The Securities and Exchange Board of India (Sebi) has recently unveiled the guidelines for the Corporate Debt Market Development Fund (CDMDF), ahead of its official launch by the finance minister, Nirmala Sitharaman, in Mumbai. The CDMDF is designed to act as a backstop facility, facilitating the purchase of investment-grade corporate debt securities during times of market stress, thereby bolstering confidence among participants in the corporate debt market.
Guarantee Fund for Corporate Debt (GFCD) Oversight
The Department of Economic Affairs (DEA) will oversee the Guarantee Fund for Corporate Debt (GFCD), which will be responsible for managing the Guarantee Scheme for Corporate Debt (GSCD). The GFCD will function as a trust fund, managed by the National Credit Guarantee Trustee Company Ltd, wholly-owned by the Department of Financial Services under the Ministry of Finance.
Scope of CDMDF Investment
Sebi has issued guidelines for mutual fund schemes and asset management companies regarding investment in CDMDF units. The CDMDF, classified as an alternative investment fund, will act as a safeguard for the purchase of investment-grade corporate debt securities.
During regular market conditions, the CDMDF will primarily deal with low-duration government securities (G-sec), treasury bills, tri-party repo on G-secs, and guaranteed corporate bond repo with a maturity not exceeding seven days.
Purchase Criteria during Market Dislocations
In times of market dislocations, the CDMDF will shift its focus to listed money market instruments, considering the long-term rating of issuers. It will only purchase investment-grade securities from secondary markets that are listed and have a residual maturity of up to five years. The CDMDF will avoid investing in unlisted, below-investment-grade, defaulted debt securities, or securities with a high risk of default or adverse credit news/views.
Fair Pricing and Payment Structure
The CDMDF will purchase securities at a fair price, taking into account liquidity risk, interest rate risk, and credit risk. Distressed pricing will be avoided to maintain market stability and investor confidence. Sellers of debt securities will receive 90% of the consideration in cash and 10% in the form of CDMDF units.
About the Corporate Debt Market Development Fund: Purpose and Objectives
The Corporate Debt Market Development Fund (CDMDF) is a backstop facility for specified debt funds during market dislocations. Its primary aim is to provide liquidity support in the event of a financial crisis, instilling confidence among participants in the corporate bond market and enhancing secondary market liquidity.
Initial Corpus and Additional Leverage
The CDMDF will have an initial corpus of Rs 3,000 crore, which will be contributed by mutual funds. To bolster its capacity, the government has approved a 10-time leverage of the fund, allowing the CDMDF to raise funds up to Rs 30,000 crore.
Contributors and Guarantees
Contributions to the fund can be made by specified debt-oriented mutual fund schemes and asset management companies of mutual funds. The fund is guaranteed by the National Credit Guarantee Trust Company (NCGTC), and the backstop facility will be managed by SBI Mutual Fund.
Access for Specified Mutual Fund Schemes
Specified debt-oriented mutual fund schemes will have access to the CDMDF for selling securities during market dislocations. The level of access will be proportional to the contribution made to the fund at a mutual fund level.
