Reserve Bank of India



SITE MAP CONTACT US DISCLAIMER

About Us Useful Information FAQs Financial Education Complaints Important Websites

Period

From
To

1.6 Facilities from RBI to PDs

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

Access to Current Account facility with RBI.
Access to Subsidiary General Ledger (SGL) Account facility (for Government securities) with RBI.
Permission to borrow and lend in the money market including call money market and to trade in all money market instruments.
Memberships 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 facilities are, however, subject to review, depending upon the market conditions and requirement.

1.7 Regulation

PDs are required to meet registration and such other requirements as stipulated by the Securities and Exchange Board of India (SEBI) including operations on the Stock Exchanges, if they undertake any activity regulated by SEBI.
PDs are expected to join 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 as initiated by them in the interest of the securities markets.
In respect of transactions in Government securities, a Primary Dealer should have a separate desk and maintain separate accounts in respect of its own position and customer transactions and subject them to external audit also.
Any change in the shareholding pattern / capital structure of a PD needs prior approval of RBI. PDs should report any other material changes such as business profile, organization, etc. affecting the conditions of licensing as PD to RBI immediately.
Reserve Bank of India reserves the right to cancel the Primary Dealership if, in its view, the concerned institution has failed to adhere to the terms of authorisation or any other RBI guideline as applicable.
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.

1.8 Supervision by RBI

1.8.1 Off-site supervision: PDs are required to submit prescribed periodic returns to RBI promptly. The current list of such returns, their periodicity, etc. is furnished in Annex II.

1.8.2 On-site inspection: RBI will have the right to inspect the books, records, documents and accounts of the PD. PDs are required to make available all such documents, records, etc. to the RBI officers and render all necessary assistance as and when required.

2. Role of Primary Dealers in the Primary Market

Concomitant with the objectives of PD system, the PDs are expected to support the primary issues of dated securities of Central Government and State Government and Treasury Bills of Central Government, through underwriting/bidding commitments and success ratios. The related guidelines are as under:

2.1 Underwriting of Dated Government Securities

2.1.1 Dated securities of Central Government:

The underwriting commitment on dated securities of Central Government will be divided into two parts - i) Minimum Underwriting Commitment (MUC) and ii) Additional Competitive Underwriting (ACU).
The MUC of each PD will be computed to ensure that at least 50 percent of the notified amount of each issue is mandatorily underwritten equally by all PDs. The share under MUC will be uniform for all PDs, irrespective of their capital or balance sheet size. The remaining portion of the notified amount will be underwritten through an Additional Competitive Underwriting (ACU) auction.
RBI will announce the MUC of each PD and the balance amount which will be underwritten under the ACU auction. In the ACU auction, each PD would be required to bid for an amount at least equal to its share of MUC. A PD cannot bid for more than 30 per cent of the notified amount in the ACU auction.
The auction could be either uniform price-based or multiple price-based depending upon the market conditions and other relevant factors, which will be announced before the underwriting auction for each issue.
Bids will be tendered by PDs within the stipulated time, indicating both the amount of the underwriting commitment and underwriting commission rates. A PD can submit multiple bids for underwriting. Depending upon the bids submitted for underwriting, RBI will decide the cut-off rate of commission and inform the PDs.
Underwriting commission: All successful bidders in the ACU auction will be paid underwriting commission on the ACU segment as per the auction rules. Those PDs who succeed in the ACU for 4 per cent and above of the notified amount of the issue, will be paid commission on the MUC at the weighted average of all the accepted bids in the ACU. Others will get commission on the MUC at the weighted average rate of the three lowest bids in the ACU.
In the GOI securities auction, a PD should bid for an amount not less than their total underwriting obligation. If two or more issues are floated on the same day, the minimum bid amount will be applied to each issue separately.
Underwriting commission will be paid on the amount accepted for underwriting by the RBI, irrespective of the actual amount of devolvement, by credit to the current account of the respective PDs at the RBI, Fort, Mumbai, on the date of issue of security.
In case of devolvement, PDs would be allowed to set-off the accepted bids in the auction against their underwriting commitment accepted by the Reserve Bank. Devolvement of securities, if any, on PDs will take place on pro-rata basis, depending upon the amount of underwriting obligation of each PD after setting off the successful bids in the auction.
RBI reserves the right to accept any amount of underwriting up to 100 per cent of the notified amount or even reject all the bids tendered by PDs for underwriting, without assigning any reason.
An illustration pertaining to the underwriting procedure is given in Annex III.

2.1.2 Dated securities of State Governments

On announcement of an auction of dated securities of the State Governments for which auction is held, RBI may invite PDs to collectively bid to underwrite up to 100 per cent of the notified amount of State Development Loans (SDL).
A PD can bid to underwrite up to 30 per cent of the notified amount of the issue. If two or more issues are floated on the same day, the limit of 30% is applied by taking the notified amounts separately.
Bids will be tendered by PDs within the stipulated time, indicating both the amount of the underwriting commitments and underwriting commission rates. A PD can submit multiple bids for underwriting.
Depending upon the bids submitted for underwriting, the RBI will decide the cut-off rate of commission and the underwriting amount up to which bids would be accepted and inform the PDs.
RBI reserves the right to accept any amount of underwriting up to 100 per cent of the notified amount or even reject all the bids tendered by PDs for underwriting, without assigning any reason.
In case of devolvement, PDs would be allowed to set-off the accepted bids in the auction against their underwriting commitment accepted by the Reserve Bank. Devolvement of securities, if any, on PDs will take place on pro-rata basis, depending upon the amount of underwriting obligation of each PD after setting off the successful bids in the auction.
Underwriting commission will be paid on the amount accepted for underwriting by the RBI, irrespective of the actual amount of devolvement, by credit to the current account of the respective PDs at the RBI, Fort, Mumbai, on the date of issue of security.

2.2 Bidding in Primary auctions of Treasury Bills

Each PD will individually commit, at the beginning of the year, to submit bids for a fixed percentage of the notified amount of Treasury Bills in each auction.
The minimum bidding commitment amount / percentage for each PD will be determined by the Reserve Bank, in consultation with the PD. While finalizing the bidding commitments, the RBI will take into account the net owned funds (NOF), the offer made by the PD, its track record and its past adherence to the prescribed success ratio. The amount/percentage of minimum bidding commitment so determined by the Reserve Bank will remain unchanged for the entire financial year or till the conclusion of agreement on bidding commitments for the next financial year, whichever is later.
In any auction of Treasury Bills, if a PD fails to submit the required minimum bid or submits a bid lower than its commitment, the Reserve Bank may take appropriate action against the PD.
A PD would be required to achieve a minimum success ratio of 40 percent of bidding commitment for Treasury Bills auctions which will be monitored on a half yearly basis. A PD is required to achieve the minimum level of success ratio in each half year (April to September and October to March) separately. (For illustrations please refer to Annex IV).

2.3 ‘When-Issued’ transactions in Central Government Securities

PDs shall adhere to the guidelines issued by the RBI vide circular IDMD.No. 2130 /11.01.01 (D) /2006-07 dated November 16, 2006, as amended from time to time, for undertaking “When Issued” transactions.

2.4 Submission of non-competitive bids

PDs shall adhere to the guidelines issued vide circular RBI / 2008-09 / 479 - IDMD.No.5877 / 08.02.33 / 2008-09 dated May 22, 2009, as amended from time to time, in respect of submission of non-competitive bids in the auctions of the Government of India securities.

2.5 Sale of securities allotted in primary issues on the same day

PDs shall adhere to the guidelines issued vide circulars IDMC.PDRS.No. PDS.1 / 03.64.00 / 2000-01 dated October 6, 2000 and RBI / 2005 / 461 – IDMD.PDRS.4777 / 10.02.01 / 2004-05 dated May 11, 2005, for undertaking sale of securities allotted in primary issues on the same day.

2.6 Settlement of primary auctions

PDs shall adhere to the guidelines issued vide circular IDMD.PDRD.No. 1393 / 03.64.00 / 2008-09 dated September 19, 2008. The primary auction settlement is independent from the secondary market settlements and therefore has to be funded separately. Successful PDs shall provide sufficient funds in their current account with the RBI on the auction settlement days before 3:00 pm to meet their obligations against the subscriptions in the primary auctions failing which the shortage will be treated as an instance of ‘SGL bouncing’ and will be subjected to the applicable penal provisions.

2.7 Secondary Market Transactions - Short-selling

PDs shall adhere to the guidelines issued by the RBI vide circular RBI / 2006-07 / 243 IDMD.No./11.01.01 (B)/2006-07 dated January 31, 2007, on short sale in Central Government dated securities, as amended from time to time.

3. Primary Dealers operations - Sources and application of funds

3.1 PDs are permitted to borrow funds from call/notice/term money market and repo (including CBLO) market. They are also eligible for liquidity support from RBI.

3.2 PDs are allowed to borrow from call/notice market, on an average in a reporting fortnight, up to 200 percent of their net owned funds (NOF) as at the end March of the preceding financial year.

3.3 PDs may lend up to 25 percent of their NOF in call/notice market. The limit will be determined by PDs on an average basis during a ‘reporting fortnight’.

3.4 These limits on borrowing and lending are subject to periodic review by Reserve Bank of India.

3.5 Liquidity Support from RBI

In addition to access to the RBI's Liquidity Adjustment Facility, stand-alone PDs are also provided with liquidity support by the Reserve Bank of India against eligible Government securities including State Development Loans (SDLs). The parameters based on which liquidity support will be allocated are given below:

Of the total liquidity support, half of the amount will be divided equally among all the stand-alone PDs. The remaining half (i.e. 50%) will be divided in the ratio of 1:1 based on market performance in primary market and secondary market. Performance in primary market will be computed on the basis of bids accepted in the T-Bill auction and G-sec auction in the proportionate weights of 1 and 3. Similarly, the secondary market performance will be judged on the basis of outright turnover in T-Bills and dated Government securities in the proportionate weights of 1 and 3.
The PD-wise limit of liquidity support will be revised every half-year (April-September and October-March) based on the market performance of the PDs in the preceding six months.
The liquidity support to PDs will be made available at the ‘Repo rate’ announced by the Reserve Bank.
The liquidity support availed by a PD will be repayable within a period of 90 days. The penal rate of interest payable by PDs if liquidity support is repaid after 90 days is Bank rate plus 5 percentage points for the period beyond 90 days.

3.6 Inter-Corporate Deposits

3.6.1 Inter-Corporate Deposits (ICD) may be raised by Primary Dealers sparingly and should not be used as a continuous source of funds. After proper and due consideration of the risks involved, the Board of Directors of the PD should lay down the policy in this regard, which among others, should include the following general principles:

While the ceiling fixed on ICD borrowings should in no case exceed 50% of the NOF as at the end of March of the preceding financial year, it is expected that actual dependence on ICDs would be much below this ceiling.
ICDs accepted by PDs should be for a minimum period of one week.
ICDs accepted from parent/promoter/group companies or any other related party should be on "arms length basis" and disclosed in financial statements as "related party transactions".
Funds raised through ICDs are subject to ALM discipline.

3.6.2 PDs are prohibited from placing funds in ICD market.

3.7 FCNR (B) loans / External Commercial Borrowings

3.7.1 PDs may avail of FCNR(B) loans up to a maximum of 25% of the NOF as at the end of March of the preceding financial year and subject to the foreign exchange risk of such loans being hedged at all times at least to the extent of 50 per cent of the exposure.

3.7.2 PDs are not permitted to raise funds through External Commercial Borrowings.

3.8 Reporting Requirements

3.8.1 PDs are required to report the sources and application of funds maintained on daily basis and reported to RBI on fortnightly basis. The format of return (PDR-I) is enclosed in Annex V.

3.8.2 PDs are required to report the securities market turnover on monthly basis. The format of return (PDR-II) is enclosed in Annex VI.

3.8.3 PDs are required to submit a quarterly statement on capital adequacy in the prescribed format (PDR-III).

3.8.4 PDs are required to report select financial and Balance Sheet indicators on quarterly basis. The format of return (PDR-IV) is enclosed in Annex VII.

4. Diversification of activities by stand-alone Primary Dealers

4.1 Stand-alone Primary Dealers (PDs) are permitted to diversify their activities, as considered appropriate, in addition to their existing business of Government securities, subject to limits.

4.2 PDs may bifurcate their operations into core and non-core activities.

4.2.1 The following activities are permitted under core activities:

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

4.2.2 PDs are permitted to undertake the following activities under non-core activities:

4.2.2.1 Activities which are expected to consume capital such as:

Investment / trading in equity and equity derivatives market
Investment in units of equity oriented mutual funds
Underwriting public issues of equity

4.2.2.2 Services, which do not consume capital or require insignificant capital outlay such as:

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 units
Distribution of insurance products

4.2.3 For distribution of insurance products, the PDs may comply with the guidelines contained in the circular DNBS(PD)CC.No.35/10.24/2003-04 dated February 10, 2004 issued by the Department of Non-Banking Supervision.

4.2.4 Specific approvals of other regulators, if needed, should be obtained for undertaking the activities detailed above.

4.2.5 PDs are not allowed to undertake broking in equity, trading / broking in commodities, gold and foreign exchange.

4.3 The investment in Government Securities should have predominance over the non-core activities in terms of investment pattern. Stand-alone PDs are required to ensure predominance by maintaining at least 50 per cent of their total financial investments (both long term and short term) in Government Securities at any point of time. Investment in Government securities will include the PD’s Own Stock, Stock with RBI under Liquidity Support / Intra-day Liquidity (IDL)/ Liquidity Adjustment Facility (LAF), Stock with market for repo borrowings and Government Securities pledged with the Clearing Corporation of India Ltd (CCIL).

4.4 The exposure to non-core activities shall be subject to the guidelines on regulatory and prudential norms for diversification of activities by stand-alone PDs, which are as under:

4.4.1 The minimum NOF requirement for a PD, proposing to undertake non-core activities, as detailed in para 4.2.2, should be Rs.100 crore as against Rs.50 crore for a PD, which does not diversify into these activities.

4.4.2 The exposure to non-core activities, as defined in paragraph 4.2.2 above , shall be subject to risk capital allocation as prescribed below.

4.4.2.1. PDs may calculate the capital charge for market risk on the stock positions / underlying stock positions/ units of equity oriented mutual funds using Internal Models (VaR based) based on the guidelines prescribed vide RBI Master circular No. IDMD.PDRD. 2/03.64.00/2009-10 dated July 1, 2009 on Capital Adequacy and Risk Management, as updated from time to time. PDs may continue to provide for credit risk arising out of equity, equity derivatives and equity oriented mutual funds as prescribed in the circular mentioned above.

4.4.2.2 The guidelines for both credit risk and market risk in respect of Commercial Paper, Corporate / PSU / FI bonds / Underwriting are contained in the RBI Master circular IDMD.PDRD./03.64.00/2009-10 dated July 1, 2009, as updated from time to time.

4.4.2.3 The capital charge for market risk (VaR calculated at 99 per cent confidence interval, 15-day holding period, with multiplier of 3.3) for the activities defined in para 4.2.2.1 above should not be more than 20 per cent of the NOF as per the last audited balance sheet.

4.4.2.4 PDs choosing to diversify into non-core business segments should define internally the scope of diversification, organization structure and reporting levels for those segments. PDs should clearly lay down exposure and risk limits for those segments in the investment policy with the approval of their Board.

5. Investment Guidelines

5.1 Investment policy – PDs should frame and implement investment and operational policy guidelines on securities transactions which should be approved by their Boards. The guidelines should contain the broad objectives to be followed while undertaking transactions in securities on their own account and on behalf of clients, clearly define the authority to put through deals, and lay down procedure to be followed while putting through deals, various prudential exposure limits, policy regarding dealings through brokers, systems for management of various risks, guidelines for valuation of the portfolio and the reporting systems etc. Operational procedures and controls in relation to the day-to-day business operations should also be worked out and put in place to ensure that operations in securities are conducted in accordance with sound and acceptable business practices. While laying down these guidelines, the PDs should strictly adhere to Reserve Bank’s instructions, issued from time to time. The effectiveness of the policy and operational guidelines should be periodically evaluated.

5.2 PDs should necessarily hold their investments in Government securities portfolio in SGL with RBI. They may also have a dematerialised account with depositories (NSDL/CDSL). All purchase/sale transactions in Government securities by PDs should be compulsorily through SGL/CSGL/Demat accounts.

5.3 PDs should hold all other investments such as commercial papers, bonds and debentures, privately placed or otherwise, and equity instruments, only in dematerialised form.

5.4 All problem exposures, which are not backed by any security or backed by security of doubtful value, should be fully provided for. Where a PD has filed suit against another party for recovery, such exposures should be evaluated and provisions made to the satisfaction of auditors. Any claim against the PD should also be taken note of and provisions made to the satisfaction of auditors.

5.5 The profit and loss account should reflect the problem exposures if any, and also the effect of valuation of portfolio, as per the instructions issued by the Reserve Bank, from time to time. The report of the statutory auditors should contain a certification to this effect.

5.6 PDs should formulate, within the above parameters, their own internal guidelines on securities transactions in both primary and secondary markets, with the approval of their Board of Directors.

5.7 Guidelines on investments in non-Government securities

5.7.1 These guidelines cover PDs’ investments in non-Government securities (including capital gains bonds, bonds eligible for priority sector status, bonds issued by Central or State public sector undertakings with or without Government guarantees and bonds issued by banks and financial companies) generally issued by corporates, banks, FIs and State and Central Government sponsored institutions, SPVs etc. These guidelines will, however, not be applicable to (i) units of equity oriented mutual fund schemes where any part of the corpus can be invested in equity, (ii) venture capital funds, (iii) commercial paper, (iv) certificate of deposit, and (v) investments in equity shares. The guidelines will apply to investments both in the primary market and the secondary market.

5.7.2 PDs should not invest in non-Government securities of original maturity of less than one year, other than Commercial Paper and Certificates of Deposits, which are covered under RBI guidelines.

5.7.3 PDs should undertake usual due diligence in respect of investments in non-Government securities.

5.7.4 PDs must not invest in unrated non-Government securities.

5.7.5 PDs will abide by the requirements stipulated by the SEBI in respect of corporate debt securities. Accordingly, while making fresh investments in non-Government debt securities, PDs should ensure that such investments are made only in listed debt securities, except to the extent indicated in paragraph 5.7.6 below.

5.7.6 PDs' investment in unlisted non-Government securities should not exceed 10% of the size of their non-Government securities portfolio on an on-going basis. The ceiling of 10% will be inclusive of investment in Security Receipts issued by Securitization Companies/Reconstruction Companies and also the investment in Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS). The unlisted non-Government debt securities in which PDs may invest up to the limits specified above, should comply with the disclosure requirements as prescribed by the SEBI for listed companies.

5.7.7 PDs are required to report their secondary market transactions in corporate bonds done in the OTC market on FIMMDA's reporting platform as indicated vide circular IDMD.530/03.64.00/2007-08 dated July 31, 2007.

5.7.8 PDs should ensure that their investment policies duly approved by the Board of Directors are formulated after taking into account all the relevant issues specified in these guidelines on investment in non-Government securities. PDs should put in place proper risk management systems for capturing and analysing the risk in respect of non-Government securities before making investments and taking remedial measures in time. PDs should also put in place appropriate systems to ensure that investment in privately placed instruments is made in accordance with the systems and procedures prescribed under respective PDs’ investment policy.

5.7.9 Boards of PDs should review the following aspects of investment in non-Government Securities at least at quarterly intervals:

Total business (investment and divestment) during the reporting period.
Compliance with the prudential limits prescribed by the Board for investment in non-Government securities.
Compliance with the prudential guidelines on non-Government securities prescribed above.
Rating migration of the issuers/ issues held in the PDs’ books.

5.7.10 In order to help the creation of a central database on private placement of debt, a copy of all offer documents should be filed with the Credit Information Bureau (India) Ltd. (CIBIL) by the PDs. Further, any default relating to interest/ installment in respect of any privately placed debt should also be reported to CIBIL by the investing PDs along with a copy of the offer document.

5.7.11 As per the SEBI guidelines, all trades with the exception of the spot transactions, in a listed debt security, shall be executed only on the trading platform of a stock exchange. In addition to complying with these SEBI guidelines, (as and when applicable) PDs should ensure that all spot transactions in listed and unlisted debt securities are reported on the NDS and settled through the CCIL.

6. Prudential systems/controls

6.1 Internal Control System in respect of securities transactions

PDs should have an Audit Committee of the Board (ACB) which should meet at least at quarterly intervals. The ACB should peruse the findings of the various audits. ACB should ensure efficacy and adequacy of the audit function.
All security transactions (including transactions on account of clients) should be subjected to concurrent audit by internal/external auditors to the extent of 100% and the results of the audit should be placed before the CEO/CMD of the PD once every month. The compliance should be monitored on ongoing basis and reported directly to the top management. The concurrent audit should also cover the business done through brokers and include the findings in their report.
The scope of concurrent audit should include monitoring of broker wise limits, prudential limits laid down by RBI, accuracy and timely submission of all regulatory returns, reconciliation of SGL/ CSGL balances with PDO statements, reconciliation of current account balance with DAD statements, settlements through CCIL, stipulations with respect to short sale deals, when-issued transactions, constituent deals, money market deals, adherence to accounting standards, verification of deal slips, reasons for cancellation of deals, if any, transactions with related parties on "arms length basis" etc.
PDs should have a system of internal audit focused on monitoring the efficacy and adequacy of internal control systems.
All the transactions put through by the PD either on outright basis or ready forward basis should be reflected on the same day in its books and records i.e. preparation of deal slip, contract note, confirmation of the counter party, recording of the transaction in the purchase/sale registers, etc.
With the approval of their Board of Directors, PDs should place appropriate exposure limits / dealing limits, for each of their counter- parties which cover all dealings with such counter parties including money market, repos and outright securities transactions. These limits should be reviewed periodically on the basis of financial statements, market reports, ratings, etc. and exposures taken only on a fully collateralized basis where there is slippage in the rating/assessment of any counterparty.
With the approval of their Boards, PDs should put in place reasonable leverage ratio for their operations, which should take into account all outside borrowings as a multiplier of their net owned funds.
There should be a clear functional separation of (i) trading (front office) (ii) risk management (mid office), and (iii) settlement, accounting and reconciliation (back office). Similarly, there should be a separation of transactions relating to own account and constituents’ accounts.
For every transaction entered into, the trading desk should generate a deal slip which should contain data relating to nature of the deal, name of the counter-party, whether it is a direct deal or through a broker, and if through a broker, name of the broker, details of security, amount, price, contract date and time and settlement date. The deal slips should be serially numbered and controlled separately to ensure that each deal slip has been properly accounted for. Once the deal is concluded, the deal slip should be immediately passed on to the back office for recording and processing. For each deal, there must be a system of issue of confirmation to the counter-party. The timely receipt of requisite written confirmation from the counter-party, which must include all essential details of the contract, should be monitored by the back office. With respect to transactions matched on the NDS-OM module, the need for counterparty confirmation of deals matched on NDS-OM does not arise.
Once a deal has been concluded, there should not be any substitution of the counter-party by the broker. Similarly, the security sold/purchased in a deal should not be substituted by another security under any circumstances.
On the basis of vouchers passed by the back office (which should be done after verification of actual contract notes received from the broker/counter-party and confirmation of the deal by the counter party), the books of account should be independently prepared.
PDs should periodically review securities transactions and report to the top management, the details of transactions in securities, details of funds/securities delivery failures, even in cases where shortages have been met by CCIL.

6.2 Purchase/Sale of securities through SGL transfer forms

All PDs should report / conclude their transactions on NDS / NDS(OM) and clear/settle them through CCIL as central counter-party. In such cases where exceptions have been permitted to tender physical SGL transfer forms, the following guidelines should be followed:

Records of all SGL transfer forms issued/received should be maintained and a system for verification of the authenticity of the SGL transfer forms received from the counter-party and confirmation of authorised signatories should be put in place.
Under no circumstances, a SGL transfer form issued by a PD in favour of a counterparty should bounce for want of sufficient balance in the SGL/Current Account. Any instance of return of SGL form from the Public Debt Office of the Reserve Bank for want of sufficient balance in the account should be immediately brought to the notice of the PD’s top management and reported to RBI with the details of transactions.
SGL Transfer forms received by purchasing PDs should be deposited in their SGL Accounts immediately. No sale should be effected by way of return of SGL form held by the PD.
SGL transfer form should be in a standard format prescribed by the Reserve Bank and printed on semi-security paper of uniform size. They should be serially numbered and there should be a control system in place to account for each SGL form.

6.3 Bank Receipt or similar receipt should not be issued or accepted by the PDs under any circumstances in respect of transactions in Government securities.

6.4 Accounting Standards for securities transactions

PDs should adopt the practice of valuing all securities in their trading portfolio on mark to market basis, at appropriate intervals.
Costs such as brokerage fees, commission or taxes incurred at the time of acquisition of securities, are of revenue/deferred nature. The broken period interest received/paid also get adjusted at the time of coupon payment. PDs can adopt either the IAS or GAAP accounting standards, but has to ensure that the method should be true and fair and should not result in overstating the profits or assets value and should be followed consistently and be generally acceptable especially to the tax authorities.
Broken period interest paid to seller as part of cost on acquisition of Government and other securities should not be capitalised but treated as an item of expenditure under Profit and Loss Account. The PDs may maintain separate adjustment accounts for the broken period interest.
The valuation of the securities portfolio should be independent of the dealing and operations functions and should be done by obtaining the prices declared by Fixed Income Money Market and Derivatives Association of India (FIMMDA) periodically.
PDs should publish their audited annual results in leading financial dailies and on their website in the format prescribed (Annex VIII). The following minimum information should also be included by way of notes to the Balance Sheet: -

Net borrowings in call (average and peak during the period),
Basis of valuation,
Leverage Ratio (average and peak),
CRAR (quarterly figures), and
Details of the issuer composition of non-Government securities investments.

PDs may also furnish more information by way of additional disclosures.

6.5 Reconciliation of holdings of Government securities

Balances as per PDs books should be reconciled at least at monthly intervals with the balances in the books of PDOs. If the number of transactions so warrant, the reconciliation should be undertaken at more frequent intervals. This reconciliation should be periodically checked during audit.

6.6. Transactions on behalf of Constituents:
The PDs should be circumspect while acting as agent of their clients for carrying out transactions in securities.
PDs should not use the constituents’ funds or assets for proprietary trading or for financing of another intermediary’s operations.
All transaction records should give a clear indication that the transaction belongs to constituents and does not belong to PDs’ own account.
The transactions on behalf of constituents and the operations in the Constituent SGL accounts should be conducted in accordance with the guidelines issued by RBI on the Constituent SGL accounts.
PDs who act as custodians (i.e. CSGL account holders) and offer the facility of maintaining gilt accounts to their constituents, should not permit settlement of any sale transaction by their constituents unless the security sold is actually held in the gilt account of the constituent.
Indirect access to NDS-OM has been permitted to certain segments of investors through banks and PDs vide circular IDMD.DOD.No.5893/10.25.66/2007-08 dated May 27, 2008. PDs should adhere to the guidelines on maintenance of gilt accounts and investments on behalf of gilt account holders while undertaking 'constituent deals' on NDS-OM.

6.7 Failure to complete delivery of security/funds in an SGL transaction

Any default in delivery of security/funds in an SGL sale /purchase transaction undertaken by a PD will be viewed seriously. A report on such transaction, even if completed through the securities/funds shortage handling procedure of CCIL, must be submitted to the Internal Debt Management Department, Reserve Bank of India immediately. The occurrence of third default in a period of 6 months (April -September and October-March) in funds and/or securities delivery will result in debarment of the PD from the use of SGL facility for a period of 6 months from the date of the third occurrence. If, after restoration of the facility, any default occurs again, the PD will be debarred permanently from the use of SGL facility.

7. Trading of Government Securities on Stock Exchanges

7.1 With a view to encouraging wider participation of all classes of investors, including retail, in Government securities, trading in Government securities through a nationwide, anonymous, order driven screen based trading system on stock exchanges, in the same manner in which trading takes place in equities, has been permitted. Accordingly, trading of dated Government of India securities in dematerialized form is allowed on automated order driven system of the National Stock Exchange (NSE) of India, the Stock Exchange Mumbai (BSE) and the Over the Counter Exchange of India (OTCEI). This trading facility is in addition to the reporting/trading facility in the Negotiated Dealing System. Being a parallel system, the trades concluded on the exchanges will be cleared by their respective clearing corporations/clearing houses.

7.2 PDs are expected to play an active role in providing liquidity to the Government securities market and promote retailing. They may, therefore, make full use of the facility to distribute Government securities to all categories of investors through the process of placing and picking-up orders on the exchanges. PDs may open demat accounts with a Depository Participant (DP) of NSDL/CDSL in addition to their accounts with RBI. Value free transfer of securities between SGL/CSGL and demat accounts is enabled by PDO-Mumbai subject to guidelines issued by RBI’s Department of Government and Bank Accounts (DGBA).

7.3 Operational Guidelines

PDs should take specific approval from their Board to enable them to trade in the Stock Exchanges.
PDs may undertake transactions only on the basis of giving and taking delivery of securities.
Brokers/trading members shall not be involved in the settlement process; all trades have to be settled either directly with clearing corporation/clearing house (in case they are clearing members) or else through clearing member custodians.
The trades done through any single broker will also be subject to the current regulations on transactions done through brokers.
A standardized settlement on T+1 basis of all outright secondary market transactions in Government Securities has been adopted to provide the participants more processing time for transactions and to help in better funds as well as risk management.
In the case of repo transactions in Government Securities, however, market participants will have the choice of settling the first leg on either T+0 basis or T+1 basis, as per their requirements.
Any settlement failure on account of non-delivery of securities/ non-availability of clear funds will be treated as SGL bouncing and the current penalties in respect of SGL transactions will be applicable. Stock Exchanges will report such failures to the respective Public Debt Offices.
PDs who are trading members of the Stock Exchanges may have to put up margins on behalf of their non-institutional client trades. Such margins are required to be collected from the respective clients. PDs are not permitted to pay up margins on behalf of their client trades and incur overnight credit exposure to their clients. In so far as the intra day exposures on clients for margins are concerned, the PDs should be conscious of the underlying risks in such exposures.
PDs who intend to offer clearing /custodial services should take specific approval from SEBI in this regard. Similarly, PDs who intend to take trading membership of the Stock Exchanges should satisfy the criteria laid down by SEBI and the Stock Exchanges.

8. Business through brokers

8.1 Business through brokers and contract limits for approved brokers -

PDs may undertake securities or derivative transactions among themselves or with clients through the members of the BSE, NSE and OTCEI. A disproportionate part of the business should not be transacted through only one or a few brokers. PDs should fix aggregate contract limits for each of the approved brokers. A limit of 5%, of total transactions (both purchase and sales) entered into by a PD during a year should be treated as the aggregate upper contract limit for each of the approved brokers. However, if for any reason it becomes necessary to exceed the aggregate limit for any broker, the specific reasons there for should be recorded and the Board should be informed of this, post facto.

8.2 With the approval of their top management, PDs should prepare a panel of approved brokers, which should be reviewed annually or more often if so warranted. Clear-cut criteria should be laid down for empanelment of brokers, including verification of their creditworthiness, market reputation, etc. A record of broker-wise details of deals put through and brokerage paid, should be maintained.

8.3 The brokerage on the deal payable to the broker, if any (if the deal was put through with the help of a broker), should be clearly indicated on the notes/memorandum put up seeking approval for putting through the transaction, and a separate account of brokerage paid, broker-wise, should be maintained.

8.4 The role of the broker should be restricted to that of bringing the two parties to the deal together. Settlement of deals between PDs and counter-parties should be directly between the counter-parties and the broker will have no role in the settlement process.

8.5 While negotiating the deal, the broker is not obliged to disclose the identity of the counter-party to the deal. On conclusion of the deal, he should disclose the counter-party and his contract note should clearly indicate the name of the counter-party.

9. Norms for Ready Forward transactions

Primary Dealers are permitted to participate in Ready Forward (Repo) market both as lenders and borrowers. The terms and conditions subject to which ready forward contracts (including reverse ready forward contracts) may be entered into by PDs will be as under:

Repos may be undertaken only in a) dated securities and Treasury Bills issued by the Government of India and b) dated securities issued by the State Governments.
Repos may be entered into only with scheduled commercial banks, Urban Cooperative banks, other PDs, NBFCs, mutual funds, housing finance companies, insurance companies and any listed company, provided they hold either an SGL account with RBI or a Gilt account with a custodian.
Listed companies can enter into repo transactions subject to the following conditions:

The minimum period for Reverse Repo (lending of funds) by listed companies is seven days. However, listed companies can borrow funds through repo for shorter periods including overnight;
Where the listed company is a ‘buyer’ of securities in the first leg of the repo contract (i.e. lender of funds), the custodian through which the repo transaction is settled should block these securities in the gilt account and ensure that these securities are not further sold or re-repoed during the repo period but are held for delivery under the second leg; and
The counterparty to the listed companies for repo/reverse repo transactions should be either a bank or a Primary Dealer maintaining SGL Account with the Reserve Bank.

PD may not enter into a repo with its own constituent or facilitate a repo between two of its constituents.
PDs should report all repos transacted by them (both on own account and on the constituent's account) on the Negotiated Dealing System (NDS). All repos shall be settled through the SGL Account/CSGL Account maintained with the RBI, Mumbai, with the Clearing Corporation of India Ltd (CCIL) acting as the central counter party.
The purchase/sale price of the securities in the first leg of a repo should be in alignment with the market rates prevalent on the date of transaction.
Repo transactions, which are settled under the guaranteed settlement mechanism of CCIL, may be rolled over, provided the security prices and repo interest rate are renegotiated on roll over.
The Global Master Repos Agreement’ on repos, with suitable schedules, as proposed by FIMMDA may be entered into by PDs with their counter parties to repos transactions

10. Portfolio Management Services by PDs

10.1 PDs may offer Portfolio Management Services (PMS) to their clients under the SEBI scheme of PMS, subject to the following conditions. Before undertaking PMS, the PD must have obtained the Certificate of Registration as Portfolio Manager from the SEBI and also a specific approval from the RBI.

PMS cannot be offered to any RBI regulated entity. However, advisory services can be provided to them with suitable disclaimers.
Where applicable, the clients regulated by any other authority should obtain clearance from the regulatory or any other authority before entering into any PMS arrangement with the PD.
PDs are required to comply with the SEBI (Portfolio Managers) Regulations, 1993 and any amendments issued thereto or instructions issued there under.

10.2 In addition, PDs should adhere to the under noted conditions:

A clear mandate from the PMS clients should be obtained and the same strictly followed. In particular, there should be full understanding on risk disclosures, loss potential and the costs (fees and commissions) involved.
PMS should be entirely at the customer's risk without guaranteeing, either directly or indirectly, any return.
Funds/securities, each time they are placed with the PD for portfolio management, should not be accepted for a period less than one year.
Portfolio funds should not be deployed for lending in call/ notice/term money/Bills rediscounting markets, badla financing or lending to/ placement with corporate/non-corporate bodies.
Client-wise accounts/records of funds accepted for management and investments made there against should be maintained and the clients should be entitled to get statements of account at frequent intervals.
Investments and funds belonging to PMS clients should be kept segregated and distinct from each other and from those of the PD. As far as possible, all client transactions should be executed in the market and not off-set internally, either with the PD or any other client. All transactions between the PD and any PMS client or between two PMS clients should be strictly at market rates.

11. Guidelines on interest rate derivatives

11.1 PDs shall adhere to the guidelines laid down in circular DBOD.No.BP.BC.86 /21.04.157 /2006-07 dated April 20, 2007 as applicable to interest rate derivatives.

11.2 PDs are required to report all their IRS/FRA trades on the CCIL reporting platform within 30 minutes from the deal time in terms of circular IDMD/11.08.15/809/2007-08 dated August 23, 2007.

11.3 PDs are required to report to IDMD, as per the pro forma indicated in Annex IX, their FRAs/ IRS operations on a monthly basis.

12. Guidelines on declaration of dividends

PDs should follow the following guidelines while declaring dividend distribution:

The PD should have complied with the regulations on transfer of profits to statutory reserves and the regulatory guidelines relating to provisioning and valuation of securities, etc.
PDs having Capital to Risk Weighted Assets Ratio (CRAR) below the regulatory minimum of 15 per cent in any of the previous four quarters cannot declare any dividend. For PDs having CRAR between the regulatory minimum of 15 per cent during all the four quarters of the previous year, but lower than 20 per cent in any of the four quarters, the dividend payout ratio should not exceed 33.3 per cent. For PDs having CRAR above 20 per cent during all the four quarters of the previous year, the dividend payout ratio should not exceed 50 per cent. Dividend payout ratio should be calculated as a percentage of dividend payable in a year (excluding dividend tax) to net profit during the year.
The proposed dividend should be payable out of the current year’s profits. In case the profit for the relevant period includes any extraordinary profit income, the payout ratio should be computed after excluding such extraordinary items for reckoning compliance with the prudential payout ratio ceiling of 33.3 per cent or 50 per cent, as the case may be.
The financial statements pertaining to the financial year for which the PD is declaring dividend should be free of any qualifications by the statutory auditors, which have an adverse bearing on the profit during that year. In case of any qualification to that effect, the net profit should be suitably adjusted downward while computing the dividend payout ratio.
In case there are special reasons or difficulties for any PD in strictly adhering to the guidelines, it may approach Reserve Bank in advance for an appropriate ad hoc dispensation in this regard.
All the PDs declaring dividend should report details of dividend declared during the accounting year as per the prescribed pro forma. The report should be furnished within a fortnight of payment of dividend.

13. Guidelines on Corporate Governance

PDs may adhere to circular DNBS.PD/CC 94/03.10.042/2006-07 dated May 8, 2007 on guidelines on corporate governance.

14. Prevention of Money Laundering Act, 2002 - Obligations of NBFCs

PDs shall adhere to the guidelines contained in circular DNBS(PD).CC.68 /03.10.042/2005-06 dated April 5, 2006.

15. Violation/Circumvention of Instructions

Any violation/circumvention of the above guidelines or the terms and conditions of the undertaking executed by a Primary Dealer with the Reserve Bank of India (Annex I) would be viewed seriously and such violation would attract penal action including the withdrawal of liquidity support, denial of access to the money market, withdrawal of authorisation for carrying on the business as a Primary Dealer, and/or imposition of monetary penalty or liquidated damages, as the Reserve Bank may deem fit.

Section II: Additional Guidelines applicable to banks undertaking PD business departmentally

1. Introduction
Scheduled commercial banks (except Regional Rural Banks) have been permitted to undertake Primary Dealership business departmentally from 2006-07.

2. Procedure for Authorisation of bank-PDs

2.1 Banks eligible to apply for Primary Dealership, for undertaking PD business, (please see eligibility conditions at (iv) of paragraph 1.3.1 above) may approach the Chief General Manager, Department of Banking Operations & Development (DBOD), Reserve Bank of India, Central Office, Centre I, World Trade Centre, Cuffe Parade, Mumbai-400 005. On obtaining an in-principle approval from DBOD, banks may then apply to the Chief General Manager, Internal Debt Management Department, Reserve Bank of India, 23rd Floor, Central Office Building, Fort, Mumbai- 400 001 for an authorization for undertaking PD business departmentally.

2.2 The banks, proposing to undertake the PD business by merging / taking over PD business from their partly / wholly owned subsidiary, or foreign banks, operating in India, proposing to undertake PD business departmentally by merging the PD business being undertaken by a group company, will be subject to the terms and conditions, as applicable, of the undertaking given by such subsidiary/ group company till such time a fresh undertaking is executed by the bank.

2.3 The banks authorized to undertake PD business will be required to have a standing arrangement with RBI based on the execution of an undertaking (Annex I) and the authorization letter issued by RBI each year (July-June).

3. Applicability of the guidelines issued for Primary Dealers

3.1 The bank-PDs would be governed by the operational guidelines as given in Section – I above, to the extent applicable, unless otherwise stated. Furthermore, the bank-PDs' role and obligations in terms of supporting the primary market auctions for issue of Government dated securities and Treasury Bills, underwriting of dated Government securities, market-making in Government securities and secondary market turnover of Government securities will also be on par with those applicable to stand-alone PDs as enumerated in Section - I of this Master Circular.

3.2 Bank-PDs are expected to join 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.

3.3 The requirement of ensuring minimum investment in Government Securities and Treasury Bills on a daily basis based on net call/ RBI borrowing and Net Owned Funds will not be applicable to bank-PDs who shall be guided by the extant guidelines applicable to banks.

3.4 As banks have access to the call money market, refinance facility and the Liquidity Adjustment Facility (LAF) of RBI, bank-PDs will not have separate access to these facilities and liquidity support as applicable to the standalone PDs.

3.5 It is clarified that for the purpose of "when-issued trades" issued vide circular IDMD.No/2130/11.01.01 (D)/2006-07 dated November 16, 2006, bank-PDs will be treated as Primary Dealers.

3.6 Bank-PDs shall be guided by the extant guidelines applicable to banks as regards borrowing in call/notice/term money market, Inter-Corporate Deposits, FCNR (B) loans /External Commercial Borrowings and other sources of funds.

3.7 The investment policy of the bank may be suitably amended to include PD activities also. Within the overall framework of the investment policy, the PD business undertaken by the bank will be limited to dealing, underwriting and market-making in Government Securities. Investments in Corporate/ PSU/ FIs bonds, Commercial Papers, Certificate of deposits, debt mutual funds and other fixed income securities will not be deemed to be a part of PD business.

3.8 The classification, valuation and operation of investment portfolio guidelines as applicable to banks in regard to "Held for Trading" portfolio will also apply to the portfolio of Government Dated Securities and Treasury Bills earmarked for PD business.

3.9 The Government Dated Securities and Treasury Bills under PD business will count for SLR.

3.10 Bank-PDs shall be guided by the extant guidelines applicable to banks as regards business through brokers, ready forward transactions, interest rate derivatives (OTC & exchange traded derivatives), investment in non-Government Securities, Issue of Subordinated Debt Instruments and declaration of dividends.

4. Maintenance of books and accounts

4.1 The transactions related to Primary Dealership business, undertaken by a bank departmentally, should be executed through the existing Subsidiary General Ledger (SGL) account of the bank. However, such banks will have to maintain separate books of accounts for transactions relating to PD business (as distinct from normal banking business) with necessary audit trails. It should be ensured that, at any point of time, there is a minimum balance of Rs. 100 crore of Government Securities earmarked for PD business.

4.2 Bank-PDs should subject 100 per cent of the transactions and regulatory returns submitted by PD department to concurrent audit. An auditors' certificate for having maintained the minimum stipulated balance of Rs. 100 crore of Government Securities in the PD-book on an ongoing basis and having adhered to the guidelines/ instructions issued by RBI, should be forwarded to IDMD, RBI on a quarterly basis.

5. Capital Adequacy and Risk Management

5.1 The capital adequacy and risk management guidelines applicable to a bank undertaking PD activity departmentally, will be as per the extant guidelines applicable to banks. In other words, for the purpose of assessing the bank's capital adequacy requirement and coverage under risk management framework, the PD activity should also be taken into account.

5.2 The bank undertaking PD activity may put in place adequate risk management systems to measure and provide for the risks emanating from the PD activity.

6. Supervision by RBI

6.1 The banks authorized to undertake PD business departmentally are required to submit prescribed periodic returns to RBI promptly. The current list of such returns and their periodicity, etc. is furnished in Annex II A.

6.2 Reserve Bank of India reserves its right to amend or modify the above guidelines from time to time, as may be considered necessary.

Top

Best viewed in 1024x768 resolution in IE 5 and above.