Master Direction – Operational Guidelines for Primary Dealers (Updated as on November 22, 2018)

RBI/IDMD/2016-17/29 Master Direction IDMD.PDRD.01/03.64.00/2016-17 July 1, 2016 ( Updated as on November 22, 2018 ) All Primary Dealers Dear Sir / Madam Master Direction – Operational Guidelines for Primary Dealers The Reserve Bank of India has, from time to time, issued a number of guidelines/instructions to the Primary Dealers (PDs) with respect to their operations. The Master Direction enclosed incorporates the updated guidelines/instructions/circulars on the subject. A list of circulars finding reference in this Master Direction is enclosed in Annex-XIII and XIV . The Direction will be updated from time to time as and when fresh instructions are issued. This Master Direction has been placed on RBI website at www.rbi.org.in .

2. The banks undertaking PD activities departmentally should follow the extant guidelines applicable to the banks on capital adequacy requirements and risk management.

Yours faithfully (A. Mangalagiri) Chief General Manager

Encl: As above

Table of Contents Sl.No. Details Section I: Regulations governing Primary Dealers 1 Primary Dealer (PD) System 2 Primary Market Activities 3 Secondary Market Activities 4 Liquidity Standing Facility 5 Investment Guidelines 6 Systems/Controls 7 Violation/Circumvention of Instructions 8 Disclosure of Penal Actions 9 Exit/Termination Procedure Section II: Additional Guidelines applicable to banks undertaking PD business departmentally 1 Introduction 2 Procedure for Authorization of bank-PDs 3 Applicability of Guidelines issued for bank-PDs 4 Maintenance of books and accounts 5 Capital Adequacy and Risk Management 6 Supervision by RBI Annexes I Format of Undertaking II-A Statements / Returns required to be submitted by PDs to IDMD II-B Statements / Returns required to be submitted by PDs to other than IDMD II- C Statements / Returns required to be submitted by banks on their PD business to IDMD III Illustration showing the underwriting scheme IV Illustration showing PDs’ commitment to T-Bills/CMBs auctions and success ratio V Format PDR–I Return VI Format PDR-II Return VII Format PDR III Return VIII Criteria for use of internal model to measure market risk capital charge IX Back Testing X Format PDR-IV Return * XI Publication of Financial Results XII Monthly Return on Interest Rate Risk of Rupee Derivatives XIII List of circulars consolidated XIV List of circulars referred

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, improve secondary market trading system and to make PDs an effective conduit for open market operations (OMO). As on June 30, 2015, there are seven standalone PDs and fourteen 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:

Eligible Institutions Eligibility conditions

• (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). • Should be registered as an NBFC under Section 45-IA of the RBI Act, 1934 for at least one year prior to the submission of application. • Should have minimum net owned funds (NOF) 1 of Rs.150 crore for undertaking core activities and Rs.250 crore for undertaking diversified activities (as defined in para 5). Before commencing PD business, applicant entity has to submit an external auditor’s certificate to this effect. • Should have exposure in the securities business and in particular to the G-Sec market for at least one year prior to the submission of application. Exposure for this purpose would be as under: Applicant’s turnover in the G-Sec business during the year preceding the year of application for PD authorisation should be at least equal to 15 per cent of its total turnover. Its assets in G-Sec during the year preceding the year of application should be at least equal to 15 per cent of its total assets. • Applicant entity should submit an annual target along with plan of action for turnover to be achieved on behalf of mid-segment (Provident Funds, Urban Cooperative banks, Regional Rural banks, Trusts, etc.) and retail (individual) investors at the time of submission of their application for PD authorisation. The annual minimum target will be same as applicable to existing PDs from time to time as mentioned in para 1.2.6 of this circular. Previous experience in servicing retail and mid- segment customers in G-Sec will be viewed favourably while processing the application for PD authorisation. • In case of subsidiaries/joint ventures set up by entities incorporated abroad, in addition to conditions given above, the following may be adhered to: The applicant should have approval of Foreign Investment Promotion Board. The parent foreign company directly or through its subsidiaries should have been in PD business for three years or more in active markets. Such entity should suitably ring fence its system from its parent and associates

Banks which do not have a partly or wholly owned subsidiary undertaking PD business and intending to undertake PD business departmentally • Minimum net owned funds (NOF) of Rs. 1,000 crore. • Minimum Capital to Risk Weighted Assets Ratio (CRAR) of 9 per cent. • Net non-performing assets of less than 3 per cent and a profit making record for last three years. • The applicant bank should have approval of Department of Banking Regulation, Central Office, Reserve Bank of India, Mumbai. • Applicant bank should submit an annual target along with plan of action for turnover to be achieved on behalf of mid-segment and retail investors at the time of submission of their application for PD authorisation. The annual minimum target will be same as applicable to existing PDs from time to time as mentioned in para 1.2.6 of this circular. Previous experience in servicing mid-segment and retail customers in G-Secs will be viewed favourably while processing the application for PD authorisation.

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 2016-June 2017 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.