Topic 2: SECURITY OF SAFE: CDMDF

On July 27th, SEBI released guidelines for the Corporate Debt Market Development Fund (CDMDF) and provided instructions for mutual fund investments in the fund's units. The CDMDF will function as an Alternative Investment Fund (AIF), serving as a safety net for purchasing debt securities during the period of financial stress.

The CDMDF is a fund that will purchase debt securities from mutual fund companies and provide them with cash to prevent redemptions from halting. This will be a closed-ended scheme with an initial 15-year term, which may be extended in the future. In regular circumstances, it will only invest in short-term government securities, treasury bills, tri-party repo on government securities, and guaranteed corporate bond repo with a maturity of no more than seven days.

CDMDF will be composed of representatives from different mutual funds, the Clearing Corporation of India Limited (CCIL), and the Association of Mutual Funds in India (AMFI). The group recommended the creation of a single ‘entity’ responsible for purchasing corporate debt securities from mutual fund schemes. The specified Debt Oriented Mutual Fund Schemes like open ended debt oriented mutual fund excluding Overnight, gilt and conservative hybrid funds. These schems will invest 0.25% of their Assets under management (AUM) in CDMDF units. This contribution and appreciation will lock in until the expiry date. As AUM of specified schemes grows so will the contribution, which will be reviewed every six months. If AUM reduces there will be no redemption from CDMDF. New Mutual funds or schemes will be contributing according to same rules. AMCs of mutual funds are required to make a one-time contribution of 2% of the AUM of their specified debt-oriented schemes. The initial contribution will be based on the AUM as of December 31, 2022, in these schemes. Any delay in contribution will attract a penalty of 15% per annum on the respective AMC for the delayed period, with the interest credited to the CDMDF. CDMDF will purchase listed corporate debt securities from specified debt-oriented mutual fund schemes. SEBI will determine the trigger and the period during which CDMDF will take action to buy these securities. CDMDF will buy securities from the secondary market with a remaining maturity period of not more than five years and holding an investment grade credit rating. Sellers will receive 90% of the payment in cash and 10% in the form of CDMDF units. Mutual funds can sell corporate debt securities from their contributing schemes’ portfolios to the CDMDF. The access to this sell facility will be proportionate to the mutual fund’s contribution to the CDMDF.

SEBI has once again emphasized that the provisions regarding CDMDF are effective immediately. Fund houses must update their scheme documents to include information about contributions to CDMDF, but these changes will not affect the core attributes of the scheme or be factored in when calculating risk or violations related to asset allocation and maturity restrictions. This measure is aimed at enhancing the safety of debt fund investors during times of market volatility.



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