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Business News/ Money / Personal Finance/  Finance Minister launches CDMDF to bail out corporate debt funds from market-induced stress. Details here
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Finance Minister launches CDMDF to bail out corporate debt funds from market-induced stress. Details here

Nirmala Sitharaman launched the Corporate Debt Market Development Fund to relieve debt funds from stress during market turmoil and ensure liquidity in corporate bonds.

Nirmala Sitharaman launched the Corporate Debt Market Development Fund on July 28, 2023.Premium
Nirmala Sitharaman launched the Corporate Debt Market Development Fund on July 28, 2023.

The country’s Finance Minister Nirmala Sitharaman launched the Corporate Debt Market Development Fund (CDMDF) in Mumbai on July 28, 2023, with the intent to advance the corporate bond market.

The main purpose of the CDMDF is to serve as a safety net for designated debt funds in times of debt market strain. Its primary role is to acquire investment-grade corporate debt securities during market crises. This measure is anticipated to enhance the trust of mutual funds and investors in the corporate debt markets while also enhancing liquidity in the secondary market for corporate debt securities. SBI Funds Management has been appointed as the investment manager for the fund.

The CDMDF serves as a safeguard mechanism aimed at acquiring investment-grade corporate debt securities from mutual funds during periods of market turbulence. Amid market disruptions, specified mutual fund schemes have the option to sell their investment-grade corporate debt securities to the CDMDF, in proportion to their contributions to the fund. This measure ensures that mutual funds can fulfil redemption requests from investors and avoid selling their investments at significantly reduced prices.

The country’s Finance Minister said, “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."

The specific details of these contributions from mutual fund schemes will be transparently stated in the fact sheets and portfolio disclosures provided by the respective fund houses. This way, investors can make well-informed decisions about whether to invest in mutual funds that participate in the CDMDF.

The introduction of the CDMDF is a positive step that is expected to enhance the stability of the Indian corporate debt market. It demonstrates SEBI's commitment to fostering the growth of the Indian capital markets and safeguarding the interests of investors.

It will be overseen by a proficient asset management company and will be endowed with a total corpus of Rs 50 billion and would be open for subscription for a period of one year.

How will CDMDF work?

In times of market stress, a designated mutual fund scheme has the option to sell its investment-grade corporate debt securities to the CDMDF in proportion to its contributions to the fund. The fund will purchase these securities at a fair and reasonable price, considering the prevailing market conditions.

Upon selling the debt securities to the fund, the sellers will receive 90 per cent of the consideration in cash and the remaining 10 per cent in the form of units of the CDMDF. The cash payment will be disbursed within three days of the sale, while the issuance of units will take place within ten days of the sale.

The CDMDF will operate as a close-ended fund with an initial tenure of 15 years, which can be extended as per the fund's provisions. Consequently, the units of the fund cannot be redeemed before the expiration of the initial tenure. However, after the initial tenure's conclusion, the redemption of the units will be subject to the terms and conditions specified by the fund.

On each business day, the CDMDF will publish its net asset value (NAV) by 9:30 pm. However, in times of market dislocation when the fund holds corporate debt, the NAV announcement will be made by 11:00 pm on the same business day.

How debt schemes will contribute to CDMDF?

All debt schemes (excluding gilt funds and overnight funds) of mutual funds will be required to invest 25 basis points of their assets under management (AUM) in the units of the CDMDF. This translates to 0.025 per cent of their AUM.

The initial contribution must be made by December 10, 2023. Subsequently, these schemes will need to make additional contributions every six months if their AUM increases. The contributions should be completed within 10 days of the end of each half-year.

Failure by the asset management company (AMC) to make the contribution within the stipulated time will result in them being liable to pay an interest rate of 15 per cent.

To illustrate the contribution process, consider a debt scheme with an AUM of Rs 100 crores. It will need to invest Rs 2.5 crores in the CDMDF. If the scheme's AUM increases to Rs 120 crore by June 2024, an additional contribution of Rs 3 crore would be required. The total contribution made by the scheme will be Rs 5.5 crore.

A circular from the Securities and Exchange Board of India (SEBI) read, “The respective mutual funds shall have access to 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 mutual fund level — that is, in the ratio of total units of CDMDF held by all specified debt schemes of each mutual fund."

The contributions from debt schemes serve as the initial funding for the CDMDF. These funds will be utilized to purchase investment-grade corporate debt securities from mutual funds during times of market stress. This measure ensures that mutual funds can fulfil redemption requests from investors and avoid selling their investments at distressed prices.

SEBI has emphasized that the regulations concerning the CDMDF will be implemented immediately. As a result, debt mutual fund investors will now benefit from an additional layer of security for their investments in debt funds, particularly during periods of market stress.

 

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What are short duration debt funds? 

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Published: 28 Jul 2023, 04:24 PM IST
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