Mutual funds have set aside ₹3,100 crore as part of the Corporate Debt Market Development Fund (CDMDF) created by the capital market regulator SEBI as a backstop arrangement to bailout specified debt schemes in times of crisis in the market.

The money deposited by mutual funds will be administered 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.

Mooted by SEBI

The decision on backstop facility was mooted by SEBI following the crisis unleashed by IL&FS and DHFL debt default and after Franklin Templeton Mutual Fund shut six of its debt mutual fund schemes abruptly amid the Covid pandemic.

As of October-end, the mutual fund industry has 252 debt schemes (excluding overnight and gilt funds) have asset under management of Rs 12.45 lakh crore.

DP Singh, Joint Managing Director, SBI Funds Management, told businessline that an amount of ₹3,093 crore set aside under Corporate Debt Market Development Fund has been deployed and units have been allotted to the specified debt schemes.

If there is an event of market dislocation, government will provide a guarantee to raise funds equivalent to 10 times or ₹30,000 crore to buyback illiquid debt papers from the debt schemes covered under CDMDF, he said.

“We do not foresee any disturbing event in the near future as the regulations have also been tightened recently,” he added.

Initial tenure

In June, SEBI notified rules for setting up a CDMDF in the form of a closed-ended alternative investment fund. The close-ended scheme has an initial tenure of 15 years from the date of its initial closing.

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 the AUM decreases, their investment cannot be redeemed from CDMDF.

CDMDF will invest 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.

At times when the market is normal, the fund will charge an expense of 15 basis points (bps) and this would increase to 20 bps when there is a market dislocation. Expenses include brokerages and clearing charges.