RBI allows PDs to diversify, but bars subsidiary route

MUMBAI: Primary dealers (PDs), who have been reeling under bond losses following the spike in interest rates, could now look at making money elsewhere.

The Reserve Bank of India (RBI) has allowed PDs to diversify into equity, merchant banking and other advisory services. However, the central bank has barred them from getting into new businesses through the subsidiary route.

The move comes at a time when a secular fall in bond prices is forcing a number of PDs to give up their licences. PD licences were issued in the early ‘90s to PDs who were allowed to participate in government bond auctions and later trade bonds in the secondary market. Besides trading, PDs could also earn commission on underwriting bond auctions.

While PDs made money in the early period of ‘00 due to falling interest rates they now face the downside of the business.The new lines of business are expected to counter-balance losses in the bond portfolio. In a circular issued to PDs, the central bank has asked PDs to bifurcate their operations into core activities and non-core activities.

The circular said core activities should involve dealing and underwriting in government securities, dealing in interest rate derivatives providing broking services in G-secs, dealing and underwriting in corporate/PSU/FI bonds/debentures, lending in call/term/repo/ CBLO market, investment in security receipts.

Non-core activities include those which are expected to consume capital such as investment/trading in equity and equity derivatives market, investment in units of equity-oriented mutual funds, underwriting public issues of equity, services, which do not consume capital or require insignificant capital outlay.

Earlier, RBI had allowed PDs as a separate business entities to broadbase the participation in the G-secs market with a specific mandate to underwrite primary issues and market making in the secondary market.

Further, the exposure to non-core activities should be subject to stipulated risk capital allocation, RBI said. According to the circular, PDs will not be permitted to set up step-down subsidiaries. And that PDs who 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 PDs. The PDs should complete its restructuring exercise and comply with the guidelines within six months from the date of this circular, it said.