The government of India recently approved the Guarantee Scheme for Corporate Debt (GSCD) to provide a guarantee cover for debt raised by the Corporate Debt Market Development Fund (CDMDF). This scheme aims to stabilize the corporate bond market during times of stress. The Securities and Exchange Board of India (SEBI) has issued guidelines for the operation and management of the scheme and the fund.
Understanding the Guarantee Scheme for Corporate Debt (GSCD)
The GSCD provides a complete guarantee cover for debt raised by CDMDF with a primary objective of enhancing investor confidence and providing stability to the corporate debt market. Managed by the Guarantee Fund for Corporate Debt (GFCD), GSCD supports the purchase of investment-grade corporate debt securities by CDMDF during market dislocation. These securities are bonds or notes issued by companies with a low risk of default and good credit rating. The guaranteed cover ensures investors are protected from potential risks associated with these investments, enhancing secondary market liquidity and the overall stability of the corporate debt market.
Role of Corporate Debt Market Development Fund (CDMDF)
The CDMDF is an alternative investment fund established to serve as a backstop facility for investment-grade corporate debt securities, thereby providing stability and enhancing investor confidence. With a backstop facility of Rs 33,000 crore established for Mutual Funds, the government contributes Rs 30,000 crore, and Asset Management Companies provide the remaining Rs 3,000 crore. In periods of market stress, CDMDF works to enhance secondary market liquidity through a permanent institutional framework acting as a safety net.
SEBI Guidelines for CDMDF
During normal market conditions, CDMDF focuses on dealing in low duration government securities, treasury bills, and guaranteed corporate bond repo with a maturity not exceeding seven days. During market dislocation, CDMDF purchases investment-grade corporate debt securities, serving as a safety net. However, CDMDF only purchases listed corporate debt securities with a residual maturity of up to five years, refraining from unlisted, below-investment-grade, or defaulted debt securities. It acquires securities at a fair price, factoring in liquidity risk, interest rate risk, and credit risk to ensure transparency and market stability.
Subscription and Contribution to CDMDF
Units of CDMDF are subscribed by Asset Management Companies (AMCs) of mutual funds and specified debt-oriented mutual fund schemes. AMCs of specified debt-oriented mutual fund schemes make a one-time contribution equivalent to two basis points of their assets under management (AUM) to support CDMDF.
Tenure of CDMDF
CDMDF will be launched as a closed-ended scheme with an initial tenure of 15 years, with a possible extension at the discretion of the Department of Economic Affairs (DEA) in consultation with SEBI.
Relevance for UPSC Civil Services Examination
Understanding these financial schemes is crucial for the UPSC Civil Services Examination. In 2019, a question emerged regarding registered foreign portfolio investors: Which of the following is issued by registered foreign portfolio investors to overseas investors who want to participate in the Indian stock market without registering themselves directly? The answer was Participatory Note. Such questions underscore the importance of understanding India’s financial markets and regulations.