Sebi Issues Framework To Set Up Corporate Debt Market Development Fund

The Securities and Exchange Board of India (Sebi) on July 27, 2023 announced the framework to set up the Corporate Debt Market Development Fund (CDMDF), an alternative investment fund regulated by the capital markets regulator.

The CDMDF is envisaged as a ‘backstop facility’ for purchasing investment-grade corporate debt securities in order to develop confidence among the participants during stressed market conditions. The Guarantee Scheme for Corporate Debt (GSCD) aims to provide guarantee cover against the debt raised or to be raised by CDMDF. This fund is aimed to provide stability to the market in times of market dislocation.

The working group constituted for this purpose by Sebi had representatives from different mutual funds, Clearing Corporation of India Limited (CCIL) and the Association of Mutual Funds in India (Amfi) who have recommended creating one ‘entity to buy corporate debt securities from MF schemes’.

According to Sebi’s circular, the AMCs of mutual funds and the specified debt-oriented mutual funds schemes shall subscribe to the units of the CDMDF, where the contribution, including the appreciation on the scheme, will be locked in until the winding up of the fund.  

Specified debt-oriented mutual fund schemes here are ‘open-ended debt oriented mutual fund schemes, excluding the overnight funds and gilt funds and including conservative hybrid fund’.

These specified debt-oriented schemes will invest 25 basis points (0.25 per cent) of their asset under management (AUM) in CDMDF units and will increase their contribution when their AUM increases and review it every six months. However, there will be no redemption from CDMDF in case their AUM reduces. The same applies to the specified schemes of new mutual funds or such new schemes from the existing mutual funds.

The AMCs are also required to make a contribution of 2 per cent of their specified debt-oriented schemes’ AUM as a one-time contribution. The initial contribution for this purpose will be based on the AUM as of December 31, 2022, in the specified schemes of the mutual funds.

Here, Amfi will calculate the contribution amount for each AMC and the mutual fund schemes and inform the AMCs and the CDMDF. Any delay in contribution, Sebi said in its circular, will attract a 15 per cent penalty per annum on the respective AMC for the delayed period. The interest so taken will also be credited to the CDMDF.

The CDMDF, that is created to provide security in the unstable market, will buy the ‘listed corporate debt securities from the specified debt-oriented MF schemes’ for which Sebi will determine the trigger and the period for such action.

During market dislocation, CDMDF will buy the securities from the secondary market whose maturity period left is not more than five years, and which hold the investment grade credit rating. The seller in this case will be paid 90 per cent in cash and 10 per cent in the form of CDMDF units.

The circular mentions that the mutual funds could sell the corporate debt securities in the ‘portfolio of the contributing schemes’ to the CDMDF. The access to the sell facility will be proportionate to the contribution to the CDMDF at the mutual fund level.

Besides this, the AMC will incorporate this information about contributing to the CDMDF in their Scheme Information Document by issuing an addendum before starting the contribution. The provisions of the circular issued are in force with immediate effect.