The Securities and Exchange Board of India (SEBI) has taken a significant step towards bolstering the corporate debt market by introducing the guidelines for the Corporate Debt Market Development Fund (CDMDF). This fund serves as a backstop facility to ensure the smooth functioning of the corporate debt market during times of market stress.
Purpose and Objectives of CDMDF
The primary purpose of the Corporate Debt Market Development Fund (CDMDF) is to act as a safeguard facility that will facilitate the purchase of investment-grade corporate debt securities during market dislocations. By providing liquidity support to specified debt funds during financial crises, the CDMDF aims to instill confidence among participants in the corporate debt market and enhance secondary market liquidity.
Management of Guarantee Fund for Corporate Debt (GFCD)
The Guarantee Fund for Corporate Debt (GFCD) will oversee the Guarantee Scheme for Corporate Debt (GSCD). The GFCD will function as a trust fund, managed by the National Credit Guarantee Trustee Company Ltd, which is wholly-owned by the Department of Financial Services under the Ministry of Finance. This arrangement ensures effective oversight and management of the fund.
Eligible Investments for CDMDF
The CDMDF, classified as an alternative investment fund, will primarily invest in low-duration government securities (G-Sec), treasury bills, tri-party repo on G-Secs, and guaranteed corporate bond repos with a maturity not exceeding seven days during regular market conditions. However, during market dislocations, the CDMDF will have the flexibility to purchase listed money market instruments, considering the long-term rating of issuers. It will only invest in investment-grade securities from secondary markets, listed and having a residual maturity of up to five years, while strictly avoiding unlisted, below-investment-grade, and defaulted debt securities.
Fair Pricing and Mode of Transaction
The CDMDF will ensure that the purchase of debt securities is conducted at a fair price, taking into account factors such as liquidity risk, interest rate risk, and credit risk. The fund will steer clear of distressed pricing to maintain market stability. Sellers of debt securities will receive 90% of the consideration in cash and 10% in the form of CDMDF units, providing them with additional exposure to the fund.
Investment by AMCs and Mutual Fund Schemes
To boost participation, the units of the CDMDF will be subscribed by Asset Management Companies (AMCs) of mutual funds and specified debt-oriented mutual fund schemes. Notably, overnight funds and gilt funds will be excluded, while conservative hybrid funds will be included in the eligible schemes. Specified debt-oriented mutual fund schemes will invest 25 basis points (bps) of their Assets Under Management (AUM) in CDMDF units.
Corporate Debt Market Development Fund: Potential Impact
The introduction of the CDMDF is a commendable move by SEBI to strengthen the corporate debt market and provide a safety net during times of financial stress. With the proposed initial corpus of Rs 3,000 crore, contributed by mutual funds, the CDMDF will be able to raise funds up to Rs 30,000 crore through a ten-time leverage approved by the government. This additional corpus will significantly enhance the fund’s ability to support the corporate debt market and promote liquidity.
