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Corporate Debt Market Development Fund

IAS Current Affairs

Corporate Debt Market Development Fund
Source: Indian Express
GS II:  Government Policies & Interventions; GS III: Capital market

Overview

  1. News in Brief
  2. SEBI Guidelines for CDMDF
Why in News?

The regulatory body has issued guidelines for mutual fund schemes and asset management companies regarding their investment in CDMDF units.

News in Brief
  • The Indian government has recently approved a noteworthy scheme that provides full guarantee cover for any debt raised by the Corporate Debt Market Development Fund (CDMDF).
  • This backstop facility is designed to provide investment-grade corporate debt to investors.

Monitoring the scheme

  • In order to ensure that this scheme operates effectively, the Securities and Exchange Board of India (SEBI) has released a comprehensive framework for the CDMDF.
  • Additionally, the Department of Economic Affairs (DEA) has announced that the Guarantee Fund for Corporate Debt (GFCD) will manage the Guarantee Scheme for Corporate Debt (GSCD).
  • The GFCD will be a trust fund that is run by the DEA and managed by the National Credit Guarantee Trustee Company Ltd.
  • Overall, this new scheme represents an important development in India’s corporate debt market and is likely to have a significant impact on the country’s economy in the years to come.
SEBI Guidelines for CDMDF
  • It is also worth noting that the market regulator has released detailed guidelines for mutual fund schemes and asset management companies that are interested in investing in CDMDF units.
  • The CDMDF is essentially an alternative investment fund that serves as a backstop for investment-grade corporate debt securities.
  • It will provide secondary market liquidity and a permanent institutional framework for times of market stress.

Investment

Image by sanjay k j from Pixabay
  • It’s important to understand that during normal times, CDMDF will deal in:
    • Low-duration government securities
    • Treasury bills
    • Tri-party repo on G-secs
    • Guaranteed corporate bond repo with a maturity not exceeding seven days
  • However, in times of market dislocation, CDMDF will buy corporate debt securities, including listed money market instruments, based on the long-term rating of issuers.
  • This approach will help ensure that the fund is able to provide a reliable source of support for investors during times of financial turbulence.

Investment policy

  • CDMDF, a mutual fund, follows a strict investment policy when purchasing securities from the secondary market.
  • Their focus is on investment-grade securities with a residual maturity of up to five years.
  • They do not purchase any defaulted or below-investment-grade debt securities or securities with a high risk of default or adverse credit news.
  • Furthermore, their purchases are made at a fair price, taking into account liquidity, interest rate, and credit risks, ensuring a balanced and secure investment for all stakeholders.

Payment

  • In terms of payment, the sellers of the debt securities will receive 90% of the consideration in cash and 10% in units of CDMDF
    • It provides a balanced and equitable transaction for all involved parties.

Tenure

  • In accordance with Sebi regulations, CDMDF will be launched as a close-ended scheme with an initial tenure of 15 years, with the possibility of extension subject to the discretion of the DEA in consultation with Sebi.
  • Additionally, the initial closing date will be determined by the date on which contributions from all AMCs and specified schemes have been received by CDMDF, ensuring a transparent and streamlined investment process.

Subscriptions

  • The Capital Debt Market Fund (CDMF) units are poised to receive subscriptions from mutual fund Asset Management Companies (AMCs) and specific debt-oriented MF schemes.
  • The specified schemes include open-ended debt-oriented mutual fund schemes, with the exception of overnight funds and gilt funds, as well as conservative hybrid funds.
  • As per the regulations, specified debt-oriented mutual fund schemes are required to invest 25 basis points (bps) of their assets under management (AUM) in the CDMF units.
  • It is important to note that one basis point is equal to one-hundredth of a percentage point.

One-time contribution

  • The regulator has further mandated that AMCs make a one-time contribution equivalent to two bps of the AUM of specific debt-oriented mutual fund schemes that they manage.
  • Additionally, AMCs of newly launched mutual funds are required to 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.
  • These contributions aim to ensure that the CDMF units receive adequate funding and support from the mutual fund industry.

Request for Quote (RFQ) platform

  • When mutual fund schemes invest in CDMDF, which are corporate debt securities sold during market dislocation, they will be treated as trades executed on a Request for Quote (RFQ) platform.
  • The SEBI has stated that the provisions of this circular will be effective immediately.

Securities and Exchange Board of India

  • The Securities and Exchange Board of India (SEBI) is the regulatory authority responsible for overseeing the securities market in India.
  • It was established on April 12, 1992, through the passing of the SEBI Act, 1992.
  • SEBI’s primary objective is to protect the interests of investors, promote the development of the securities market, and regulate various participants in the market.
  • Key functions and responsibilities of SEBI include:
    1. Regulation of securities market:
      • SEBI regulates and supervises various segments of the securities market, including:
        • Stock exchanges
        • Brokers
        • Mutual funds
        • Portfolio managers
        • Depositories
        • Other intermediaries
    2. Investor protection:
      • SEBI aims to safeguard the interests of investors by ensuring fair and transparent dealings in securities and preventing fraudulent and unfair trade practices.
    3. Promoting market development:
      • SEBI takes initiatives to promote the growth and development of the securities market by introducing new financial instruments and market infrastructure.
    4. Regulation of listed companies:
      1. SEBI regulates the conduct of listed companies by:
        1. Imposing disclosure requirements
        2. Corporate governance norms
        3. Regulations related to insider trading
    5. Registration and regulation of intermediaries:
      • SEBI registers and regulates various intermediaries operating in the securities market, such as:
        • Brokers
        • Sub-brokers
        • Merchant bankers
        • Credit rating agencies
    6. Prohibition of insider trading:
      • SEBI enforces strict rules against insider trading to prevent unauthorized trading based on non-public information.
    7. Regulating mutual funds:
      • SEBI regulates the functioning and operations of mutual funds to protect the interests of investors and ensure the proper functioning of these investment vehicles.
    8. Surveillance and enforcement:
      • SEBI employs surveillance mechanisms to monitor market activities and takes enforcement actions against entities found in violation of securities laws.
  • SEBI plays a crucial role in maintaining the integrity and stability of India’s securities market and ensures that market participants adhere to the necessary regulations to foster investor confidence and market efficiency.

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