Primary Dealer System
A framework established by RBI in which licensed financial intermediaries — called Primary Dealers (PDs) — are obligated to bid at G-Sec auctions, underwrite unsubscribed portions, and provide two-way market-making quotes in the secondary market, in exchange for access to RBI's liquidity windows.
The Primary Dealer (PD) system in India was established in 1995 based on recommendations of the Vaghul Committee as part of broader government securities market development reforms. RBI licensed specific institutions — including standalone PDs and bank-PDs — to perform the critical function of absorbing government borrowing and ensuring a liquid secondary market for G-Secs.
Core obligations of a PD included: bidding in a minimum percentage of notified G-Sec auctions (called the success ratio requirement, typically 40 percent), underwriting the full notified amount at each auction (providing a committed backstop to government borrowing), and maintaining minimum daily quoting requirements in the secondary market through the NDS-OM (Negotiated Dealing System – Order Matching) platform operated by CCIL.
In exchange, PDs received several privileges: access to RBI's Liquidity Adjustment Facility (LAF) repo window, participation in Open Market Operations (OMO) conducted by RBI, access to the Marginal Standing Facility (MSF), and the right to deal directly with RBI in the secondary G-Sec market. Standalone PDs (non-bank PDs such as Nomura Fixed Income Securities, STCI Primary Dealer, and I-Sec PD) were also permitted to raise short-term funds through call money and term repo markets.
The underwriting commitment distinguished PDs from other market participants. Before each G-Sec auction, PDs submitted underwriting bids specifying the amount they were willing to underwrite at a minimum underwriting commitment. RBI used a competitive underwriting process where PDs were compensated through underwriting fees for the amounts they underwrote. This eliminated the risk of devolvement (auction failure) on the RBI, providing certainty to government cash flows.
India had approximately twelve to fourteen licensed PDs at any given time, with the group collectively holding approximately 25-30 percent of outstanding dated G-Sec stock. RBI reviewed PD licences periodically and had the authority to suspend or revoke licences for non-compliance with auction commitments or market-making obligations.