With the government likely to borrow a record Rs 4,51,000 crore in 2009-10, life is getting tougher for primary dealers (PDs).
The partial devolvement of bond auction on PDs for four consecutive weeks in August and September has brought into focus the pressure on market players due to these borrowings.
Dealers across private and public sector bond houses said PDs as market makers had to invest at auctions. The limits on existing capital base to support frontloaded borrowing in the first half have became apparent now.
The Reserve Bank of India (RBI) has sensed the criticality of the matter and decided to increase the minimum net-owned fund (NOF) for PDs.
The non-bank standalone PDs will have to maintain a minimum NOF of Rs 150 crore as against the previous requirement of Rs 50 crore. In case PDs want to enter other businesses, the minimum NOF requirement has been enhanced to Rs 250 crore from Rs 100 crore.
The central bank has given time till March 2010 to meet the revised NOF norms.
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While most of the PDs are adequately capitalised for now, many of them are looking to enhance their capital base.
GA Tadas, chief executive and managing director of IDBI Gilts, said, his company was in talks with the top management of the IDBI Bank for further capital infusion. He, however, did not elaborate how much capital the company sought from its parent.
Beside the rise in business volumes, the capacity to face risks in the volatile market also seems to have driven RBI to increase capital requirement for the primary dealers.
Pankaj Vaish, managing director and head-equities and fixed income liquid markets of Nomura India, said, "Keeping in mind the global financial environment, the regulator's prescription of higher capital requirement is understandable. We are well capitalised with net-owned fund of over Rs 250 crore."
Nomura India PD is the new version of Lehman Brothers' primary dealership, which has just commenced operations. It had stopped working soon after the collapse of the investment banking outfit and its parent Lehman Brothers in September 2008. Japanese finance powerhouse Nomura bought over its business in India.
The fund requirements of PDs have gone up in tandem with the rise in business volumes. RBI has now allowed bond houses to borrow more. It raised the limit on borrowing from the call/ notice money market up to 225 per cent of NOF from 200 per cent earlier.
One head of a public sector bond house said, "We (PDs) had asked for a hike up to 300 per cent of NOF. May be this will be considered at a later date, since the government will continue to borrow more even during the next financial year."
While business in the government bond market will remain the prime driver for primary dealers, RBI has allowed them to enter new business areas, such as interest rate futures.
"RBI has permitted PDs to trade in interest rate futures. This will definitely help to broad base the bond market. Similarly, there is a case for well-capitalised and tightly regulated PDs to be allowed in the currency futures market," said Vaish.
The Indian market also seems to be drawing interest from global financial players. Just as Nomura thought it apt to revive Lehman's PD business, another global financial services firm Morgan Stanley has also made an entry into the PD business here.
Morgan Stanley is entering the primary dealership business for the longer term. It was already active in government bonds (trading) for a year through a non-banking finance company, said Ranodeb (Ronnie) Roy, head of interest rate, credit and currency (IRCC) division for Asia-Pacific, Morgan Stanley.
Roy said, "While we do not have a target for market share, it would be reasonable to say that we would like to be among the top five players."