secondary Debt Market

In the secondary debt market, investors can freely buy and sell debt securities like bonds, T-bills, and dated securities.

As per RBI directions, PDs’ investment in Government Securities and Treasury Bills daily should be at least equal to its net call/notice/repo (including CBLO) borrowing plus net RBI borrowing (through LAF/ Intra-Day Liquidity/ Liquidity Support) plus the minimum prescribed NOF.

As per RBI directions, PDs’ investment in Government Securities and Treasury Bills daily should be at least equal to its net call/notice/repo (including CBLO) borrowing plus net RBI borrowing (through Liquidity Adjustment Facility (LAF)/ Intra-Day Liquidity/ Liquidity Support) plus the minimum prescribed NOF(Net Owned Funds). PDs should annually achieve a minimum turnover ratio of 5 times for government-dated securities and 10 times for Treasury Bills of the average month-end stocks. The turnover ratio in respect of outright transactions should not be less than 3 times in government-dated securities and 6 times in Treasury Bills (The turnover ratio is computed as the ratio of total purchases and sales during the year in the secondary market to average month-end stocks.

The Reserve Bank currently extends the following facilities to PDs to enable them to effectively fulfill their obligations:

PDs have access to the current account facility with RBI. They also have access to the Subsidiary General Ledger (SGL) Account facility (for Government securities).

PDs can borrow and lend in the money market including the call money market and trade in all money market instruments.

PDs are provided with memberships of electronic dealing, trading, and settlement systems (NDS platforms/INFINET/RTGS/CCIL).

They have access to the Liquidity Adjustment Facility (LAF) of RBI.

Access to liquidity support from RBI under a scheme separately notified for standalone PDs.