Termed the Corporate Debt Market Development Fund (CDMDF), the initiative is designed to help MFs tide over instances of liquidity crisis in the debt market in case of a major credit event/market dislocation.
“It’s a positive move. In case of a credit event, the fund will provide liquidity to MFs to meet redemption pressure,” said D P Singh, deputy managing director, SBI MF.
AMCs’ contribution to the corpus will be proportional to their total debt assets. The bigger the size of debt schemes, the higher will be the contribution of that AMC.
“Our model has been built and approved by the government. This model, along with deliberations by the board, will be the basis of triggering the fund,” said Sebi Chairperson Madhabi Puri Buch.
The regulator will decide if the credit situation merits intervention by the fund. Once the fund is pressed into action, MFs can sell debt papers to CDMDF to tackle redemption pressure from unitholders.
“Liquidity is still a challenge for the debt market. We have seen multiple events in the past few years — from Covid-19 to Dewan Housing Finance Corporation and the Infrastructure Leasing & Financial Services crises — when liquidity had dried up. In such scenarios, MF schemes are forced to sell good papers at distressed prices to pay unitholders wanting to redeem them. This initiative will solve that problem to a great extent,” said Alok Saigal, president and head, Nuvama Private.
The fund will “act as a backstop facility for the purchase of investment-grade corporate debt securities during the times of stress to instil confidence in the participants in the corporate bond market and to generally enhance secondary market liquidity. CDMDF, based on a guarantee to be provided by the National Credit Guarantee Trustee Company, may raise funds, for the purchase of corporate debt securities during market dislocation,” Sebi said in a media release.