Primary Dealers for Government Securities in India

The system of Primary Dealers (PDs) in the Government Securities Market was introduced by Reserve Bank of India in 1995 to strengthen the market infrastructure of Government Securities and put in place an improved, efficient secondary market trading system. This was to encourage holding of Government Securities on large scale and make the market more vibrant and liquid. In 2006-07, RBI gave Banks the option to undertake Primary Dealership business departmentally.

DFHI was set up by RBI along with public sector banks and financial institutions in March 1988 to activate the Money Market. It got the status of Primary Dealer in February 1996. Over a period of time, RBI divested its stake and DFHI became a subsidiary of State Bank of India (SBI). SBI had also set up a subsidiary in 1996 for doing PD business namely SBI Gilts Limited. Both these companies were merged in 2004 to become the largest Primary Dealer in the country in terms of net worth (Rs. 1,059 crores as on March 31, 2008)

Primary Dealers can also be referred to as Merchant Bankers to Government of India as only they are allowed to underwrite primary issues of government securities other than RBI who have since shed this role.

Stand-alone PDs are allowed the following activities as core activities:

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

a) Activities, which are expected to consume capital, such as:

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

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

1. Professional Clearing Services
2. Portfolio Management Services
3. Issue Management Services
4. Merger & Acquisition Advisory Services
5. Private Equity Management Services
6. Project Appraisal Services
7. Loan Syndication Services
8. Debt restructuring services
9. Consultancy Services
10. Distribution of mutual fund units
11. Distribution of insurance products

PDs are not allowed to undertake broking in equity, trading / broking in commodities, gold and foreign exchange. Their total investment pattern should include minimum 50% in Government Securities.

PDs are permitted to borrow, lend and trade in the money market including call money market, CBLO of CCIL and participate in Repos. They are eligible for memberships of electronic dealing, trading and settlement systems (NDS platforms / INFINET / RTGS / CCIL). Stand-alone PDs can also open CSGL accounts to enable customers to hold government securities in demat form.