Finance Minister inaugurates bail-out facility for debt funds

Mutual Funds

Finance Minister Nirmala Sitharaman launched the Corporate Debt Market Development Fund (CDMDF) on July 28, 2023,

with the aim of advancing the corporate bond market.

The CDMDF will act as a backstop facility for specified debt funds during periods of stress in debt markets. Its function will involve purchasing investment-grade corporate debt securities when the debt markets face crises. This move is expected to bolster the confidence of mutual funds and investors in the corporate debt markets while also improving secondary market liquidity in corporate debt securities. SBI Funds Management will serve as the investment manager of the CDMDF.

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This lifeline offered to mutual funds will function as an alternative investment fund. It will be initially funded through contributions from specified debt-oriented mutual fund schemes and asset management companies of mutual funds. During times of market dislocation, specified mutual fund schemes can sell their investment-grade corporate debt securities to the CDMDF, in proportion to their contributions made to the fund at a mutual fund level. The details of such contributions by mutual fund schemes will be clearly outlined in the fact sheets and portfolio disclosures provided by the respective fund houses.

CDMDF can purchase the securities from mutual funds in times of market-wide stress. This corpus would be available only in case of a widespread contagion, and not when a single fund house faces illiquidity issues.

“The financial sector is an effective barometer of the underlying confidence in the macroeconomic fundamentals of the economy. It also reveals the growth potential. The CDMDF initiative is in the interest of both issuers and the investors,” said Finance Minister Nirmala Sitharaman.

This measure is expected to offer some respite to investors in corporate debt through debt mutual fund schemes.

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G Pradeepkumar, CEO, Union Mutual Fund says, “CDMDF is a good step to ensure liquidity in corporate bonds. In times of stress, the fund houses can sell good quality bonds at fair valuation to this fund and raise money, instead of selling those at distressed valuations.”

In April 2020, on the back of extreme illiquidity in the Indian debt markets, Franklin Templeton Mutual Fund had to suddenly wind up six of its schemes due to redemption pressure it faced at that time. Since then, the financial market regulator – Securities & Exchange Board of India (SEBI) had taken many steps to reduce the risks debt mutual funds investors are exposed to. The regulator earlier had made it mandatory for the debt schemes to invest at least 10 percent of its corpus in liquid securities. CDMDF is a step further in the same direction to enhance the liquidity of the mutual funds.

SEBI issued detailed guidelines about CDMDF and its functioning on July 27, 2023.

In the last couple of years, most debt fund managers have reduced their exposure to bonds with relatively low ratings. Even credit risk funds are selectively treading in bonds below AA ratings. Credit risk funds have to invest a minimum of 65 percent of the money in bonds with a rating of AA and below. CDMDF is seen as a pool of liquidity in stressed times, especially for schemes such as credit risk funds, wherein the fund manager is expected to invest in bonds rated AAA and government securities.