HomeMarket NewsA Rs 30,000 crore safety net for India's corporate debt market

A Rs 30,000 crore safety net for India's corporate debt market

SEBI approves framework for corporate debt market development fund as backstop facility for specified debt funds.

By CNBCTV18.com March 30, 2023, 8:48:03 AM IST (Updated)

The Corporate Debt Market will soon get a new safety net that can be used by specified debt mutual funds in emergency situations. The board of market regulator SEBI on Wednesday approved the framework to set up a Rs 3,000 crore Corporate Debt Market Development Fund (CDMDF). This fund, which will be set up in the form of an Alternative Investment Fund, will act as a backstop facility in the event of a market dislocation.

Market dislocation is a situation where markets stop valuing or pricing assets correctly in a relative or absolute basis, often culminating in panic-selling or heightened redemption pressures. Remember, in 2022 Franklin Templeton India had to shut down 6 debt funds after investors began withdrawing money and the fund house could not sell it debt investments to meet these redemption pressures.

The government has approved a 10-time leverage to this fund, meaning a corpus of Rs 30,000 crores. "This Rs 30,000 crores will be guaranteed by the National Credit Guarantee Trust Company (NCGTC), the government’s guaranteeing arm. So it will be a sovereign guarantee," SEBI chairperson Madhabi Puri Buch explained.

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The fund will serve two purposes. One: it will purchase illiquid and investment-grade corporate debt securities during times of stress to instill confidence amongst the participants in the Corporate Bond Market. Two: it will act to generally enhance secondary market liquidity.

"When the button is triggered that we are in the middle of a market dislocation and we need sovereign support, then this entity will go borrow from the banking system or repo market or wherever, and it will now have Rs 33,000 crores with which to go out and be a buyer of last resort from Mutual Funds," Buch said.

The initial Rs 3,000 crore corpus will come from Mutual Funds schemes and Asset Management Companies of  mutual  funds. The split is envisaged thus: 9 percent from the equity of AMCs managing the specified debt oriented mutual funds that can access this facility in times of need, 1 percent from unitholder contributions to these specific schemes, and 90 percent from the specific schemes that will benefit.

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When a market dislocation is determined and the backstop framework is activated, only the contributing Mutual Funds will be able to participate. Each of them will be eligible to participate to the extent of their contribution. However, SEBI has clarified that this contribution will be calculated at the mutual fund level, and not the individual scheme level.

The Board has also approved the framework for triggering of CDMDF’s asset purchases during market dislocation. The final decision on triggering the backstop facility will rest with the SEBI board. "A very elaborate framework has been built, analysed and approved by the government specifically. Of course, all models are meant to be reviewed from time to time because we expect this will be a very long-term facility," Buch said.

Also Read: India's corporate debt market fund will help boost liquidity and confidence in the bond market