Which of the following statements is true 1 Primary Dealers are those corporations li...........

Economic Affairs Financial Markets

Which of the following statements is true

1. Primary Dealers are those corporations like Discount & Finance House of India Ltd., which are active in government securities market.

2. Satellite dealers act on behalf of primary dealers and render services in any part of the country.

Choose your answer from the codes given below:

Both 1, 2

1 only

Neither 1 nor 2

2 only

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Explanation:

1st statement is correct.
Primary dealers are registered entities with the RBI who have the license to purchase and sell government securities. They are entities who buys government securities directly from the RBI (the RBI issues government securities on behalf of the government), aiming to resell them to other buyers. In this way, the Primary Dealers create a market for government securities.
The Primary Dealers system in the government securities market was introduced by the RBI in 1995.
The PDs are thus created to promote transactions in government securities market. A facilitating arrangement is essential for selling of government securities as government is the single largest borrower in the market who borrows through the issue of its securities – treasury bills and bonds.
The RBI instructs PDs to have a minimum turnover ratio, bidding ratio, underwriting ratio, secondary market participation etc to ensure that they are active in supporting the trade in government securities. PDs are active in the stock market also for enhancing the trading of government securities.

Eligibility Conditions for PDs

a. Subsidiary of scheduled commercial bank/s and All India Financial Institutions
b. Subsidiaries/ joint ventures set up in India by entities incorporated abroad.
c. Company incorporated under the Companies Act, 1956 and does not fall under (a) or (b).
The applicant for PD should register as an NBFC for at least one year prior to the submission of application. Other conditions like net owned fund etc are mentioned by the RBI.
The decision to authorize PDs will be taken by RBI based on its perception of market needs, suitability of the applicant and the likely value addition to the system. Some other functions besides trading in government securities are also assigned to them.

Satellite dealer- satellite dealers were created 1996 as a supporting infrastructure for primary dealers and form the second tier of government trading and distribution of government securities. some of them were promoted at par with primary dealers