RBI/2014-15/96
IDMD.PDRD.01/03.64.00/2014-15

July 1, 2014

All Primary Dealers

Dear Sir / Madam

Master Circular – Operational Guidelines to Primary Dealers

The Reserve Bank of India has, from time to time, issued a number of guidelines/instructions to the Primary Dealers (PDs) in regard to their operations. The Master Circular incorporating the guidelines/instructions/circulars on the subject issued up to June 30, 2014 is enclosed. A list of circulars finding reference in this master circular is enclosed as Annex-XII.

2. The guidelines on Capital Adequacy Standards and Risk Management for the standalone PDs are being issued vide our Master Circular IDMD.PDRD.02/03.64.00/2014-15 dated July 1, 2014. The banks undertaking PD activities departmentally should follow the extant guidelines applicable to the banks regarding their capital adequacy requirement and risk management. This Master Circular has also been placed on RBI website at www.rbi.org.in.

Yours faithfully

(Rekha Warriar)
Chief General Manager

Encl: As above

Section I – Regulations governing Primary Dealers

1. Primary Dealer System

1.1 Introduction

In 1995, the Reserve Bank of India (RBI) introduced the system of Primary Dealers (PDs) in the Government Securities (G-Sec) Market. The objectives of the PD system are to strengthen the infrastructure in G-Sec market, development of underwriting and market making capabilities for G-Sec outside the RBI, improve secondary market trading system and to make PDs an effective conduit for open market operations (OMO). As on June 30, 2014, there are seven standalone PDs and thirteen banks authorized to undertake PD business departmentally.

1.2 Eligibility conditions

1.2.1 The eligibility criteria for an entity to apply to the Reserve Bank of India for undertaking the activities of a PD are as under:

1.2.2 An applicant will not be eligible for authorisation as a PD if, within the last one year, it has been subject to litigation or regulatory action or investigation that the Reserve Bank considers material or otherwise relevant to the business of PD. In making such determination, RBI may consult with the appropriate regulators for their views.

1.2.3 An entity satisfying the criteria stipulated above should submit its application to the Chief General Manager, Internal Debt Management Department (IDMD), RBI, Mumbai. The RBI will, if satisfied, grant ‘in principle approval’. The applicant will, thereafter, submit an undertaking in respect of the terms and conditions agreed to as per the prescribed format given in Annex I. Based on the application and undertaking, an authorisation letter will be issued by RBI. Continuation as a PD would depend on its compliance with the terms and conditions of authorisation.

1.2.4 The decision to authorise 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.

1.2.5 The applicant entity may also have to adhere to other terms and conditions, as may be specified by RBI from time-to-time.

1.2.6 Existing PDs should submit an annual target (in consultation with RBI) along with plan of action for turnover to be achieved on behalf of mid-segment and retail investors in the month of June every year. The annual target for July 2014-June 2015 should not be less than 150 per cent of minimum NOF for standalone PDs and 100 per cent of minimum NOF for bank PDs. The target will be reviewed annually.

1.2.7 PDs are not permitted to set up step-down subsidiaries.

1.3 Role and obligations of the PDs

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 (Annex I) 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.

1.4 Facilities from RBI

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

1. access to Current Account facility with RBI;

2. access to Subsidiary General Ledger (SGL) Account facility with RBI;

3. access to e-Kuber facility for primary auction;

4. permission to borrow and lend in the money market including call money market and to trade in all money market instruments;

5. memberships of electronic dealing, trading and settlement systems (NDS platforms/INFINET/RTGS/CCIL);

6. access to the Liquidity Adjustment Facility (LAF) of RBI;

7. access to liquidity support from RBI under a scheme separately notified for standalone PDs; and

8. access to OMO by RBI.

The facilities are subject to review.

1.5 Regulation and Supervision by RBI

Operations of the PDs are subject to prudential and regulatory guidelines issued by RBI from time to time.

1.5.1 Returns: As part of off-site supervision, PDs are required to submit prescribed periodic returns to RBI as per Annex II–A & B. RBI may also prescribe any other return as it may deem necessary.

1.5.2 On-Site Supervision: RBI will have the right to inspect the books, records, documents and accounts of a 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.

1.5.3 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.

1.5.4 In addition, 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.

1.5.5 A PD 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.

1.5.6 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.

2. Primary Market Activities

PDs are expected to support the primary issues of dated securities of Central Government and State Government, T-Bills and CMBs through underwriting/bidding commitments. The related guidelines are as under:

2.1 Underwriting of Dated G-Sec

2.1.1 Dated securities of Central Government

1. The underwriting commitment on dated securities of Central Government will be divided into two parts - a) Minimum Underwriting Commitment (MUC), and b) Additional Competitive Underwriting (ACU).

2. 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 the 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 ACU auction.

3. RBI will announce the MUC of each PD. 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.

4. 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.

5. Bids will be tendered by the 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.

6. 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 accepted bids in the ACU.

7. In the GOI securities auction, a PD should bid for an amount not less than its 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.

8. 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.

9. In case of devolvement, PDs would be allowed to set-off the accepted bids in the auction against their shortfall in underwriting commitment accepted by the RBI. 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.

10. 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.

11. An illustration on underwriting procedure is given in Annex III.

2.1.2 Dated securities of State Governments

1. On announcement of an auction of State Development Loans (SDLs), which are dated securities of the State Governments, RBI may invite PDs to collectively bid to underwrite up to 100 per cent of the notified amount.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. In case of devolvement, PDs would be allowed to set-off the accepted bids in the auction against their shortfall in underwriting commitment accepted by the RBI. 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.

8. 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 T-Bills/CMBs

1. Each PD will individually commit, at the beginning of the year (April – March), to submit bids for a fixed percentage of the notified amount of T-Bills/CMBs in each auction.

2. The minimum bidding commitment amount / percentage for each PD will be determined by the RBI, in consultation with the PD. While finalizing the bidding commitments, the RBI will take into account the 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 RBI will remain unchanged for the entire year or till execution of the undertaking for the next year.

3. In any auction of T-Bills/CMBs, if a PD fails to submit the required minimum bid or submits a bid lower than its commitment, the RBI may take appropriate penal action against the PD.

4. A PD would be required to achieve a minimum success ratio of 40 percent of bidding commitment in T-Bills/CMBs auctions which will be monitored on a half yearly basis, i.e. April to September and October to March, separately (For illustrations please refer to Annex IV).

5. The CMB transactions may be reported in PDR returns along with the T-Bill transactions.

2.3 ‘When-Issued’ transactions in Central G-Sec

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 client bids in the primary auctions

The PDs are allowed to submit bids of their SGL/Gilt account holders in the primary auctions as their own bids under competitive route after putting in place the following safeguards:

1. PDs should have a Board approved policy including appropriate risk management system to take care of risks arising out of such activity

2. List of clients, details of business done through such clients and appropriateness of risk management system put in place may be periodically reviewed by the Board.

3. Records maintained in this regard should be subjected to concurrent audit.

PDs may execute the secondary market sale transaction and report the same on NDS-OM (T+1 settlement). With respect to the dated securities, the sale transaction may be made within one hour of intimation of firm allotment in the primary auctions.

2.5 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 G-Sec.

2.6 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, RBI/2005/461–IDMD.PDRS.4777/10.02.01/2004-05 dated May 11, 2005 and RBI/2012-13/133-IDMD.PDRD.188/03.64.00/2012-13 dated July 16, 2012 for undertaking sale of securities allotted in primary issues on the same day. PDs can avail services of brokers for carrying out such sale contracts.

2.7 Settlement of primary auctions

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.

3. Secondary Market activities

3.1 Market making in G-Sec: PDs should offer two-way prices in G-Sec through the Negotiated Dealing System-Order Matching (NDS-OM), over-the-counter (OTC) market and recognized Stock Exchanges in India and take principal positions in the secondary market for G-Sec.

3.2 Turnover ratio: A PD should annually achieve a minimum turnover ratio of 5 times for Government dated securities and 10 times for T-Bills/CMBs 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 T-Bills/CMBs (Turnover ratio is the ratio of total purchase and sales during the year in the secondary market to average month-end stocks).

3.3 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”, and RBI/2011-12/615 IDMD.PCD.No.21/14.03.07/2011-12 dated June 21, 2012 on “Secondary market transactions in Government Securities - Short Selling” as amended from time to time.

3.4 Separate Trading of Registered Interest and Principal of Securities (STRIPS) in G-Sec

PDs shall adhere to the guidelines issued by the RBI vide circular RBI/2009-10/360-IDMD.DOD.No.7/11.01.09/2009-10 dated March 25, 2010, on STRIPS in G-Sec, as amended from time to time.

4. Sources of funds

4.1 PDs are permitted to borrow funds from call/notice/term money market, repo (including CBLO) market, Inter-Corporate Deposits, FCNR (B) loans, Commercial Paper and Non-Convertible Debentures. They are also eligible for liquidity support from RBI.

4.2 Call/Notice Market

4.2.1 PDs are allowed to borrow from call/notice market, on an average in a ‘reporting fortnight’, up to 225 percent of their NOF as at the end March of the preceding financial year. They may lend up to 25 percent of their NOF in call/notice money market, on an average in a ‘reporting fortnight’. These limits on borrowing and lending are subject to periodic review by RBI. PDs are governed by the provisions of the RBI Master Circular IDMD.PCD. 03/14.01.01/2013-14 dated July 1, 2014 on “Call/Notice Money Market Operations”,

4.3 Inter-Corporate Deposits (ICDs)

4.3.1 ICDs may be raised by PDs as per their funding needs. The PDs should put in place a Board approved policy for ICDs which takes due consideration of the associated risks and should include the following general principles:

1. The ICD borrowings should in no case exceed 150 per cent of the NOF as at the end of March of the preceding financial year.

2. ICDs accepted by PD should be for a minimum period of one week.

3. ICDs accepted from parent/promoter/group companies or any other related party should be on ‘arm’s length basis’ and disclosed in financial statements as "related party transactions".

4. Funds raised through ICDs are subject to ALM discipline.

4.3.2 PDs are prohibited from placing funds in ICD market.

4.4 FCNR (B) loans / External Commercial Borrowing

4.4.1 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.

PDs are governed by the provisions of the RBI Circular IDMC.PDRS.No. 3820/03.64.00/2002-03 dated March 24, 2003, as amended from time to time, on “Availment of FCNR (B) Loans by Primary Dealers (PDs)”.

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

4.5 Non-Convertible Debentures (NCDs):

PDs may issue NCDs of maturity up to one year, without the requirement of having a working capital limit with a bank. They are governed by the directions, “Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010”, issued vide circular RBI/2009-10/505-IDMD.DOD.10/11.01.01(A)/2009-10 dated June 23, 2010, as amended from time to time.

4.6 Commercial Paper

Issuance of Commercial Paper by PDs will be guided by RBI Master Circular IDMD.PCD. 04/14.01.02/2013-14 dated July 1, 2014 on “Guidelines for Issue of Commercial Paper”.

4.7 Liquidity Support from RBI

In addition to access to the RBI's LAF, standalone PDs are also provided with liquidity support by the RBI against eligible G-Sec including SDLs. The parameters based on which liquidity support will be allocated are given below:

1. Of the total liquidity support, half of the amount will be divided equally among all the standalone 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/CMB auctions and G-Sec auctions 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/CMBs and G-Sec in the proportionate weights of 1 and 3.

2. 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.

3. The liquidity support will be made available at the ‘Repo Rate’ announced by the RBI.

4. The liquidity support availed by a PD will be repayable within a period of 90 days. If it is repaid after 90 days, the penal rate of interest payable by PDs is Bank rate plus 5 percentage points for the period beyond 90 days.

5. Application of Funds

5.1 PDs are permitted to undertake a set of core and non-core activities. PDs which undertake only the core activities are required to maintain a minimum NOF of Rs.150 crore. PDs which also undertake non-core activities are required to maintain a minimum NOF of Rs.250 crore.

5.2 The investment in G-Sec should have predominance over the non-core activities in terms of investment pattern. Standalone 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 G-Sec at any point of time. Investment in G-Sec will include the PD’s Own Stock, Stock with RBI under Liquidity Support / Intra-day Liquidity (IDL)/ LAF, Stock with market for repo borrowings and G-Sec pledged with the CCIL.

5.3 Further, a PD’s investment in G-Sec (including T-Bills and CMBs) and Corporate Bond (to the extent of 50% of NOF) on a daily basis 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.

5.4 The following are permitted under core activities:

1. Dealing and underwriting in G-Sec,

2. Dealing in Interest Rate Derivatives,

3. Providing broking services in G-Sec,

4. Dealing and underwriting in Corporate / PSU / FI bonds/ debentures,

5. Lending in Call/ Notice/ Term/ Repo/ CBLO market,

6. Investment in Commercial Papers (CPs),

7. Investment in Certificates of Deposit (CDs),

8. Investment in Security Receipts issued by Securitization Companies/ Reconstruction Companies, Asset Backed Securities (ABS), Mortgage Backed Securities (MBS),

9. Investment in debt mutual funds where entire corpus is invested in debt securities,

10. Investments in NCDs, and

11. Dealing in Credit Default Swaps.

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

5.5.1 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, and

3. Underwriting public issues of equity.

5.5.2 Services which may not require significant 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, and

11. Distribution of insurance products.

5.5.3 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, RBI as amended from time to time.

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

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

5.5.6 The exposure to non-core activities shall be subject to the guidelines on regulatory and prudential norms for diversification of activities by standalone PDs.

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

5.6 The exposure to core and non-core activities of PD shall be subject to risk capital allocation (credit risk & market risk) as prescribed in RBI Master Circular IDMD.PDRD.02/03.64.00/2014-15 dated July 1, 2014 on “Capital Adequacy Standards and Risk Management Guidelines for Standalone Primary Dealers”.

6. Norms for Ready Forward transactions

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

1. Repos may be undertaken in a) dated securities, T-Bills and CMBs issued by the Government of India (GoI); and b) dated securities issued by the State Governments.

2. Further, PDs are permitted to undertake repo in Corporate bonds as given in the circulars RBI/2009-10/284-IDMD.DOD.No.05/11.08.38/2009-10 dated January 8, 2010, RBI/2010-11/268-IDMD.PCD.22/11.08.38/2010-11 dated November 9, 2010. They are also permitted to undertake repo in Commercial Papers, Certificates of Deposit and Non-Convertible Debentures of less than one year of original maturity vide circular RBI/2012-13/365-IDMD.PCD.09/14.03.02/2012-13 dated January 7, 2013. PDs shall adhere to the directions ‘Repo in Corporate Debt Securities (Amendment) Directions, 2013’, as amended from time to time.

3. 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.

4. Listed companies can enter into repo transactions subject to the following conditions:

1. 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;

2. 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

3. The counterparty to the listed companies for repo/reverse repo transactions should be either a bank or a PD maintaining SGL Account with the RBI.

5. A PD may not enter into a repo with its own constituent or facilitate a repo between two of its constituents.

6. PDs should report all repos transacted by them (both on own account and on the constituent's account) on the CCIL platform. All repos shall be settled through the SGL Account/CSGL Account maintained with the RBI, Mumbai, with the CCIL acting as the central counter party (CCP).

7. 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.

8. 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.

9. The Master Repo Agreement (MRA), as finalised by FIMMDA, is not mandatory for repo transactions in G-Sec settling through a CCP. However, MRA is mandatory for repo transactions in corporate debt securities, which is settled bilaterally without involving a CCP.

10. PDs shall adhere to the guidelines for accounting of Repo / Reverse Repo transactions issued vide circular RBI/2009-10/356 IDMD.No.4135/11.08.43/2009-10 dated March 23, 2010, as amended from time to time.

7. Portfolio Management Services by PDs

7.1 PDs may offer Portfolio Management Services (PMS) to their clients under the SEBI scheme of PMS, subject to the following conditions:

1. 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.

2. PMS cannot be offered to any RBI regulated entity. However, advisory services can be provided to them with suitable disclaimers.

3. 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.

4. PDs are required to comply with the SEBI (Portfolio Managers) Regulations, 1993 and any amendments issued thereto or instructions issued there under.

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

1. A clear mandate from the PMS clients should be obtained and the same may be strictly followed. In particular, there should be full understanding on risk disclosures, loss potential and the costs (fees and commissions) involved.

2. PMS should be entirely at the customer's risk without guaranteeing, either directly or indirectly, any return.

3. Funds/securities, each time they are placed with the PD for portfolio management, should not be accepted for a period less than one year.

4. 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.

5. 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.

6. 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.

8. Guidelines on Interest Rate Derivatives

8.1 PDs shall adhere to the guidelines applicable to interest rate derivatives as laid down in circular DBOD.No.BP.BC.86 /21.04.157 /2006-07 dated April 20, 2007 as amended from time to time and Interest Rate Futures (Reserve Bank) Directions, 2013 dated December 05, 2013 issued by the RBI. Standalone PDs are allowed to deal in Interest Rate Futures (IRFs) for both hedging and trading on own account and not on client’s account, as given in the circular IDMD.PDRD.No.1056/03.64.00/2009-10 dated September 1, 2009 and as amended from time to time.

8.2 As per RBI circular IDMD/11.08.15/809/2007-08 dated August 23, 2007, PDs are required to report all their IRS/FRA trades, except with clients, on the CCIL reporting platform within 30 minutes from the deal time. Further, as per circular FMD.MSRG.No.94/02.05.002/2013-14 dated December 4, 2013, all transaction with clients in INR FRA/IRS shall be reported before 12 noon of the following business day.

9. Guidelines on Credit Default Swaps

PDs shall adhere to the guidelines laid down in circular IDMD.PCD.No.10 /14.03.04/2012-13 dated January 07, 2013 as applicable to Credit Default Swaps. PDs intending to act as market makers in CDS shall fulfill the following criteria:

1. Minimum Net Owned Funds of Rs 500 crore
2. Minimum CRAR of 15 percent
3. Have robust risk management systems in place to deal with various risks

The regulatory approval to PDs to act as market makers in the CDS market would be accorded by the Chief General Manager, Internal Debt Management Department, Central office, RBI, Mumbai on a case by case basis, on application for the same.

10. Investment Guidelines

10.1 Investment policy - PDs should frame and implement, a Board approved, investment policy and operational guidelines on securities transactions. The policy 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 RBI’s instructions, issued from time to time. The effectiveness of the policy and operational guidelines should be periodically evaluated.

10.2 PDs should necessarily hold their investments in G-Sec portfolio in SGL with RBI. They may also have a dematerialised (Demat) account with depositories – National Securities Depository Limited / Central Depository Services (India) Limited. All purchase/sale transactions in G-Sec by PDs should be through SGL / Constituent SGL (CSGL) / Demat accounts.

10.3 PDs should hold all other investments such as CPs, bonds and debentures (privately placed or otherwise) and equity instruments, only in demat form.

10.4 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.

10.5 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 RBI, from time to time. The report of the statutory auditors should contain a certification to this effect.

10.6 HTM Portfolio

10.6.1 Standalone PDs are allowed to categorize a portion of their G-Sec portfolio in the HTM category, subject to the following conditions:

1. The transfer of securities (both Central Government and State Government) to/from HTM portfolio shall be done as per the policy formulated by the Board. Such transfers shall be permitted only once in a quarter.

2. Transfer of securities to/from HTM portfolio should be done with the approval of the Board at the acquisition cost/ book value/ market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer shall be fully provided for. PDs are allowed to shift investments to/from HTM portfolio with the approval of the MD of the PD/Head of ALCO, only in case of exigencies. However, it should be ratified by the Board.

3. Only securities acquired by the PD under primary auction will be eligible for classification under HTM category.

4. The quantum of securities that can be classified as HTM shall be restricted to 200% of the audited NOF of the PD as at the end March of the preceding financial year.

5. The profit on sale of securities, if any, from the HTM category shall first be taken to the P & L Account and thereafter be appropriated to the “Reserve Account”; loss on sale shall be recognized in the P & L Account.

6. Investments classified under HTM will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortized over the remaining period to maturity. The book value of the security should continue to be reduced to the extent of the amount amortized during the relevant accounting period.

7. The concurrent auditors should specifically verify compliance with these instructions.

8. The facility shall be available until further advice.

10.6.2 Banks undertaking PD activities departmentally may continue to follow the extant guidelines applicable to banks with regard to the classification and valuation of the investment portfolio issued by Department of Banking Operations and Development (DBOD), RBI.

10.7 Guidelines on investments in non-G-Sec

10.7.1 These guidelines cover PD’s investments in non-G-Sec (including capital gain 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 corporate, banks, FIs and State and Central Government sponsored institutions, Special Purpose Vehicles (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) CPs, (iv) CDs, and (v) investments in equity shares. The guidelines will apply to investments both in the primary and secondary market.

10.7.2 Standalone PDs are permitted to become members of SEBI approved Stock Exchanges for the purpose of undertaking proprietary transactions in corporate bonds. While doing so, standalone PDs should comply with all the regulatory norms laid down by SEBI and all the eligibility criteria/rules of stock exchanges.

10.7.3 As per RBI circular IDMD.PCD.No. 2223/14.03.05 /2012-13 dated January 30, 2013, Standalone PDs are allowed a sub-limit of 50% of NOF for investment in corporate bonds within the overall permitted average fortnightly limit of 225 per cent of NOF as at the end of March of the preceding financial year for call /notice money market borrowing.

10.7.4 PDs should not invest in non-G-Sec of original maturity of less than one year, other than NCDs, CPs and CDs, which are covered under RBI guidelines. PDs are permitted to invest in NCDs with original or initial maturity up to one year issued by the corporates (including NBFCs). However, their investments in such unlisted NCDs should not exceed 10 per cent of the size of their non-G-Sec portfolio on an on-going basis. While investing in such instruments, PDs should be guided by the extant prudential guidelines in force and instructions given in the circulars IDMD.DOD.10/11.01.01(A)/2009-10 dated June 23, 2010, IDMD.PCD.No.24/14.03.03/2010-11 dated December 6, 2010 and IDMD.PCD.08/14.03.03/2011-12 dated August 23, 2011 as amended from time to time.

10.7.5 PDs should undertake usual due diligence in respect of investments in non-G-Sec.

10.7.6 PDs must not invest in unrated non-G-Sec.

10.7.7 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 10.7.6.

10.7.8 PD's investment in unlisted non-G-Sec should not exceed 10% of the size of their non-G-Sec 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 ABS and 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.

10.7.9 As per 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. As per guideline issued vide IDMD.PCD. 10 /14.03.06/ 2013-14 dated February 24, 2014, OTC trades in Corporate Bonds and Securitized Debt Instruments are to be reported within 15 minutes of the trade on any of the stock exchanges (NSE, BSE and MCX-SX). Further as per guidelines IDMD.No.1764/11.08.38/2009-10 dated October 16, 2009 and IDMD.PCD.11/14.03.06/2012-13 dated June 26, 2013, these trades may be cleared and settled through any of the clearing corporations (NSCCL, ICCL and MCX-SX CCL).

10.7.10 PDs should ensure that their investment policies are formulated after taking into account all the relevant issues specified in these guidelines on investment in non-G-Sec. They should put in place proper risk management systems for capturing and analysing the risk in respect of non-G-Sec 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 PD’s investment policy.

10.7.11 Boards of the PDs should review the following aspects of investment in non-G-Sec at least at quarterly intervals:

1. Total business (investment and divestment) during the reporting period.

2. Compliance with the prudential limits as well as prudential guidelines prescribed by the Board for investment in non-G-Sec.

3. Rating migration of the issuers/ issues held in the PD’s books.

10.7.12 In order to help 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.

10.8 Exposure Norms

10.8.1 Exposure norms for standalone PDs will be guided by RBI circular IDMD.PCD. 12/14.03.05/ 2013-14 dated March 27, 2014. The extant norms are as follows:

1. The exposure ceiling limits would be 25 percent of latest audited Net Owned Funds (NOF) in case of a single borrower/counterparty and 40 percent of NOF in case of a group borrower/counterparty.

2. The ceilings on single /group exposure limit would not be applicable where principal and interest are fully guaranteed by the Government of India.

3. PDs should include credit risk exposures to all other categories of non-Government securities including investments in mutual funds, commercial papers, certificate of deposits, positions in OTC derivatives not settled through Qualifying CCP (QCCP) etc. to compute extent of credit exposure to adhere to the prescribed prudential limits.

4. Clearing exposure to a QCCP will be kept outside of the exposure ceiling of 25 per cent of its NOF applicable to a single counter party.

5. Clearing exposure to QCCP would include trade exposure and default fund exposure as defined in the guidelines on capital requirements for PDs’ exposure to central counterparties issued vide Circular IDMD.PCD.11/14.03.05/2013-14 dated March 27, 2014.

6. Other permissible exposures to QCCPs such as investments in the capital of CCP etc. will continue to be within the existing exposure ceiling of 25 per cent of NOF to a single borrower/counterparty. However, all exposures of a PD to a non-QCCP should be within the exposure ceiling of 25 per cent.

7. Presently, there are four CCPs viz. Clearing Corporation of India Ltd. (CCIL), National Securities Clearing Corporation Ltd. (NSCCL), Indian Clearing Corporation Ltd. (ICCL), and MCX-SX Clearing Corporation Ltd. (MCX-SXCCL) that are subjected, on an ongoing basis, to rules and regulations that are consistent with CPSS-IOSCO Principles for Financial Market Infrastructures. While the CCIL has been granted the status of a QCCP by the Reserve Bank, the other three CCPs have been granted the status of QCCP by SEBI.

8. It may also be mentioned that the status of a CCP as a QCCP may change in future, if a regulator/supervisor of the CCP withdraws the status of QCCP. After withdrawal of the status of a QCCP, the CCP will be considered a non-QCCP and exposure norms as applicable to non-QCCPs would be applicable.

10.8.2 PDs should calculate exposure for various items as per Master Circular IDMD.PDRD.02/03.64.00/2014-15 dated July 1, 2014 on “Capital Adequacy Standards and Risk Management Guidelines for Standalone Primary Dealers”.

11. Prudential Systems/Controls

11.1 PDs shall have an efficient internal control system for fair conduct of business, settlement of trades and maintenance of accounts.

1. PDs should maintain adequate physical infrastructure and skilled manpower for efficient participation in primary issues, trading in the secondary market, and to advise and educate investors.

2. In respect of transactions in G-Sec, a PD 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.

3. 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.

4. 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 counterparty, 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. In view of the reporting and confirmation of OTC trades on Negotiated Dealing System (NDS) and guaranteed settlement through CCIL, the requirement to exchange written confirmation for OTC trades in G-Sec has been dispensed with. With respect to transactions matched on the NDS-OM module, separate counterparty confirmation of deals is not required.

5. 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.

6. 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.

7. 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.

8. 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/MD 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.

9. 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 ‘arm’s length basis’, provisions related to HTM portfolio etc.

10. PDs should have a system of internal audit focused on monitoring the efficacy and adequacy of internal control systems.

11. With the approval of their Board, PDs should put in place appropriate exposure limits / dealing limits, for each of their counterparties 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.

12. 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 NOF.

13. 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.

14. 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 and should ensure efficacy and adequacy of the audit function.

11.2 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:

1. 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 authorized signatories should be put in place.

2. Under no circumstances, a SGL transfer form issued by a PD in favour of 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 (PDO) of the RBI 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.

3. 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.

4. SGL transfer form should be in a standard format, prescribed by the RBI, 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.

11.3 Bank Receipt or similar receipt should not be issued or accepted by the PDs under any circumstances in respect of transactions in G-Sec.

11.4 Accounting Standards for securities transactions

1. All securities in trading portfolio should be marked to market, at appropriate intervals.

2. 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 gets adjusted at the time of coupon payment. PDs can adopt either the IAS or GAAP accounting standards, but have to ensure that the method should be true and fair and should not result in overstating the profits or assets value. It should be followed consistently and be generally acceptable especially to the tax authorities.

3. Broken period interest paid to seller as part of cost on acquisition of Government and other securities should not be capitalized but treated as an item of expenditure under Profit and Loss Account. The PDs may maintain separate adjustment accounts for the broken period interest.

4. 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 FIMMDA periodically.

5. 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 on accounts to the Balance Sheet:

   1. Net borrowings in call (average and peak during the period),

   2. Basis of valuation,

   3. Leverage Ratio (average and peak),

   4. CRAR (quarterly figures), and

   5. Details of the issuer composition of non-G-Sec investments.

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

11.5 Reconciliation of holdings of G-Sec

Balances as per books of PDs 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 verified during concurrent/internal audit of the PDs.

11.6. Transactions on behalf of Constituents

1. The PDs should undertake all due diligence while acting as agent of their clients for carrying out transactions in securities.

2. PDs should not use the constituents’ funds or assets for proprietary trading or for financing of another intermediary’s operations.

3. All transaction records should give a clear indication that the transaction belongs to constituent and does not belong to PD’s own account.

4. The transactions on behalf of constituents and the operations in the CSGL accounts should be conducted in accordance with the guidelines issued by RBI on the CSGL accounts.

5. 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.

6. 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.

11.7 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 IDMD, RBI immediately. In terms of circular RBI/2010-11/115-IDMD.DOD.17/11.01.01(B)/2010-11 dated July 14, 2010, for any default in delivery of security / funds in a SGL sale / purchase transaction undertaken by a PD (event of bouncing of SGL transfer forms) and the failure of the PD to offer satisfactory explanation for such bouncing of SGL, the PD shall be liable to pay penalties as per the circular ibid.

12. Trading of G-Sec on Stock Exchanges

12.1 With a view to encouraging wider participation of all classes of investors, including retail, in G-Sec, trading in G-Sec 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 G-Sec in demat form is allowed on automated order driven system of the National Stock Exchange (NSE) of India, the Bombay Stock Exchange Ltd., Mumbai (BSE), the Over the Counter Exchange of India (OTCEI) and the MCX Stock Exchange. This trading facility is in addition to the reporting/trading facility in the NDS. Being a parallel system, the trades concluded on the exchanges will be cleared by their respective clearing corporations/clearing houses.

12.2 PDs are expected to play an active role in providing liquidity to the G-Sec market and promote retailing. They may, therefore, make full use of the facility to distribute G-Sec 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 own demat account is enabled by PDO-Mumbai subject to guidelines issued by Department of Government and Bank Accounts (DGBA), RBI.

12.3 Guidelines

1. PDs should take specific approval from their Board to enable them to trade in the Stock Exchanges.

2. PDs may undertake transactions only on the basis of giving and taking delivery of securities.

3. 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.

4. The trades done through any single broker will also be subject to the current regulations on transactions done through brokers.

5. A standardized settlement on T+1 basis of all outright secondary market transactions in G-Sec has been adopted to provide the participants more processing time for transactions and to help in better funds as well as risk management.

6. In the case of repo transactions in G-Sec, 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.

7. 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 PDOs.

8. 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 intraday exposures on clients for margins are concerned, the PDs should be conscious of the underlying risks in such exposures.

9. 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.

13. Business through brokers

13.1 Business through brokers and limits for approved brokers

PDs may undertake securities transactions among themselves or with clients through the members of the BSE, NSE and OTCEI. However, if the PDs undertake OTC interest rate derivative transactions through brokers, they should ensure that these brokers are accredited by FIMMDA. PDs should fix aggregate contract limits for each of the approved brokers. A limit of 5% of total broker transactions (both purchase and sales) entered into by a PD during a year should be treated as the aggregate upper 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 thereof should be recorded and the Board should be informed of this, post facto.

13.2 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.

13.3 Brokerage 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.

13.4 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.

13.5 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.

14. Guidelines on declaration of dividend

PDs should follow the following guidelines while declaring dividend distribution:

1. 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.

2. PDs having CRAR below the regulatory minimum of 15 per cent in any of the previous four quarters cannot declare any dividend. For PDs having CRAR at or above 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 (DPR) should not exceed 33.3 per cent. For PDs having CRAR at 20 per cent or above during all the four quarters of the previous year, the DPR should not exceed 50 per cent. DPR should be calculated as a percentage of dividend payable in a year (excluding dividend tax) to net profit during the year.

3. The proposed dividend should be payable out of the current year’s profits. In case the profit for the relevant period includes any extraordinary income, the payout ratio should be computed after excluding such extraordinary items for reckoning compliance with the prudential payout ratio ceiling.

4. 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 DPR.

5. In case there are special reasons or difficulties for any PD in strictly adhering to the guidelines, it may approach RBI in advance for an appropriate ad hoc dispensation in this regard.

6. All the PDs declaring dividend should report details of dividend declared during the accounting year as per the prescribed pro forma (Annex X) along with the Board resolution passed for declaration of dividend. The report should be furnished within a fortnight of payment of dividend.

15. 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, as amended from time to time.

16. 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, as amended from time to time, on the prevention of money laundering.

17. Violation/Circumvention of Instructions

Any violation/circumvention of the above guidelines or the terms and conditions of the undertaking executed by a PD with RBI (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 authorization for carrying on the business as a PD, and/or imposition of monetary penalty or liquidated damages, as the RBI may deem fit.

18. Disclosure of Penal Actions

18.1 In order to maintain transparency with regard to imposition of penalties and in conformity with the best practices on disclosure of penalties imposed by the regulator, the details of the penalty levied on a PD shall be placed in the public domain.

18.2 The mode of disclosures of penalties, imposed by RBI will be as follows:

1. A Press Release will be issued by the RBI, giving details of the circumstances under which the penalty is imposed on the PD along with the communication onthe imposition of penalty in public domain.

2. The penalty shall also be disclosed in the 'Notes on Accounts' to the Balance Sheet of the PD in its next Annual Report.

19.1 RBI may suspend or terminate a PD, as it may deem fit, in the following circumstances:

1. Violation/circumvention of the regulatory guidelines or the terms and conditions of the undertaking executed by a PD with the RBI.

2. Failure to meet the performance criteria and capital standards on an ongoing basis.

3. Repeatedly providing bids and offers in the primary and/or secondary market that are not reasonably competitive.

4. RBI is of the view that the PD has attempted to manipulate the market; involved in market abuse; made an incorrect representation or certification; failed to provide information required under the extant guidelines, or provided information that was incorrect, inaccurate, or incomplete.

5. If it appears, in the Reserve Bank’s judgment that the PD has an inadequate or weak control environment.

6. If a PD becomes the subject of, or involved with, regulatory or legal proceedings that, in the judgment of the Reserve Bank, unfavorably impacts the PD business.

7. PD intends to surrender PD authorisation on its own. In such a case, the PD should discuss the orderly unwinding of any positions held, agree the timing and date of termination of PD operations, and the content of any announcements to be made to the market, by the Reserve Bank. In the interests of discouraging ‘fair-weather’ trading and ensure that a PD is available in the market even when the market condition is not favourable, the Reserve Bank will not approve an application from the same firm for a fresh PD authorisation for some considerable period of time.

19.2 RBI will notify the PD of its intention to impose a sanction, and will provide the PD with an opportunity to submit its view, before taking a final decision.

19.3 RBI will ensure that a PD’s exit is carried out in a way that does not cause undue disruptions to other market participants.

19.4 Such suspension or termination will be made public by RBI through press release. An announcement in this regard shall be made preferably on the last working day of the week, with the sanction effective from the close of business on the same day.

20. List of circulars consolidated and list of circulars referred are enclosed at Annex XI and XII respectively.

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 PD business departmentally from 2006-07.

2. Procedure for Authorization of bank-PDs

2.1 Banks eligible to apply for undertaking PD business, [please see eligibility conditions at paragraph 1.2.1 of Section I above] may approach the Chief General Manager, DBOD, RBI, Central Office. On obtaining an in-principle approval from DBOD, banks may apply to the Chief General Manager, IDMD, RBI, 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 every three years (July-June). Undertaking will be based on passing of a fresh Board resolution by the PD every three years.

3. Applicability of guidelines issued for PDs

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 dated G-Sec and T-Bills/CMBs, underwriting of dated G-Sec, market-making in G-Sec and secondary market turnover in G-Sec will also be at par with those applicable to standalone PDs as enumerated in Section - I of this Master Circular.

3.2 Bank-PDs are expected to join PDAI and FIMMDA and abide by the code of conduct framed by them and such other actions initiated by them in the interest of the securities market.

3.3 The requirement of ensuring minimum investment in G-Sec and T-Bills on a daily basis, based on net call / RBI borrowing and NOF 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 LAF of RBI, bank-PDs will not have separate access to these facilities and liquidity support as applicable to the standalone PDs.

3.5 The guidelines issued vide circular IDMD.No/2130/11.01.01 (D)/2006-07 dated November 16, 2006 on ’When-issued’ trades will be applicable to bank-PDs also.

3.6 Bank-PDs shall be guided by the extant guidelines applicable to banks as regards borrowing in call/notice/term money market, ICDs, 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 G-Sec. Investments in Corporate / PSU / FIs bonds, CPs, CDs, 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 G-Sec including T-Bills/CMBs earmarked for PD business.

3.9 The G-Sec including T-Bills/CMBs under PD business will count for SLR purpose.

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

4. Maintenance of books and accounts

4.1 The transactions related to PD business, undertaken by a bank departmentally, should be executed through the existing SGL account of the bank. However, Bank-PDs need to maintain distinct PD book as per DBOD guidelines RBI/2006-07/104 DBOD.FSD.BC. No.25/24.92.001/2006-07 dated August 9, 2006. The decision regarding maintaining a PD book as part of HFT-G-Sec portfolio or treating the entire HFT-G-Sec- portfolio as PD book is left to the banks. However, banks may clearly indicate in their investment policy the intention of denoting the whole or part of HFT-G-Sec book as PD book with the approval of their Board/ALCO.

4.2 Bank-PDs shall decide about classification (HTM/AFS/HFT-G-Sec-bank/HFT-G-Sec-PD) of securities allotted in the primary auction/purchased in the secondary market, at the time of acquisition of the securities.

4.3 It should be ensured that, at any point of time, there is a minimum balance of Rs.100 crore of G-Sec earmarked for PD business.

4.4 Bank-PDs should subject 100 per cent of the transactions and regulatory returns submitted by PD department to concurrent audit. An auditor’s certificate for having maintained the minimum stipulated balance of Rs.100 crore of G-Sec 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- C.

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

Annex I

Format of Undertaking

To
The Chief General Manager,
Internal Debt Management Department,
Reserve Bank of India,
Central Office Building,
Mumbai - 400 001

By
             ………………………………………………………………..
             Registered Office ……………………………………………..
             …………………………………………………………………
             ………………………………………………………………….

WHEREAS the Reserve Bank of India (RBI) has offered in principle to permit us to undertake Primary Dealer (PD) activity in Government securities in accordance with the Guidelines issued thereon from time to time.

AND WHEREAS as a precondition to our being authorized to undertake PD activity we are required to furnish an undertaking covering the relative terms and conditions.

AND WHEREAS at the duly convened Board of Directors meeting of ________________ on __________, the Board has authorised Shri/Smt./Kum. _________________ and Shri/Smt./Kum. __________________ to execute and furnish an UNDERTAKING for the period July ….. to June ……. to the RBI jointly and severally as set out below:

NOW, THEREFORE, in consideration of the RBI agreeing to permit us to undertake PD activity, we hereby undertake and agree:

1. To commit to aggregatively bid in the auction of Treasury Bills (TBs), including Cash Management Bills (CMBs) to the extent of specific per cent of each issue of auction Treasury Bills/Cash Management Bills as decided every year (April-March) and for a minimum amount equal to the underwriting commitment (allotted under Minimum Underwriting Commitment and Additional Competitive Underwriting) for GoI Dated Securities and to maintain the success ratio in aggregate winning bids at not less than 40 per cent for TBs and CMBs or such other percent as may be notified by RBI keeping in view the relevant factors.

2. To offer to underwrite primary issues of GoI dated securities, TBs, CMBs, and State Government securities, for which auction is held, and accept devolvement, if any, of any amount as may be determined by RBI in terms of prevalent scheme for Bidding/Underwriting.

3. a) To determine prudential ceilings, with the prior approval of the Board of Directors (Board) of the company, for reliance on borrowings from the money market including repos, as a multiple of net owned funds, subject to the guidelines, if any, issued by the RBI in this regard (applicable to standalone PDs only).

b) To adhere to prudential ceilings, with the prior approval of the Board of the bank, subject to the guidelines, if any, issued by the RBI in this regard (applicable to bank-PDs only).

4. To offer firm two-way quotes through NDS / NDS-OM, over the counter telephone market / recognised Stock Exchanges in India and deal in the secondary market in Government dated securities and TBs of varying maturity from time to time and take principal positions.

5. To achieve a sizeable portfolio in Government securities and to actively trade in the Government securities market.

6. To achieve an annual turnover of not less than 5 times in Government dated securities and not less than 10 times in TBs/CMBs of the average of month-end stocks (in the book separately maintained for the PD business) subject to the turnover in respect of outright transactions being not less than 3 times in Government dated securities and 6 times in TBs /CMBs or as may be notified by RBI from time to time..

7. To maintain the capital adequacy standards prescribed by the RBI, and to subject ourselves to all prudential and regulatory guidelines as may be issued by the RBI from time to time.

8. To maintain adequate infrastructure in terms of both physical apparatus and skilled manpower for efficient participation in primary issues, trading in the secondary market, and for providing advice and education to investors.

9. To adhere to “Guidelines on Securities Transaction to be followed by PDs” issued vide circular IDMC.No.PDRS/2049-A/03.64.00/99-2000 dated December 31, 1999 and Master Circulars issued from time to time and put in place necessary internal control systems for fair conduct of business and settlement of trades and maintenance of accounts.

10. To comply with all applicable RBI /Securities and Exchange Board of India (SEBI) requirements under the existing guidelines and which may be laid down from time to time in this behalf, failing which RBI would be at liberty to cancel the authorisation as a PD.

11. To abide by the code of conduct as laid down by RBI/SEBI, the Primary Dealers’ Association of India (PDAI) and the Fixed Income, Money Markets and Derivatives Association of India (FIMMDA).

12. To maintain separate books of account for transactions relating to PD business (distinct from the normal banking business) with necessary audit trails and to ensure that, at any point of time, there is a minimum balance of Rs.100 crore of Government securities or as may be notified by RBI from time to time earmarked for PD business (applicable to bank-PDs only).

13. To maintain and preserve such information, records, books and documents pertaining to our working as a PD as may be specified by the RBI from time to time.

14. To permit the RBI to inspect all records, books, information, documents and make available the records to the officers deputed by the RBI for inspection/scrutiny and render all necessary assistance.

15. To maintain at all times a minimum net owned funds of Rs.150 crore / Rs.250 crore or as may be prescribed by RBI from time to time in Government securities and to deploy the liquidity support from the RBI, net borrowings from call money market and net repo borrowings exclusively in Government securities (applicable to standalone PDs only).

16. To maintain an arm’s length relationship in transactions with group and related entities.

17. To obtain prior approval of RBI for any change in the shareholding pattern of the company (applicable to standalone PDs only).

18. To submit in prescribed formats periodic reports including daily transactions and market information, monthly report of details of transactions in securities and risk position and performance with regard to participation in auctions, annual audited accounts and an annual performance review and such statements, certificates and other documents and information as may be specified by RBI from time to time.

19. To report the matter immediately to Internal Debt Management Department of the RBI and abide by such orders, instructions, decisions or rulings given by the RBI if and when any kind of investigation/inquiry/inspection is initiated against us by statutory/regulatory authorities, e.g. SEBI/RBI, Stock Exchanges, Enforcement Directorate, Income-tax authorities etc.

20. To pay an amount of Rupees Five Lakh, or as applicable, to the RBI, for violation of any of the instructions issued by the RBI in the matter or for non-compliance with any of the undertakings given hereinabove.

We do hereby confirm that the above undertakings will be binding on our successors and assigns.

Dated this          day of                     Two Thousand …………..

Signed, sealed and delivered by the within named,   )
being the authorized persons, in terms of the           )
Resolution No._______ of the Board )
at the duly convened Meeting held on___________  )    
in the in the presence of _______________            )

Signatory (i)
              (ii)

Witness   (i)
               (ii)
Notes:

1. Para 3.a, 15 and 17 are applicable to standalone PDs only.
Para 3.b, words in italics in para 6 and para 12 are applicable to bank-PDs only.

Annex II-A

Statements / Returns required to be submitted by PDs to IDMD

Annex II-B

Statements / Returns required to be submitted by PDs
to departments other than IDMD of Reserve Bank of India

Annex II-C

Statements / Returns required to be submitted by banks
on their Primary Dealership business to IDMD

Annex IV

Illustrations showing PDs’ Commitment to
T-Bills / CMBs auctions and Success Ratio

A PD has committed to bid aggregatively Rs. 500 crore in T-Bills as shown below. The success ratio to be maintained by the PD is 40 per cent in respect of T- Bills/CMBs. Various scenarios in respect of fulfillment of the bidding commitment and the success ratio assuming that the bids tendered and the bids accepted will be as under:

Annex V

Format - PDR I Return

Name of PD:
Net Owned Funds (as per last b/s):
Return for fortnight ending:

Annex X

Reporting format for Primary Dealers declaring dividend

Details of dividend declared during the financial year beginning on ……..

Name of the Primary Dealer:

Note: While submitting the statement for the final dividend declared, details of the interim dividends declared, if any, shall also be included in the statement.

I / We confirm that the guidelines issued by the Reserve Bank of India for declaration of dividend have been complied with while declaring the above mentioned dividend.

Authorised Signatory / Authorised Signatories

Name:
Designation:

Annex XI

List of circulars consolidated

Annex XII

List of circulars referred

¹ In terms of the explanatory note to Section 45-IA of Chapter III-B of the RBI Act, 1934, NOF is calculated as (a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance-sheet of the company after deducting there from– (i) accumulated balance of loss; (ii) deferred revenue expenditure; and (iii) other intangible assets; and (b) further reduced by the amounts representing – (1) investments of such company in shares of – (i) its subsidiaries; (ii) companies in the same group; (iii) all other non-banking financial companies; and (2) the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with,– (i) subsidiaries of such company; and (ii) companies in the same group, to the extent such amount exceeds ten per cent of (a) above.