Union Finance Minister Nirmala Sitharaman | File photo: PTI
The Securities and Exchange Board of India will set up Corporate Debt Market Development Fund (CDMDF) to provide liquidity to mutual funds and other participating institutional investors in the corporate bond market, Finance Minister Nirmala Sitharaman
As the financial sector evolves from a bank-dominated system to a market-oriented system, supporting financial markets has become an important aspect, Sitharaman said. “Hence a permanent arrangement of an SPV facility is considered for providing liquidity, so that they can act as the buyer of the last resort, during stress times, and to some extent even acting as a market maker during times of peace,” she said.
Mutual funds account for 60%-70% of trades in corporate bond market, commercial papers and certificate of deposits, thereby facilitating fundraising by issuers such as banks, corporates, NBFCs, and Housing Finance Corporations, Sitharaman said.
“Selling off, and selling by mutual funds, leads to a contagion effect, we saw recently how because of one of the mutual funds, having a genuine problem, had a very rattling effect in the market. So there is advantage in moving to bond market from bank finance-led model,” Sitharaman said.
The new fund will be set up as an alternative investment fund, and SEBI
is working on the operational details of this facility in consultation with the Department of Economic Affairs. The special SPV is proposed to be jointly set up with the contribution of mutual funds, and also other institutional investors. The majority ownership shall be with a subsidiary of a public sector mutual fund, she said.
Sitharaman, in her Budget Speech, had said, “To instill confidence amongst the participants in the corporate bond market during times of stress and to generally enhance secondary market liquidity, it is proposed to create a permanent institutional framework. The proposed body would purchase investment grade debt securities both in stressed and normal times and help in the development of the bond market.”
The key mandate of the fund will be to trade in corporate debt with a focus on below AAA rated papers, Sitharaman said. However, those papers will have to be of investment grade during non-stress period, she added. The fund will also have the capability to buy and hold, single or a basket of, corporate debt securities from secondary market during times of systemic stress.
This would help in dealing with a late 2019-like situation when NBFCs faced liquidity issues, and were holding corporate debt papers below investment grade. “That experience has been teaching us a few things, which I'm glad the SEBI
is addressing in this form, so that they will have a given formulation to address such stress during stressful time, and during normal times,” she said.
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RBI’s line of credit to help DFI
Responding to questions from members of Rajya Sabha, Sithraman said the new Development Finance Institution will be able to access the line of credit from the Reserve Bank of India, which will help it in quickly meeting demands, particularly for creating social sector infrastructure. Sitharaman said the DFI will not just fund roads and bridges, but also projects in sectors such as transport, energy, water and sanitation communication, and social commercial infrastructure, among others.
The National Bank for Financing Infrastructure and Development Bill, 2021, that was passed by Rajya Sabha on Thursday, also provides an enabling provision to provide sovereign guarantee to bonds issued by the DFI, she said. The infrastructure lender will issue long dated securities which will in turn encourage domestic savings, she added.