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.
Eligibility Conditions for PDs
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 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.
Role and Functions of Primary Dealers
The role of Primary Dealers is to:
(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
(v) 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.”
As on January 2015, there was 21 Primary Dealers in the country. 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.