Backstop Corpus For Debt Funds May Grow In Future

D.P. Singh, deputy managing director at SBI Mutual Fund, said the initial corpus is based on deliberations made about two years ago. “This (amount) was pegged to the assets under management (AUM) at that particular point in time, and since it has gone up now, the fund size would perhaps also increase in the coming years. This is a dynamic number in my view," Singh said over the phone.

On Wednesday, the Securities and Exchange Board of India (Sebi) approved setting up the Corporate Debt Market Development Fund in the form of an Alternative Investment Fund (AIF). The fund will act as a backstop to the purchase of investment-grade corporate debt securities in times of stress. Sebi said this would instil confidence among corporate bond market participants and enhance secondary market liquidity. The announcement comes about three years after Franklin Templeton closed down six debt funds, citing a lack of liquidity in April 2020.

“When such an event occurs, the liquidity pressure is there not just on mutual funds but on the entire banking, financial services and insurance (BFSI) sector," Singh said.

According to Singh, asset management companies can dip into the new fund to liquidate their securities and handle their redemption requirements at times of such liquidity crisis. Approximately ₹3,000 crore will be contributed by mutual funds, and the rest will be a credit line from lenders, guaranteed by the National Credit Guarantee Trust Co. Ltd (NCGTC). Singh said that while the list of lenders is yet to be finalized, discussions have already started.

Set up in March 2014 by the department of financial services, NCGTC is a wholly-owned company of the government and acts as a common trustee company for multiple credit guarantee funds.

“Rather than fund houses scrambling for liquidity, this backstop fund will provide it to them. In case of a liquidity crisis owing to credit events, the backstop fund will buy securities from mutual fund houses which may be illiquid at that point in time," Singh said.

Singh said the industry had seen adverse events like the 2008 global financial crisis when good securities also suddenly became illiquid and demand-supply gaps cast fear over the market.

“Some arrangement has to be in place on how to take care of that behavioural issue at such times. It will definitely help and people will not run around trying to sell securities when there is a fund," Singh said.

In the Union budget speech in 2021, finance minister Nirmala Sitharaman proposed a permanent institutional framework that would instil confidence among participants in the corporate bond market during times of stress and enhance secondary market liquidity. The proposed body would purchase investment grade debt securities both in stressed and normal times and help in the development of the bond market, she had said.

Sebi chairperson Madhabi Puri Buch said on Wednesday that the fund would be on standby in normal times and would be activated when required. Whenever there is a significant market dislocation which warrants sovereign intervention, then just like developed markets which instantly trigger asset purchase programmes, India will have the ability to quickly activate this backstop fund, she said. “It will go in there and become the buyer of last resort from the mutual funds," Buch said.