On July 27, 2023, the Securities and Exchange Board of India (SEBI) made a crucial announcement regarding the Corporate Debt Market Development Fund (CDMDF), a regulatory-backed “backstop facility.” The primary objective of this fund is to bolster market confidence and offer support during periods of market stress by acquiring investment-grade corporate debt securities. The Guarantee Scheme for Corporate Debt (GSCD) is set to provide guarantee cover for the debt raised or to be raised by the CDMDF, enhancing market stability during turbulent times.
A working group, composed of representatives from different mutual funds, the Clearing Corporation of India Limited (CCIL), and the Association of Mutual Funds in India (AMFI), played a pivotal role in establishing the CDMDF. The group recommended the creation of a singular entity responsible for purchasing corporate debt securities from specified debt-oriented mutual fund schemes.
Under the scheme, specified debt-oriented mutual fund schemes, excluding overnight funds and gilt funds, as well as conservative hybrid funds, will invest 0.25% (25 basis points) of their assets under management (AUM) in CDMDF units. This initial contribution, along with any appreciation, will remain locked until the fund’s eventual winding up.
As the AUM of the specified schemes grows, their contributions to the CDMDF will also increase, with a review of contributions every six months. However, in case the AUM of the specified schemes reduces, there will be no redemption from the CDMDF.
The AMCs of mutual funds have a one-time obligation to contribute 2% of the AUM of their specified debt-oriented schemes based on their AUM as of December 31, 2022. Any delay in contributions will attract a penalty of 15% per annum on the respective AMC for the delayed period, with the interest credited to the CDMDF.
The CDMDF will fulfill its role by purchasing listed corporate debt securities from specified debt-oriented mutual fund schemes when triggered by SEBI during a specified period. The eligible securities for purchase will be from the secondary market, with a remaining maturity period of not more than five years and holding an investment grade credit rating.
When selling corporate debt securities to the CDMDF, sellers will receive 90% of the payment in cash and 10% in the form of CDMDF units. Access to the sell facility will be proportionate to the mutual fund’s contribution to the CDMDF.
The circular issued by SEBI on the provisions of the CDMDF is effective immediately. Mutual fund AMCs will incorporate information about contributing to the CDMDF in their Scheme Information Document by issuing an addendum before initiating the contribution.