The government on Thursday notified a scheme to set up a Rs 30,000 crore Corporate Debt Market Development Fund (CDMDF) to act as a safety net by investing in corporate debt securities at times of market dislocation with a view to stabilizing the markets. The move follows a FY22 Budget announcement in this regard.
The scheme would provide a stability buffer for investors in the corporate debt market and help mutual funds and others offering debt schemes to hard-sell such products.
The guarantee will cover the debt of CDMDF, along with interest accrued and other bank charges, but subject to a limit of Rs 30,000 crore, the finance ministry said.
The CDMDF, a Sebi-regulated Alternative Investment Fund, will be able to raise debt up to ten times its corpus. The fund will be created out of subscriptions by AMCs of mutual funds and specified debt-oriented MF schemes.
In a market dislocation situation, markets stop valuing or pricing assets correctly on a relative or absolute basis, often culminating in panic-selling or heightened redemption pressures. In 2022 Franklin Templeton India had to shut down six debt funds after investors began withdrawing money and the fund house could not sell its debt investments to meet these redemption pressures.
The Guarantee Fund for Corporate Debt (GFCD) would be a Trust Fund formed by Department of Economic Affairs (DEA) would be managed by National Credit Guarantee Trustee Company Ltd. The purpose of the Scheme is to provide 100% guarantee cover against debt raised/to be raised by CDMDF.
The duration of the scheme would be initially for a period of 15 years from the initial closing date of CDMDF, extendable at the discretion of the DEA in consultation with SEBI.
The six-member managing committee of the GFCD would be headed by DEA Secretary.
The contribution to the Fund shall be mandatory for the specified debt-oriented MF Schemes and AMCs as laid down by SEBI. Specified debt-oriented MF Schemes shall contribute 25 bps of their AUM to the Fund (~Rs 3,005 crore based on AUM as on August 31, 2022). AMCs shall make a one-time contribution equivalent to 2 bps of the AUM of their specified debt-oriented MF schemes. Further, AMCs of new MFs shall also make a one-time contribution equivalent to 2 bps of their specified debt-oriented MF schemes, based on the AUM at the end of the financial year following the one in which the specified schemes are launched. The Fund will be eligible to take leverage of up to 10 times of contribution to corpus, from banks or bond market or repo market which shall be guaranteed by NCGTC up to a maximum of Rs 30,000 crore.
With the aim to develop the corporate debt market in India, the government in the Budget 2021-22 announced developing a Backstop Facility for corporate debt securities.
“To instill confidence amongst the participants in the Corporate Bond Market during times of stress and to generally enhance secondary market liquidity, it is proposed to create a permanent institutional framework. The proposed body would purchase investment grade debt securities both in stressed and normal times and help in the development of the Bond market,” finance minister had said.