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Corporate Debt Market Development Fund

Context:

The Indian government has approved the Guarantee Scheme for Corporate Debt (GSCD) to offer a guarantee cover for the debt raised by the Corporate Debt Market Development Fund (CDMDF). The CDMDF’s objective is to stabilize the corporate bond market during periods of stress. SEBI has issued guidelines for the functioning and management of the scheme and the fund.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. Guarantee Scheme for Corporate Debt
  2. Corporate Debt Market Development Fund
  3. Key SEBI Guidelines for CDMDF

Guarantee Scheme for Corporate Debt

The Guarantee Scheme for Corporate Debt (GSCD) is a program that offers a comprehensive guarantee cover for debt raised by the Corporate Debt Market Development Fund (CDMDF).

Key Points about GSCD:
  • Objective: The primary aim of GSCD is to boost investor confidence and bring stability to the corporate debt market.
  • Management: GSCD is managed by the Guarantee Fund for Corporate Debt (GFCD), which is a trust fund created by the Department of Economic Affairs (DEA) and overseen by the National Credit Guarantee Trustee Company Ltd. This company operates under the Ministry of Finance’s Department of Financial Services.
  • Support during Market Dislocation: The scheme is designed to support the purchase of investment-grade corporate debt securities by the CDMDF during times of market dislocation.
  • Investment-Grade Corporate Debt: Investment-grade corporate debt securities refer to bonds or notes issued by companies that have a low risk of default and possess a good credit rating.
  • Risk Protection: The guarantee cover provided by GSCD ensures that investors are protected from potential risks associated with investing in investment-grade corporate debt securities.
  • Enhancing Market Liquidity: With the ability to purchase guaranteed securities under GSCD, the CDMDF contributes to enhancing liquidity in the secondary market and thereby supports the overall stability of the corporate debt market.

Corporate Debt Market Development Fund

The Corporate Debt Market Development Fund (CDMDF) is an alternative investment fund created to cater to the requirements of the corporate debt market in India. It operates as a close-ended scheme, meaning that it has a fixed term and cannot issue new units once it is launched.

Key Features of CDMDF:
  • Backstop Facility: The primary purpose of CDMDF is to serve as a backstop facility for investment-grade corporate debt securities. It provides a safety net for investors during market dislocation, offering stability and enhancing investor confidence in the market.
  • Funding Structure: CDMDF has a total backstop facility of Rs. 33,000 crore, specifically established for Mutual Funds. The government contributes Rs. 30,000 crore to the fund, and the Asset Management Companies (AMCs) contribute the remaining Rs. 3,000 crore.
  • Enhancing Secondary Market Liquidity: CDMDF aims to enhance liquidity in the secondary market by establishing a permanent institutional framework that can be activated during periods of market stress.
  • Market Stability: During times of market turmoil or instability, CDMDF steps in to provide support and stability to the corporate debt market. This helps in mitigating the impact of adverse market conditions on investors and promotes smoother market operations.

Key SEBI Guidelines for CDMDF:

The Securities and Exchange Board of India (SEBI) has formulated specific guidelines for the operation and functioning of the Corporate Debt Market Development Fund (CDMDF). These guidelines ensure transparency, market stability, and investor protection while enabling CDMDF to serve as a backstop facility for the corporate debt market.

Key SEBI Guidelines for CDMDF:

Investment Focus:

  • During normal market conditions, CDMDF primarily invests in low-duration government securities (G-sec), treasury bills, and guaranteed corporate bond repo with a maturity not exceeding seven days.

Market Dislocation:

  • When the market experiences dislocation, CDMDF steps in to purchase investment-grade corporate debt securities, providing a safety net for investors.

Trading on RFQ Platform:

  • Corporate debt securities sold by mutual fund schemes to CDMDF during market dislocation will be treated as trades executed on the Request for Quote (RFQ) platform.

Authorized Purchase:

  • CDMDF is authorized to purchase only listed corporate debt securities with a residual maturity of up to five years. It refrains from acquiring unlisted, below-investment-grade, or defaulted debt securities.
  • Securities with a material possibility of default or adverse credit news or views are also excluded.

Fair Pricing:

  • CDMDF buys securities at a fair price, considering liquidity risk, interest rate risk, and credit risk to ensure transparency and market stability. Buying or trading is done at a fair price and not at distress price.
  • Selling of securities is done at breakeven or for profit as the market stabilizes, aiming to reduce borrowing as soon as possible.

Subscription and Contribution:

  • 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 (bps) of their assets under management (AUM) to support the functioning of CDMDF.

Tenure and Extension:

  • CDMDF is launched as a closed-ended scheme with an initial tenure of 15 years. The possibility of extension lies at the discretion of the Department of Economic Affairs (DEA) in consultation with SEBI.

-Source: Indian Express


March 2024
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