CORPORATE DEBT MARKET DEVELOPMENT FUND

Corporate Debt Market Development Fund

The expression ‘corporate debt market development fund’ is defined under Regulation 2(1)(ga) of Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, (‘Regulation’ for short) as an Alternative Investment Fund set up and making investments in terms of Chapter III-C (from Regulations 19N to 19U)  of these regulations.

The market regulator has clarified that the Corporate Debt Market Development Fund has been classified as Category I Alternative Investment Fund. The fund was set up as a backstop facility to provide liquidity to debt funds when there is an event that causes a surge of redemptions.

Applicability

The provisions of Chapter III of these Regulations shall apply only to the corporate debt market development fund (‘Fund’ for short).  The provisions of these regulations except the following provisions and the guidelines and circulars issued under these regulations, unless the context otherwise requires or is repugnant to the provisions of this Chapter, shall apply to the Corporate Debt Market Development Fund, its sponsor, manager, trustee and investors-

• Regulation 9(2) – investment condition;
• Regulation 10 (a) - raising funds from any investor whether Indian, foreign or non-resident Indians by way of issue of units;
• Regulation 10 (c) -the fund shall not accept from an investor, an investment of value less than Re. 1 crore;
• Regulation 10(d)  - the Manager or Sponsor shall have a continuing interest in the Fund of not less than 2.5% of the corpus or Rs. 5 crores, whichever is lower,
• Regulation 10 (f) - no scheme of the Fund shall have more than 1000 investors;
• Regulation 12 (2) – filing of placement memorandum with the Board through a merchant banker, at least thirty days prior to launch of scheme;
• Regulation 12 (3) -The Board may communicate its comments, if any, to the merchant banker prior to launch of the scheme and the same are to be incorporated;
• Regulation 12 (1) - The Fund may launch schemes subject to filing of placement memorandum with the Board.
• Regulation 12 (5) - The first close of the scheme shall be declared by a Fund in the manner as may be specified by the Board from time to time.
• Regulation 14 – listing;
• Regulation 16 -Conditions for Category I of the fund;
• Regulation 17 – Conditions for Category II of the fund;
• Regulation 18 – Conditions for Category III of the fund.
• Regulation 19 – other funds.
• Regulation 15(1)
• Regulation 20(15)
• Regulation 29(1) (a)(b) (c)
• Regulation 29(2), (3), (4) and (8)

Features of this fund

• The fund shall be constituted in the form of a Trust.
• The Trust deed shall be registered under the provisions of Indian Registration Act, 1908.
• It shall be a closed ended fund.
• The tenure of this fund shall be 15 years from the date of its first closing.
• The tenure of 15 years may be extended with the approval of the Securities and Exchange Board of India (‘Board’ for short).
• This fund shall be wound up with the approval of the Board.

Registration

The Fund shall apply for registration as an Alternative Investment Fund in accordance with the provisions of Chapter II of these regulations.  The placement memorandum of the Corporate Debt Market Development Fund shall be filed with the Board.  The Board may communicate its comments, if any, to the Manager prior to the launch of the fund and the Manager shall incorporate the comments in the placement memorandum prior to the launch of the fund.

Investment

• The units of the Fund shall be offered to the Asset Management Companies as defined under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 and the specified debt-oriented schemes of mutual funds.
• The investment shall be in accordance with the provisions of SEBI (Mutual Funds) Regulations, 1996.
• The Manager or Sponsor shall have a continuing interest in the Fund of not less than Rs. 5 crores in the form of investment in the fund but such continuing interest shall not be through the waiver of management fees.

Conditions for investment

• During periods of market dislocation, the Fund shall purchase corporate debt securities from the specified debt-oriented schemes of mutual funds.
• The above said mutual funds shall meet the following eligible criteria-

• corporate debt securities shall be listed and have an investment grade rating;
•  the residual maturity of such securities shall not exceed 5 years on the date of purchase;
• securities where there is no material possibility of default or adverse credit news or views.

• The Fund shall purchase corporate debt securities in proportion to the contribution made in it at a mutual fund level in accordance with the guidelines, approved by the Board.
• The Fund shall hold eligible securities till maturity or sell the same in the secondary market upon reversal of market dislocation, in the manner as specified by the Board from time to time.
• The Fund shall invest in liquid and low-risk debt instruments and undertake any other activity related to corporate debt market, as may be specified by the Board from time to time, other than market dislocation period.
• The Fund shall buy corporate debt securities at fair price adjusted for liquidity risk, interest rate risk and credit risk but not at distress prices.
• The sharing of loss by the sellers of corporate debt securities to the Fund during periods of market dislocation may be higher than their pro rata holding in the Alternative Investment Fund vis-à-vis other unit holders.
•  The Fund shall not invest in the securities of companies incorporated outside India.
•  Investment by the Fund in any one investee company shall not exceed 5% of its fund capital at the time of investment.
• The Fund may borrow funds up to ten times its corpus, subject to such conditions as may be specified by the Board in consultation with the Government of India.
• The valuation procedure and methodology for valuing assets of the Fund shall be governed by the norms applicable to Mutual Fund schemes.
• In-specie distribution of assets of the Fund may be made to the unit holders, only at the time of winding up subject to the consent of 75% of the unit holders by value of their investment in such fund.
• Any material alteration to the investment strategy of the Fund shall be with the prior approval of the Board.

Disclosures

The portfolio of the Fund shall be disclosed to the unitholders on a fortnightly basis.  The Net Asset Value of the Fund shall be disclosed to the unitholders on a daily basis.

Governance

The provisions relating to governance mechanism was inserted vide Notification dated 15.06.2023. 

Trustee Company

The Fund shall appoint a trustee company.  The Board of Directors of trustee company and the Manager of the Fund shall be appointed with the prior approval of the Board.  The roles and responsibility of the trustee company shall be similar to that of the trustee appointed under Mutual Fund regulations.  The trustee company shall not engage in any activity other than acting as a trustee of the Fund, except with the prior written consent of the Board. Two-thirds of the members of the board of directors of the trustee company shall be independent directors and shall not be associated with the Sponsor or the Manager in any manner whatsoever.  No person shall initially or any time thereafter be appointed as a director of the trustee company of the Fund without the prior approval of the Board.

Audit Committee

An audit committee of the trustee company shall be constituted to review compliance with the provisions of placement memorandum as required under these regulations along with other responsibilities as may be specified by the Board from time to time.

Governance Committee

The manager of the Fund shall appoint a Governance Committee.  The said committee shall comprise corporate bond market experts including academicians, fund managers or Chief Investment Officers, risk management professionals and independent market experts.  This committee jointly with the board of the Manager and trustee company, shall approve the policies of the Fund.  The Committee shall supervise the activities of the Fund, especially relating to management of conflict of interest, if any.  It shall have oversight on management of asset liability mismatches during times of market dislocation.

Listing

 The units of the Fund shall not be listed on any recognised stock exchange.

Winding up

These shall cease to exist upon the winding up of the Fund.

Responsibility

The Manager of Fund shall continue to be responsible for any liabilities, that may arise out of the mandate in relation to its investment management activities.

Conclusion

This fund will address the needs of the corporate debt market in India and it will be launched as a close-ended scheme.  This fund serves as a backstop facility for investment-grade corporate debt securities, providing stability and enhancing investor confidence in the market.  The Fund provides a backstop facility of Rs 33,000 crore has been established for Mutual Funds. It aims to enhance secondary market liquidity by creating a permanent institutional framework that can be activated during periods of market stress.  The fund acts as a safety net for investors during times of market dislocation, providing support and stability to the corporate debt market.