Sebi puts in place framework for Corporate Debt Market Development Fund

Sebi on Thursday came out with an exhaustive framework for Corporate Debt Market Development Fund

New Delhi: Capital markets regulator Sebi on Thursday came out with an exhaustive framework for Corporate Debt Market Development Fund (CDMDF) and also put in place investment guidelines for mutual funds in the units of such fund.

This came after Sebi in June notified rules for setting up of a CDMDF in the form of an Alternative Investment Fund (AIF), which will act as a backstop facility for purchase of debt securities during times of financial stress.

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This will help in instilling confidence amongst the participants in the corporate bond market and to generally enhance secondary market liquidity by creating a permanent institutional framework for activation in times of market stress.

In two separate circulars, Sebi said that CDMDF units will be subscribed by AMCs of mutual funds and specified debt-oriented Mutual Fund (MF) schemes — open-ended debt oriented mutual fund schemes excluding overnight funds and Gilt funds and including conservative hybrid funds.

Contribution from specified debt-oriented MF schemes and AMCs, including the appreciations on the same, if any, will be locked-in till winding up of the fund.

Such debt-oriented MF schemes will invest 25 basis points of their Assets Under Management (AUM) in the units of CDMDF. Further, such schemes will provide additional incremental contribution to CDMDF as the AUM increases, every six months. However, if AUM decreases there would be no return or redemption from CDMDF.

AMCs will have to make a one-time contribution equivalent to 2 basis points of the AUM of specified debt-oriented MF schemes managed by them.

Sebi said that access to the fund for selling securities during market dislocation will be open to specified mutual fund schemes in proportion to the contribution made to the CDMDF at a mutual fund level.

CDMDF would be launched as a close-ended scheme with an initial tenure of 15 years (extendable) from the date of its initial closing — date on which contribution from all AMCs and specified schemes is received by the fund.

Under the framework for CDMDF, Sebi said that the during normal times, the fund will deal in only securities such as low duration government securities (G-Sec), treasury bills, tri-party repo on G-sec and Guaranteed corporate bond repo with maturity not exceeding seven days.

Corporate debt securities to be bought by CDMDF during market dislocation include listed money market instruments. The long-term rating of issuers will be considered for the money market instruments.

However, if there is no long-term rating available for the same issuer, then based on credit rating mapping of Credit Rating Agencies (CRAs) between short-term and long-term ratings, the most conservative long-term rating will be taken for a given short-term rating, it added.

The fund will follow the fair pricing document, while purchasing corporate debt securities during market dislocation needs to follow the loss waterfall accounting.

CDMDF would buy securities from secondary markets of only investment grade, listed and having residual maturity of up to 5 years. Further, it will not buy any unlisted, below investment grade or defaulted debt securities or securities in respect of which there is a material possibility of default or adverse credit news or views.

The fund will have to disclose Net Asset Value (NAV) of the fund by 9:30 pm on all business days on the website of its investment manager and mutual fund industry body Amfi. For times when CDMDF would have exposure to corporate debt, such NAV would be disclosed by 11 pm on all business days.

With regards to fees, Sebi said that the fund will charge 0.15 per cent and 0.2 per cent of the portfolio value charged on daily pro-rata basis during normal time, and during market stress, respectively.

In addition, stock exchanges will have to provide a separate window on the existing Request for Quote (RFQ) platform to facilitate the purchase within 3 months and clearing corporations have been asked to provide required infrastructure to facilitate the trade settlement of corporate debt trades by CDMDF during market dislocation within 3 months.