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Sebi Greenlights Backstop Fund For Corporate Debt Market

By - King Stubb & Kasiva on April 21, 2023

  • The Securities and Exchange Board of India (‘the Board’) has announced the formation of a new fund, the ‘Corporate Debt Market Development Fund’ (CDMDF), to support the corporate debt market and prevent panic selling in times of market turbulence.
  • The fund, which is worth Rs 330 billion ($4 billion), will help ensure that India's corporate debt market remains liquid during times of stress and lessen redemption pressures, thus avoiding situations such as the one involving Franklin Templeton Mutual Fund.[1]
  • SEBI's approval of the changes allows for the creation of the alternative investment fund-based backstop facility, which will allow for the emergency acquisition of investment-grade corporate debt instruments during times of stress. The CDMDF will have a corpus of INR 3,000 crores, with INR 2,700 crores will come from mutual fund debt plans. The corporate bond backstop fund will have a sovereign guarantee and 10x leverage.
  • The fund will improve secondary market liquidity and increase investor confidence in the corporate bond market. It will also help participants in the market feel more secure in times of market downturns. To raise funds for the purchase of corporate debt securities during a market downturn, the CDMDF may rely on a guarantee from the National Credit Guarantee Trust Corporation (NCGTC).
  • The CDMDF will also be initially funded by specified debt-oriented mutual fund schemes and mutual fund asset management providers. Certain mutual fund schemes will have access to the fund in proportion to their mutual fund level contribution, allowing them to sell securities during a market disruption.
  • SEBI's decision also extends the time of compliance for large corporations to raise 25% of their additional borrowings through the debt market from the existing two years to a continuous block of three years. Additionally, for High Value Debt Listed Entities (HVDLEs), SEBI has decided to prolong the "comply or explain" period with regard to corporate governance standards until March 31, 2024.


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