In a bid to develop the corporate debt market and instill confidence among investors, market regulator SEBI has put in place a framework for rolling out the Corporate Debt Market Development Fund (CDMDF) under which mutual funds will have to contribute 25 basis points (bps) of the specified debt asset under management to the fund.

The initial contribution of mutual funds to CDMDF will be based on AUM of the specified MF schemes as of last December-end. The specified schemes include debt-oriented funds excluding overnight and gilt funds. The move will lead to a contribution of ₹2,242 crore by mutual funds to CDMDF.

“With this framework, the regulator also appears to be focussed on averting another Franklin Templeton-type debt fund crisis. SEBI is trying to protect investors in debt funds by asking the mutual fund asset management companies to create the fund which can act as a backstop in such emergencies,” said a market expert.

The CDMDF will purchase investment grade corporate bonds from fund houses in distress to help them meet redemption requests. The backstop will also prevent disruption in fund raising in corporate bond markets during such crises. Since the initial contribution to the CDMDF will need to come from the AMCs, it is expected that they will be more judicious about their debt fund investments. With the aid given to fund houses dependent on their contribution, the corpus is expected to increase over the years.

Guarantee scheme notified

On Wednesday, the government notified the Guarantee Scheme for Corporate Debt which includes the Framework for Corporate Debt Market Development Fund.

AMFI will calculate and inform on the contribution to be made by each MF scheme. The initial contribution has to be made in 10 working days on request from CDMDF. The half-yearly contributions will start this December, said SEBI in a circular on Wednesday.

CDMDF will be launched as a close ended scheme with an initial tenure of 15 years from the date of the initial closing after contribution from all AMCs.

The specified debt schemes have to make incremental contribution as their AUM increases, every six months to ensure 25 bps of scheme asset is invested in units of CDMDF. However, if debt AUM decreases there shall be no return or redemption from CDMDF, SEBI said.

In case of delay in contribution, AMCs have to pay interest of 15 per annum for delayed period. Such interest shall be credited to the fund of CDMDF.

One-time contribution

Further, AMCs of new mutual funds shall also make a one-time contribution equivalent to two bps of their specified debt- schemes, based on the AUM at the end of the financial year.

In times of market dislocation, CDMDF shall purchase listed corporate debt securities from the specified debt-oriented MF schemes. The trigger and period for which the backstop facility will be open will be as decided by SEBI.

Mutual funds can sell corporate debt securities during market dislocation, held in the portfolio of contributing schemes, to the CDMDF. Access to the fund shall be in proportion to the contribution made to the Fund at a MF level.

The securities purchased by CDMDF would be from secondary market, having investment grade credit rating and residual maturity not exceeding five years on the date of purchase.

CDMDF will not buy any unlisted or below investment grade or defaulted debt securities or securities with possibility of default or adverse credit news or views.

It will buy the securities at a fair price but not at distress price. The utilisation of such facility by specified debt-oriented MF schemes shall be voluntary.

The sellers of debt securities will be paid 90 per cent of the consideration in cash and 10 per cent in terms of units of CDMDF. Such units paid as consideration will bear the risk of first loss and can be redeemed during the tenure of scheme.

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