The Union government has approved a scheme providing complete guarantee cover for debt raised by the Corporate Debt Market Development Fund (CDMDF), a backstop facility for investment-grade corporate debt that launches today.
Following this, the Securities and Exchange Board of India (Sebi) on Thursday released a framework for the CDMDF.
In a notification Wednesday, the Department of Economic Affairs (DEA) said the Guarantee Fund for Corporate Debt (GFCD) will manage the Guarantee Scheme for Corporate Debt (GSCD). The GFCD will be a trust fund formed by the DEA and managed by the National Credit Guarantee Trustee Company Ltd, a wholly-owned company of the Department of Financial Services under the Ministry of Finance.
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On Thursday, the market regulator released guidelines for investment by mutual fund schemes and asset management companies in CDMDF units.
CDMDF, an alternative investment fund, will act as a backstop for purchase of investment-grade corporate debt securities. It will enhance secondary market liquidity by creating a permanent institutional framework for activation in times of market stress. The fund will be launched by Finance Minister Nirmala Sitharaman on Friday.
During normal times, CDMDF will deal in low duration government securities (G-sec), treasury bills, tri-party repo on G-secs and guaranteed corporate bond repo with maturity not exceeding seven days.
Corporate debt securities to be bought by CDMDF during market dislocation include listed money market instruments, for which the long-term rating of issuers will be considered, Sebi said.
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CDMDF will buy only investment-grade securities from secondary markets, listed and having residual maturity of up to five years. It will not buy any unlisted, below-investment-grade or defaulted debt securities or securities in respect of which there is a material possibility of default or adverse credit news or views.
It will buy at a fair price (adjusted for liquidity risk, interest rate risk and credit risk) but not at distress price, Sebi said. The sellers of debt securities shall be paid 90 per cent of the consideration in cash and 10 per cent in terms of units of CDMDF.
Sebi said CDMDF will be launched as a close-ended scheme with an initial tenure of 15 years (extendable) from the date of its initial closing, that is, the date on which contribution from all AMCs and specified schemes is received by CDMDF, extendable at the discretion of the DEA in consultation with Sebi.
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The units of CDMDF will be subscribed by AMCs of mutual funds and specified debt-oriented MF schemes – open-ended debt oriented mutual fund schemes excluding overnight funds and gilt funds and including conservative hybrid funds.
Specified debt-oriented mutual fund schemes will invest 25 basis points (bps) of their assets under management (AUM) in the units of CDMDF. One basis point is one-hundredth of a percentage point.
AMCs will make a one-time contribution equivalent to two bps of the AUM of specified debt-oriented mutual fund schemes managed by them, the regulator said. AMCs of new mutual funds will also make a one-time contribution equivalent to two 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.
In respect of investment of mutual fund schemes in CDMDF, corporate debt securities sold by MF schemes to CDMDF during market dislocation will be treated as trade executed on Request for Quote (RFQ) platform. Sebi said the provisions of this circular will come into force with immediate effect.