iia audit of primary dealership

7/30/2019 IIA Audit of Primary Dealership

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PRIMARY DEALERSHIP ANDPRIMARY DEALERSHIP ANDAUDIT OF PRIMARYAUDIT OF PRIMARYDEALERSHIPDEALERSHIP


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MEANINGMEANING

A primary dealer is a firm which buysgovernment securities directly from a

government, with the intention of

reselling them to others, thus acting as a

market maker of government securities.


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THE BEGINNINGTHE BEGINNING

1995 by the RBI in G-Sec Markets 2006-07, banks (departmentally) were

included in order to broaden the scope

and system of operation

Standalone PDs were permitted

diversification into other business activities-

subject to conditions

As on June 2012- 8 standalone PDs13 banks (departmentally)


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OBJECTIVESOBJECTIVES

Strengthen the infrastructure in G-Secmarket in order to make it vibrant, liquidand broad based;

Ensure development of underwriting andmarket making capabilities for G-Sec

outside the RBI; Improve secondary market trading

system, which would contribute to pricediscovery, enhance liquidity and turnover

and encourage voluntary holding of G-Sec amongst a wider investor base; and

Make PDs an effective conduit for openmarket operations (OMO).


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Diversification of activities byDiversification of activities bystandalone PDsstandalone PDs

May bifurcate their operations intocore and non-core activities


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CORE ACTIVITIESCORE ACTIVITIES

Dealing in:

Government of India Securities (G-SEC)

State Government Securities (SG)

Treasury Bills (T-Bills) Call Money Market

Interest rate swaps (IRS).

Collateralised Borrowing & LendingOptions (CBLO)


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CORE ACTIVITIESCORE ACTIVITIES

Investment in Security Receipts issuedby Securitization Companies/Reconstruction Companies, AssetBacked Securities (ABS), Mortgage

Backed Securities (MBS), Investment in debt mutual funds where

entire corpus is invested in debtsecurities,

Investments in NCDs, and Dealing in Credit Default Swaps for

corporate bonds, subject to guidelines.


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OTHER NONOTHER NON--PD ACTIVITIESPD ACTIVITIES

Dealing in Bonds, Commercial Paper(CP), Debentures, Certificate of

Deposits (CD) and Discounted

Instruments.

Debt Capital Market (DCM) Activity: fee

based and consists of arranging,

underwriting and handling othermodalities of debt instrument issues on

behalf of corporate clients.


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NONNON--CORE ACTIVITIESCORE ACTIVITIES Activities which are expected to

consume capital Services which do not consume capital or

require insignificant capital outlay

distribution of insurance products NOT allowed to undertake broking in

equity, trading / broking in commodities,

gold and foreign exchange.

The exposure to non-core activities shallbe subject to the guidelines on regulatory

and Prudential norms for diversification of

activities by standalone PDs


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ELIGIBILTYELIGIBILTY INSTITUTIONS:

a. Subsidiary of scheduled commercialbank/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 do not fall

under (a) and (b)

d. Banks which do not have a partly or

wholly owned subsidiary undertaking PD

business and intend to undertake PD

business departmentally


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Role andRole and obligationsobligations of theof the PDsPDs

Support to Primary Market

Market making in G-Sec

Maintain adequate physical infrastructure

and skilled manpower

Efficient internal control system

Allow RBI to access all records, books,

information and documents

Satisfy the minimum criteria of PDsinvestment on a daily basis in G-Sec,

including T-Bills and CMBs


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Role andRole and obligationsobligations of theof thePDs.PDs.

Maintain the annual turnover criteria

Submission of periodic returns, as

prescribed by the RBI

Operations of the PDs are subject to

prudential and regulatory guidelines

issued by the RBI


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Facilities fromFacilities from RBI,RBI, subject to review,subject to review,depending upon the market conditions anddepending upon the market conditions andrequirementsrequirements

access to Current Account facility with

RBI

access to Subsidiary General Ledger

(SGL) Account facility with RBI

permission to borrow and lend in the

money market

memberships of electronic dealing,trading and settlement systems (NDS

platforms/ INFINET/ RTGS/ CCIL);


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Facilities from RBIFacilities from RBI

access to the Liquidity AdjustmentFacility (LAF) of RBI;

access to liquidity support from RBI

under a scheme separately notified forstandalone PDs

access to OMO by RBI.


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Regulations and CompliancesRegulations and Compliances

Requirement to meet registration and otherrequirements as stipulated by (SEBI), if they

undertake any activity regulated by SEBI.

Join Primary Dealers Association of India

(PDAI) and Fixed Income Money Marketand Derivatives Association (FIMMDA) and

abide by their code of conduct and such

other actions as initiated by them in the

interest of the securities markets.


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Regulations andRegulations and CompliancesCompliances

In respect of transactions in G-Sec, havea separate desk and maintain separate

accounts in respect of its own position

and customer transactions and subject

them to external audit Any change in the shareholding pattern

/ capital structure needs prior approval

of RBI. Report any other material

changes such as business profile,organization, etc. affecting the

conditions of licensing as a PD to RBI

immediately


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Regulations and CompliancesRegulations and Compliances

RBI reserves the right to cancel thePrimary Dealership if, in its view, theconcerned institution has failed toadhere to the terms of authorization or

any other guidelines Should bring to the attention of RBI any

major complaint against it or actioninitiated/taken against it by authorities

such as the Stock Exchanges, SEBI, CBI,Enforcement Directorate, Income TaxDepartment, etc.


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Supervision by RBISupervision by RBI

Off-site supervision

On-site inspection


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Role of PDs in the PrimaryRole of PDs in the PrimaryMarketMarket

Underwriting of Dated G-Sec

o Dated securities of Central

Government

o Dated securities of StateGovernments

Bidding in Primary auctions of T-

Bills/CMBs

When-Issued transactions in Central G-

Sec


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Role of PDs in the PrimaryRole of PDs in the PrimaryMarket.Market.

Submission of non-competitive bids

Sale of securities allotted in primary

issues on the same day

Submission of client bids in the primaryauctions

Settlement of primary auctions

Secondary Market Transactions - Short-

selling

PD tiPD ti S dS d


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PDs operationsPDs operations -- Sources andSources andApplication of fundsApplication of funds

Permitted to borrow funds fromcall/notice/term money market and

repo

Eligible for liquidity support from RBI Limits on borrowing and lending are

subject to periodic review by RBI

Liquidity Support from RBI

Inter-Corporate Deposits (ICDs)

PDs are prohibited from placing funds in

ICD market

FCNR (B) loans

PD tiPD ti S dS d


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PDs operationsPDs operations -- Sources andSources andApplication ofApplication of funds..funds..

Not permitted to raise funds throughExternal Commercial Borrowings

Issuance of Non-Convertible

Debentures (NCDs) Reporting Requirements


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Investment GuidelinesInvestment Guidelines

Frame and implement, a Board

approved, investment policy andoperational guidelines on securitiestransactions

Hold their investments in G-Sec portfolio

in SGL with RBI Hold all other investments such as CPs,

bonds and debentures (privately placedor otherwise) and equity instruments,only in demat form.

All problem exposures, not backed byany security or backed by security ofdoubtful value, should be fully providedfor.


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InvestmentInvestment Guidelines.Guidelines.

The profit and loss account shouldreflect the problem exposures

Should formulate, within the above

parameters, their own internalguidelines on security transactions in

both primary and secondary markets,

with the approval of their Board of

Directors HTM Portfolio

Guidelines on investments in non-G-Sec

Exposure Norms


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Prudential Systems/ControlsPrudential Systems/Controls Internal Control System in respect of

securities transactions Purchase/Sale of securities through SGL

transfer forms

Bank Receipt or similar receipt in respect

of transactions in G-Sec

Accounting Standards for securities

transactions

Reconciliation of holdings of G-Sec Transactions on behalf of Constituents

Failure to complete delivery of

security/funds in an SGL transaction


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OTHER GUIDELINESOTHER GUIDELINES

Interest Rate Derivatives

Declaration of dividend

Corporate Governance

Prevention of Money Laundering Act,2002 - Obligations of NBFCs

Violation/Circumvention of Instructions

Disclosure of Penal Actions

Exit / Termination procedure


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THANK YOU

iia audit of primary dealership

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