Sebi paves way for Rs 33,000-crore ‘backstop’ for debt mutual funds

The Securities and Exchange Board of India (Sebi) has approved a Rs 33,000-crore backstop emergency fund for debt mutual funds (MFs) to help instil confidence in investors in the corporate bond market and also enhance secondary market liquidity.

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.

The initial corpus of Rs 3,000 crore will be contributed by asset management companies (AMCs); the rest may be borrowed from the market as and when required.

“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.

The fund will be set up in the form of an alternative investment fund (AIF) and will enjoy a guarantee from the National Credit Guarantee Trustee Company. SBI MF — the country’s largest asset manager — will be the main stakeholder for the proposed AIF.

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.

Sebi told reporters that chosen debt MFs will contribute 2 basis points of their assets under management towards the fund.

“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 fund was first envisaged in the Union Budget.

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.

The amount an AMC can avail of from this facility will be proportional to its contribution. For instance, an AMC that has contributed Rs 1,000 crore can sell papers valued up to Rs 11,000 crore

“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.

In April 2020, Franklin Templeton India MF stopped redemptions from six debt funds, citing a lack of liquidity due to the pandemic.

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.