Disclaimer: Copyright infringement not intended.

Context

• SEBI approved the framework to set up a Rs 3,000 crore Corporate Debt Market Development Fund (CDMDF).

The Fund

• This fund, which will be set up in the form of an Alternative Investment Fund, will act as a backstop facility in the event of market dislocation.

Market Dislocation

• Market dislocation is a situation where markets stop valuing or pricing assets correctly in a relative or absolute basis, often culminating in panic-selling or heightened redemption pressures.

Need of the Fund

• With this Fund, Corporate Debt Market will soon get a new safety net that can be used by specified debt mutual funds in emergency situations.
• In the event of any crisis in the debt markets (we have seen many of these recently), this will instill confidence in debt market players.

Guarantor of the Fund

• This Rs 30,000 crores will be guaranteed by the National Credit Guarantee Trust Company (NCGTC), the government’s guaranteeing arm. So, it will be a sovereign guarantee. 

Purpose of the Fund

The fund will serve two purposes.

1. One: it will purchase illiquid and investment-grade corporate debt securities during times of stress to instill confidence amongst the participants in the Corporate Bond Market.
2. Two: it will act to generally enhance secondary market liquidity.

Mechanism

• When the button is triggered that we are in the middle of market dislocation and we need sovereign support, then this entity will go borrow from the banking system or repo market or wherever, and it will now have Rs 33,000 crores with which to go out and be a buyer of last resort from Mutual Funds.

Source of the Fund

• The initial Rs 3,000 crore corpus will come from Mutual Funds schemes and Asset Management Companies of mutual funds.
• The split is envisaged thus:

-9 percent from the equity of AMCs managing the specified debt oriented mutual funds that can access this facility in times of need,

-1 percent from unitholder contributions to these specific schemes, and

-90 percent from the specific schemes that will benefit.

Eligibility

• When a market dislocation is determined and the backstop framework is activated, only the contributing Mutual Funds will be able to participate.
• Each of them will be eligible to participate to the extent of their contribution. However, SEBI has clarified that this contribution will be calculated at the mutual fund level, and not the individual scheme level.

Framework for triggering of Backstop Facility

• The Board has also approved the framework for triggering of CDMDF’s asset purchases during market dislocation.
• The final decision on triggering the backstop facility will rest with the SEBI board.

NATIONAL CREDIT GUARANTEE TRUSTEE COMPANY LTD (NCGTC) National Credit Guarantee Trustee Company Ltd (NCGTC) is a private limited company incorporated under the Companies Act 1956 on March 28, 2014, established by the Department of Financial Services, Ministry of Finance, as a wholly owned company of the Government of India, to act as a common trustee company for multiple credit guarantee funds. Credit guarantee programs are designed to share the lending risk of the lenders and in turn, facilitate access to finance for prospective borrowers. The Credit Guarantee Scheme (CGS) aims to reassure the lenders in the event wherein an unit fails to repay the lender. NCGTC offers credit guarantee programmes for students, women entrepreneurs, MSMEs, vocational training needs and more, to support India's economic development. Presently, there are five dedicated credit guarantee Trusts under the Management of NCGTC viz. Credit Guarantee Fund Scheme for Educational Loans (CGFEL), Credit Guarantee Fund Scheme for Skill Development (CGFSD), Credit Guarantee Fund Scheme for Factoring (CGFF), Credit Guarantee Fund for Micro Units (CGFMU) and Credit Guarantee Fund for Stand Up India (CGFSI), Emergency Credit Line Guarantee Scheme (ECLGS), Credit Guarantee Scheme for MFIs (CGSMFI), Loan Guarantee Scheme for COVID Affected Sectors (LGSCAS) and Loan Guarantee Scheme for COVID Affected Tourism Service Sector (LGSCATSS).

Trivia: Alternate Investment Fund

• The term “alternative investment fund”, refers to the collection of pooled investment funds that infuse in venture capital, private equity, hedge funds, managed futures, and other types of investments. We can also say that an AIF is a type of investment distinct from traditional investment options such as stocks, bonds, and other debt securities.
• The Securities and Exchange Board of India’s Regulation Act, 2012 defines an Alternative Investment Fund (SEBI). AIFs can form as a corporation, a trust, or a Limited Liability Partnership (LLP).
• Generally, high-net-worth people and organizations engage in Alternative Commitment Funds since, unlike Mutual Funds, they need a large initial investment.

PRACTICE QUESTION Q. Corporate Debt Market Development Fund (CDMDF) will act as a backstop facility in the event of market dislocation. Elaborate. Also, outline the mechanism and provisions of CDMDF in detail.

Read about SEBI: https://www.iasgyan.in/daily-current-affairs/securities-and-exchange-board-of-india-sebi

Read all about Mutual Funds: https://www.iasgyan.in/daily-current-affairs/mutual-fund 

https://www.cnbctv18.com/market/a-rs-30000-crore-safety-net-for-india-corporate-debt-market-16298271.htm