The Indian government's Rs 30,000 crore safety fund for the corporate bond market would help deepen it and also boost investor confidence, market analysts and fund managers said. The fund, which was ideated in Budget 2021, will be called the Corporate Debt Market Development Fund (CDMDF). Its purpose would be to stabilise and deepen the corporate debt market in stressful situations — for example when the global COVID-19 pandemic hit in 2020 — that could impact liquidity in the system.
The fund will run like an alternative investment fund (AIF) scheme.
SBI Mutual Fund has been tasked with managing this fund. For now, it will only cover debt mutual funds, except overnight funds and gilt funds, industry sources told CNBC TV18. Open-ended debt fund will have to contribute 25 bps of their assets to the CDMDF. In addition, asset management companies (AMCs) will also contribute some amount from their books to this fund.
“The CDMDF will be an AIF category 1 fund and SBI MF has been given the responsibility to manage it. It is a welcome step taken by the government and it will be good for the interest of the market as well as investors. Initially, we are looking at a 10 percent contribution from AMCs and the total value of the scheme will be somewhere around Rs 30,000 crore. However, we are hoping that with the increase in size of the AUM, this amount will increase to Rs 40,000-50,000 crore,” DP Singh, Deputy Managing Director at SBI Mutual Fund, said.
Global events such as the COVID-19 pandemic, heavily impacted liquidity in the corporate debt market. Such situations have led to debt fund investors taking big hits on their net asset values (NAVs). In some cases such as Franklin Templeton's, fund houses had to shut down schemes to protect the money in debt mutual funds.
Right after the liquidity crisis of 2020, Finance Minister Niramala Sitharaman had proposed the formation of a facility that could help market participants in situations such as a COVID-induced liquidity crisis. “To instill confidence among the participants in the Corporate Bond Market during times of stress and to generally enhance secondary market liquidity, it is proposed to create a permanent institutional framework. The proposed body would purchase investment grade debt securities both in stressed and normal times and help in the development of the bond market,” Sitharaman had said in her Budget 2021 speech.
The CDMDF will look to buy at five-year investment grade securities at fair value in such illiquid situations in the market. According to sources, the fund can take 10x leverage in such situations. “The decision of when the fund should be activated in a stressful situation, or if the situation is grave enough to use the fund, will be taken by the SEBI board after consideration of data points and outlook of the market,” the sources said.
Market participants believe that this move can positively impact the debt mutual funds in different ways. They said this can help mutual funds recover the loss of confidence that happened after the liquidity crisis in 2020. “We all know that Franklin Templeton was not a default issue, it was a liquidity issue. That issues became so big that investors started redeeming even from schemes that had liquid securities. I think having a government backing helps a lot on the ground and even psychologically. Distributors can now tell investors that in situations of crisis, their funds will be helped the government. At least there is a provision now. So, this will be a good step from investor confidence point of view,” Joydeep Sen, independent debt market analyst, said.
