Understanding Corporate Debt Market Development Fund (CDMDF)
Background to Debt Market Development Fund
Back in Apr2020, Prof. Jayant R Varma proposed setting up of a guarantee fund to protect the unitholders of debt mutual funds in the event of any financial troubles in the corporate debt market.
Debt mutual funds area a vital cog in the Indian financial system. They provide funding for coporates, banks and non-financial banking companies (NBFCs) and play an important role in corporate debt markets.
As argued by Prof Varma, some sort of a sovereign backstop is needed for the debt mutual funds in the larger interest of financial stability and giving fillip to a vibrant debt market in India.
The suggestion from Prof Varma came in the backdrop of winding up, in April 2020, of six debt mutual fund schemes by Franklin Templeton India Mutual Fund. The Franklin Templeton debt funds fiasco caused a major upheaval in the debt mutual fund industry in 2020 and caused temporary losses (in fact, permanent losses for many) for debt fund unitholders in an awful way.
In 2020, debt mutual fund schemes in India faced huge redemption pressures, due to downgrading of debt instrements of some debt-ridden corporates. Between 2018 and 2020, heavily-indebted firms in India faced debt servicing problems in the aftermath of COVID-19 Pandemic and collapse of IL&FS (Infrastructure Leasing and Financial Services) in 2018.
Fast Forward to Now
Securities and Exchange Board of India (SEBI), India's capital market regulator is proposing to set up a Corporate Debt Market Development Fund (CDMDF).
In a press release dated 29Mar2023, SEBI says the CDMDF will be in the form of an Alternative Investment Fund (AIF) and acts as a backstop facility for purchase of investment-grade corporate debt securities during times of financial stress.
Initial corpus for CDMDF will come from debt mutual fund schemes and asset management companies (AMCs).
In times of market dislocation, the fund (based on a guarantee from National Credit Guarantee Trust Company or NCGTC) will buy corporate debt securities from debt mutual funds and provide liquidity to the debt funds.
Such a guarantee fund will provide a relief to debt mutual funds and prevent any redemption pressures in times of panic.
A screenshot of the relevant information >
Various media reports on 29Mar2023 suggested the CDMDF will have an initial corpus of Rs 3,000 crore being funded, inter alia, by AMCs and debt mutual fund schemes -- and the fund will have ten times leverage and sovereign guarantee through NCGTC.
It is expected the move by SEBI to set up CDMDF will boost investor confidence in Indian debt mutual fund industry.
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P.S.: The following weblinks / references have been added after the blog was posted on 30Mar2023 >
06Sep2023 SEBI circular - clarification regd investment by mutual fund schemes and AMCs in units of CDMDF
28Jul2023 PIB press release - Finance Minister today inaugurated CDMDF and initiated the trading on the limited purpose clearing corporation (LPCC) called AMC Repo Clearing Corporation Ltd (AMC RCCL) - LPCC and AMC RCCL to provide triparty repo services and central counterparty (CCP) services -
Excerpts from above press release >
Backstop Facility:
The Department of Economic Affairs, Ministry of Finance, Government of India, has notified the establishment of ‘Guarantee Scheme for Corporate Debt’ (GSCD) for the purpose of providing guarantee cover against debt to be raised by Corporate Debt Market Development Fund (CDMDF) which will act as a backstop in the corporate debt market, in times of market dislocation. The genesis of backstop facility was set forth as part of the Union Budget 2021-22 announcement.
The GSCD is envisaged to be managed by the Guarantee Fund for Corporate Debt (GFCD), a Trust Fund formed by DEA with a corpus of Rs 310 crore. The GFCD will be managed by National Credit Guarantee Trustee Company Ltd. (NCGTC), a wholly owned company of the Department of Financial Services (DFS), Ministry of Finance, Government of India. The Trust would provide guarantee cover for loans not exceeding Rs. 30,000 crore, to be raised by CDMDF during times of market dislocation. NCGTC will give the guarantee as a standing facility, initially for 15 years. The SEBI Board shall decide the trigger of debt market disruption warranting the Backstop Facility to operate in times of market dislocation and consequently the need for activation of the guarantee by the NGCTC.
CDMDF is notified as an Alternative Investment Fund (AIF) in the form of a Trust under SEBI (AIF) Regulations. It would purchase investment grade debt securities both in stressed and normal times and help in development of the bond market. The units of CDMDF shall be subscribed by Asset Management Companies (AMCs) of Mutual Funds (MFs) and “specified debt-oriented MF Schemes.
Limited Purpose Clearing Corporation:
As another initiative to deepen corporate bond markets, the Limited Purpose Clearing Corporation (LPCC) named as AMC Repo Clearing Corporation Limited started functioning with the first transaction done today. LPCC has been set up with the purpose of clearing and settlement of corporate bond repo transactions and to develop an active repo market, which will, in turn, improve liquidity in the underlying corporate bond market. This institution will create a vibrant corporate bond repo market that allows market makers to access cost effective funding for their inventory, that allows holders of bonds to meet their short term liquidity needs without having to liquidate their assets and the opportunity to entities with short term surpluses to deploy their funds in a safe and efficient manner, can all be achieved through this institution.
The Department of Economic Affairs, Ministry of Finance, Government of India, has notified the establishment of ‘Guarantee Scheme for Corporate Debt’ (GSCD) for the purpose of providing guarantee cover against debt to be raised by Corporate Debt Market Development Fund (CDMDF) which will act as a backstop in the corporate debt market, in times of market dislocation. The genesis of backstop facility was set forth as part of the Union Budget 2021-22 announcement.
The GSCD is envisaged to be managed by the Guarantee Fund for Corporate Debt (GFCD), a Trust Fund formed by DEA with a corpus of Rs 310 crore. The GFCD will be managed by National Credit Guarantee Trustee Company Ltd. (NCGTC), a wholly owned company of the Department of Financial Services (DFS), Ministry of Finance, Government of India. The Trust would provide guarantee cover for loans not exceeding Rs. 30,000 crore, to be raised by CDMDF during times of market dislocation. NCGTC will give the guarantee as a standing facility, initially for 15 years. The SEBI Board shall decide the trigger of debt market disruption warranting the Backstop Facility to operate in times of market dislocation and consequently the need for activation of the guarantee by the NGCTC.
CDMDF is notified as an Alternative Investment Fund (AIF) in the form of a Trust under SEBI (AIF) Regulations. It would purchase investment grade debt securities both in stressed and normal times and help in development of the bond market. The units of CDMDF shall be subscribed by Asset Management Companies (AMCs) of Mutual Funds (MFs) and “specified debt-oriented MF Schemes.
Limited Purpose Clearing Corporation:
As another initiative to deepen corporate bond markets, the Limited Purpose Clearing Corporation (LPCC) named as AMC Repo Clearing Corporation Limited started functioning with the first transaction done today. LPCC has been set up with the purpose of clearing and settlement of corporate bond repo transactions and to develop an active repo market, which will, in turn, improve liquidity in the underlying corporate bond market. This institution will create a vibrant corporate bond repo market that allows market makers to access cost effective funding for their inventory, that allows holders of bonds to meet their short term liquidity needs without having to liquidate their assets and the opportunity to entities with short term surpluses to deploy their funds in a safe and efficient manner, can all be achieved through this institution.
27Jul2023 SEBI circular - Investment by Mutual Fund Schemes and AMCs in units of CDMDF -
-- CDMDF shall be launched as a closed end scheme with an initial tenure of 15 years (extendable) from the date of its initial closing (date on which contribution from all AMCs and specifiedschemes is received by CDMDF)
-- The units of CDMDF shall be subscribed by AMCs of Mutual Funds and “specified debt-oriented MF Schemes” (i.e., Open ended Debt oriented Mutual Fund schemes excluding Overnight funds and Gilt funds and including Conservative Hybrid funds) - index funds and ETFs are also excluded
-- Specified debt-oriented MF Schemes shall invest 25 basis points (bps) of their Assets Under Management (AUM) in the units of CDMDF. The specified MF schemes shall provide additional incremental contribution to CDMDF as their AUM increases, every six months to ensure 25 bps of scheme AUM is invested in units of CDMDF. However, if AUM decreases there shall be no return or redemption from CDMDF
-- AMCs shall make a one-time contribution equivalent to 2 bps of the AUM of specified debt-oriented MF Schemes managed by them
-- The units of CDMDF shall be subscribed by AMCs of Mutual Funds and “specified debt-oriented MF Schemes” (i.e., Open ended Debt oriented Mutual Fund schemes excluding Overnight funds and Gilt funds and including Conservative Hybrid funds) - index funds and ETFs are also excluded
-- Specified debt-oriented MF Schemes shall invest 25 basis points (bps) of their Assets Under Management (AUM) in the units of CDMDF. The specified MF schemes shall provide additional incremental contribution to CDMDF as their AUM increases, every six months to ensure 25 bps of scheme AUM is invested in units of CDMDF. However, if AUM decreases there shall be no return or redemption from CDMDF
-- AMCs shall make a one-time contribution equivalent to 2 bps of the AUM of specified debt-oriented MF Schemes managed by them
27Jul2023 SEBI circular - Framework for Corporate Debt Market Development Fund - CDMDF -
24Jul2023 BL: Finance Minister to launch Rs 33,000 crore backstop fund bonds on Friday - CDMDF - AIF (alternative investment fund) - CDMDF to be managed by SBI Asset Management Company -
27Jun2023 SEBI - Memorandum to SEBI Board - Framework for CDMDF - backstop facility - comparison of CDMDF with three categories of AIF (page 16 of the PDF) - minimum corpus of CDMF Rs 3,088 crore - leverage can be upto 10 times the corpus using guarantee extended by Govt of India - as per proposed regulatory mandate, initial contribution of specified debt-oriented mutual fund schemes may be approximately Rs 2,860 Crore and the one time contribution of AMCs shall be approximately Rs 228 Crore (total Rs 3,088 crore) (page 21) - loss waterfall (page 32) -
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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