PDs get nod to diversify, with rider

The RBI has allowed primary dealers (PDs) in government securities (gilts) to diversify into other businesses, but with a caveat: they will be required to form a holding company to conduct businesses other than primary dealership.

The decision was intimated to PDs during informal discussions, said a dealer said. He added that to diversify, PDs will have to undertake some structural changes. PDs have been pushed into the red as hardening interest rates have dragged down prices of securities, forcing dealers to book depreciation.

PDs, most of which were making losses since late 2004, had earlier made presentations to the RBI seeking permission to diversify other businesses like commodity trading, foreign exchange, derivatives and equity.

PDs are firms which manage government borrowing programme by subscribing to gilts floated by the government in the primary auction. These securities are then offloaded in the secondary market later.

The RBI had come out with a proposal asking PDs promoted by commercial banks to merge with their parent companies, which resulted in some banks firming up plans for merger.

State Bank of India, Citibank, Standard Chartered and HSBC among others have PD subsidiaries.

Sources said Discount & Finance House of India (DFHI) "" a subsidiary of State Bank of India "" is planning to set up a holding company for diversifying into other businesses.

As per RBI's suggestions, the primary dealing firm will have to form a holding company under which each business will be conducted as a separate division and the balance sheet will be consolidated for all businesses.