The Securities and Exchange Board of India will establish a Corporate Debt Market Development Fund (CDMDF) to provide liquidity to mutual funds and other institutional investors participating in the corporate bond market, has said Finance Minister Nirmala Sitharaman.
As the financial sector evolves from a bank-dominated system to a market-oriented one, supporting financial markets has become an important aspect, Sitharaman said. “Therefore, a permanent arrangement of an SPV facility is envisioned to provide liquidity, so that they can act as a buyer of last resort, during times of stress, and to some extent even as a tenor. market in peacetime, ”she said. .
Mutual funds account for 60-70% of transactions in the corporate bond, commercial paper and certificate of deposit market, facilitating fundraising by issuers such as banks, corporations, NBFCs and housing finance companies, Sitharaman said.
“Selling and selling through mutual funds has a contagion effect, we saw recently how, because of one of the mutual funds, having a real problem, it had a very shaking effect in the market. So there is an advantage in moving to the bond market from a model focused on bank financing, ”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 set up in conjunction with the contribution of mutual funds, as well as other institutional investors. The majority stake will be held by a subsidiary of a public sector mutual fund, she said.
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Sitharaman, in his budget speech, said: “To instill confidence in participants in the stressful corporate bond market and to generally improve secondary market liquidity, it is proposed to create a permanent institutional framework. The proposed body would buy quality debt securities in times of crisis and normal times and help develop the bond market. “
The fund’s primary mandate will be to trade corporate debt securities with an emphasis on papers rated below AAA, Sitharaman said. However, these papers will need to be investment grade during the stress-free period, she added. The fund will also have the ability to buy and hold, as a single or a basket, corporate debt securities in the secondary market during times of systemic stress.
This would help cope with a similar situation to the end of 2019 when NBFCs faced liquidity issues and held substandard corporate debt. “This experience has taught us a few things, which I am happy that the SEBI is approaching in this form, so that they have a given formulation to cope with such stress in times of stress and in normal times,” he said. she declared.
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RBI’s line of credit to help DFI
Responding to questions from members of Rajya Sabha, Sithraman said that the new development finance institution will be able to access the Reserve Bank of India line of credit, which will help it respond quickly to requests, especially for the establishment infrastructure in the social sector. Sitharaman said that the DFI will not only finance roads and bridges, but also projects in sectors such as transport, energy, water and sanitation communication, and social trade infrastructure, between others.
The National Infrastructure and Development Finance Bank Bill 2021, which was passed by Rajya Sabha on Thursday, also includes an enabling provision to provide a sovereign guarantee to bonds issued by the DFI, she said. The infrastructure lender will issue long-term securities which, in turn, will encourage domestic savings, she added.