Mutual fund houses will start parking ₹3,300 crore from next week into the Corporate Debt Market Development Fund (CDMDF) created by capital market regulator SEBI as a backstop arrangement to bailout specified debt schemes in times of market dislocation.

In June, SEBI notified rules for setting up a CDMDF in the form of a closed-ended alternative investment fund, which will be managed by SBI Mutual Fund. Asset management companies will make a one-time contribution equivalent to 2 bps of the AUM of specified debt-oriented schemes. The initial contribution will be based on the AUM of the specified MF schemes as of December 31, 2022.

DP Singh, Joint CEO, SBI Funds Management, told businessline that the money into the CDMDF from mutual funds will start flowing in next week, and the AIF, in times of stress, will provide liquidity by purchasing debt instruments from specified schemes.

On the basis of collection in CDMDF, the government will provide a guarantee of ₹30,000 crore. The close-ended scheme has an initial tenure of 15 years from the date of its initial closing.

A Balasubramanian, Managing Director, Aditya Birla Sun Life AMC, said that for the first time in the world, such a concept of a backstop facility is being implemented in the mutual fund industry to instill confidence in investors, and all credit should go to SEBI Chairperson Madhabi Puri Buch for making it a reality.

Incremental contribution

Besides making an initial contribution, AMCs will provide an additional incremental contribution of 25 basis points every six months if their AUM increases. However, if AUM decreases, their investment cannot be redeemed from CDMDF.

Under normal circumstances, the backstop fund will deal only with securities such as low-duration government securities (G-Sec), Treasury bills, tri-party repo on G-Sec, and guaranteed corporate bond repo with a maturity not exceeding seven days.

In times of crisis, CDMDF would buy only listed investment-grade securities with a residual maturity of 5 years and would not acquire 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.

G Pradeepkumar, CEO, Union Asset Management Company, said the investment in CDMDF will not have much impact on the net asset value of the schemes as the value of the investment will be included in the debt fund NAV.

In all, the debt funds will park ₹3,000 crore, and AMCs will have to chip in with ₹300 crore depending on their debt fund AUM, he added.