Corporate Debt Market Development Fund (CDMDF)

July 28, 2023

GS Paper III Indian Economy

Context:

The Union government has approved a scheme called the Guarantee Scheme for Corporate Debt (GSCD), which aims to provide complete guarantee cover for debt raised by the Corporate Debt Market Development Fund (CDMDF).

More on News:

Guarantee Fund for Corporate Debt (GFCD) will manage the Guarantee Scheme for Corporate Debt (GSCD).
- The GFCD will be a trust fund formed by the Department of Economic Affairs (DEA) and managed by the National Credit Guarantee Trustee Company Ltd (NCGTC).
  - NCGTC is a wholly-owned company of the Department of Financial Services under the Ministry of Finance.

About CDMDF:

CDMDF, an alternative investment fund, is a backstop facility for investment-grade corporate debt securities.
Objective: To enhance secondary market liquidity, particularly during times of market stress.

Framework Release by SEBI: The Securities and Exchange Board of India (SEBI) has released a framework for the CDMDF, outlining the guidelines and regulations for its operation.

Investment Guidelines: CDMDF will primarily deal in low-duration government securities (G-Secs), treasury bills, tri-party repo on G-Secs, and guaranteed corporate bond repo with a maturity not exceeding seven days during normal times.
Purchase of Corporate Debt Securities: CDMDF will buy only investment-grade securities from the secondary markets, which are listed and have a residual maturity of up to five years.
- It will not purchase unlisted, below-investment-grade, defaulted debt securities, or those with a high risk of default or adverse credit news or views.
Pricing Mechanism: CDMDF will buy these securities at a fair price, taking into account liquidity risk, interest rate risk, and credit risk. It will not buy distressed assets.
Payment to Sellers: Sellers of debt securities to CDMDF will receive 90% of the consideration in cash and 10% in terms of units of CDMDF.
Tenure and Launch of CDMDF: CDMDF will be launched as a close-ended scheme with an initial tenure of 15 years (extendable).

Key Terms:

Alternate Investment Fund:

An Alternative Investment Fund (AIF) is a category of investment funds that operates differently from traditional mutual funds, portfolio management services, and other regulated investment vehicles.
Governed by: The Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012.
AIFs are pooled investment vehicles that collect funds from investors with a defined investment strategy.
They include angel funds, commodities, real estate, venture capital, private equity, etc.

News Source: The Indian Express