FM Nirmala Sitharaman to launch backstop fund, AMC Repo Clearing on Friday

Both Sebi initiatives aimed at developing corporate bond market

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Finance Minister Nirmala Sitharaman will launch the Rs. 33,000-crore backstop fund for mutual funds (MFs) on Friday. The backstop facility, termed the Corporate Debt Market Development Fund (CDMDF), was cleared by the capital markets regulator, the Securities and Exchange Board of India (Sebi), in March.

The fund corpus will be created by pooling money from debt schemes. The initiative aims to provide liquidity to debt schemes during periods of market stress.

According to a Sebi circular issued on Thursday, debt schemes — excluding passive, overnight, and gilt funds — will contribute 25 basis points (bps) of their assets under management towards the creation of the CDMDF.

Conservative hybrid funds will also contribute to the fund. In addition, asset management companies (AMCs) will make a one-time contribution of 2 bps.

The total collection will be around Rs. 3,300 crore. The fund can avail itself of credit for up to 10 times the initial corpus whenever needed. The circular also details the investment framework of the CDMDF and the pricing models.

During phases of market dislocation, MF schemes will be able to sell their investment-grade papers to the CDMDF at a fair value rather than selling at distressed prices in the market to meet redemptions. They can sell bonds to the fund to the extent of their contribution.

The fund has been set up in the form of an alternative investment fund and will enjoy a guarantee from the National Credit Guarantee Trustee Company.

From the same stage in Mumbai, Sitharaman will flag off the AMC Repo Clearing, a limited-purpose clearing corporation backed by Sebi and funded by AMCs. The platform will help all regulated entities — such as AMCs, insurance companies, market makers, and short-term traders — take positions and manage their risks in listed corporate bonds and debentures (non-convertible debt securities), commercial papers, and certificates of deposit.

Market players say both initiatives will help deepen the corporate bond markets and safeguard investors from market shocks.

Free from debt

• Initiative by FM, CDMDF aimed at providing liquidity to debt schemes 
• Fund corpus will be created by pooling money from debt schemes 
• Debt schemes will contribute 25 bps of their assets AUM towards the creation of the CDMDF
• Both initiatives will help deepen corporate bond markets, say market players