The Hindu : Business : Primary dealers allowed to trade in equity market

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Thursday, Jul 06, 2006

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Business

Primary dealers allowed to trade in equity market

Corporate Reporter

NOF fixed at Rs. 100 cr. for non-core activities

CHENNAI: The Reserve Bank of India (RBI) has allowed stand-alone primary dealers (PD) to bifurcate their operations into core and non-core activities. Under core activities, they are permitted to undertake dealing and underwriting in government securities, corporate / PSU / FI bonds/ debentures, lending in call/ notice/ term/ repo markets, dealing in interest rate derivatives, providing broking services in government securities and investing in debt mutual funds.

They are also now permitted to undertake non-core activities such as investment/ trading in equity and equity derivatives markets, investment in units of equity oriented mutual funds and underwriting of public issues of equity.

The RBI has also allowed primary dealers to take up services which do not consume capital or require insignificant capital.

These include professional clearing services, portfolio management services, issue management services, merger and acquisition advisory services, private equity management services and project appraisal services.

The minimum net owned fund (NOF) requirement for a PD proposing to undertake non-core activities would be Rs. 100 crore as against Rs.50 crore for a PD who does not diversify into these activities.

It has also been decided that PDs will not be permitted to set up step-down subsidiaries. PDs that already have step-down subsidiaries (in India and abroad) may restructure the ownership pattern of these subsidiaries.

If the PD is a subsidiary of a holding company, the step-down subsidiary of the PD may become another direct subsidiary of the holding company. In case the PD itself is a holding company, then the step-down subsidiary may take up the PD activity and the holding entity may take up activities other than those permitted for the PDs. There are some regulatory and prudential norms for diversification of activities displayed in the RBI website http://www.rbi.org.in

The institution of primary dealers was conceived and permitted by the RBI with the objectives of strengthening the infrastructure in the government securities market and ensuring development of underwriting and market-making capabilities for government securities.

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