SEBI Guidelines for Debt Mutual Funds –CDMDF During the Times of Unfavorable Market Conditions

The Corporate Debt Market Development Fund (CDMDF), eagerly anticipated for nearly four months, has finally received detailed guidelines from the Securities and Exchange Board of India (SEBI). The CDMDF is designed to act as a support system for debt mutual funds by purchasing investment-grade corporate debt securities during times of market disarray. Finance Minister Nirmala Sitharaman is expected to inaugurate the debt fund in Mumbai.

SEBI New Guidelines For Debt Funds: Key Highlights

  • SEBI introduces guidelines for the much-awaited Corporate Debt Market Development Fund (CDMDF).
  • CDMDF acts as a backstop facility for debt mutual funds during market dislocation.
  • The fund will invest in short-duration government securities and investment-grade corporate debt securities.
  • Mutual fund houses contribute to CDMDF, ensuring liquidity support and stability during stress.
  • CDMDF provisions are effective immediately, offering greater reassurance to debt fund investors.
  • For stock market investors, CDMDF brings added stability and confidence in debt fund investments.

SEBI Guidelines for Debt Mutual Funds: Understanding CDMDF’s Functionality

The CDMDF is a fund that will buy debt securities from mutual fund houses, ensuring that redemptions can continue uninterrupted. Operating as a closed-ended scheme initially, it will invest in short-duration government securities, treasury bills, tri-party repo on government securities, and guaranteed corporate bond repo during normal circumstances. The debt fund will charge an expense of 15 basis points plus taxes during normal times, which increases to 20 basis points plus taxes during market stress. These expenses include brokerages and clearing charges.

How CDMDF Responds to a Debt Crisis

In times of a debt crisis, the CDMDF will purchase only investment-grade listed corporate debt securities and listed money market instruments from debt mutual funds. 

The securities bought will have less than five years of residual maturity, and long-term credit ratings of corporate bonds will take precedence over short-term ratings. 

The fund will follow a cautious approach in determining the credit rating of an instrument when long-term ratings are unavailable. 

SEBI’s new guidelines have also outlined specific approaches for purchasing and valuing securities during stressful times.

Funding the CDMDF

Apart from gilt funds and overnight funds, debt funds and schemes, including conservative hybrid schemes, will invest a portion of their assets under management (AUM) equivalent to 25 basis points in the units of CDMDF. Contributions will be made every six months, increasing incrementally if there is growth in AUM. Existing mutual fund schemes must begin contributing from December 2023, and this contribution cannot be withdrawn even if the scheme’s AUM decreases. All mutual fund houses must make a one-time contribution at the rate of 2 basis points of the AUM of specified debt schemes, and new fund houses will contribute similarly at the end of their first financial year.

SEBI New Guidelines For Debt Mutual Funds Ensuring Market Stability

During times of stress, if a fund house decides to sell a corporate listed debt security to the CDMDF, only 90 percent of the consideration will be paid in cash, with the remaining paid in terms of CDMDF units. These units will absorb the first loss if the security sold to the CDMDF results in a loss. Units can be sold during the scheme’s tenure under certain conditions. Mutual funds will have access to sell corporate debt securities during market dislocation in proportion to their contribution to the CDMDF.

Immediate Implementation of CDMDF Provisions

SEBI has emphasised that these CDMDF provisions are effective immediately. 

This new layer of security provided by the CDMDF offers debt mutual fund investors greater reassurance during challenging market conditions.

SEBI guidelines for debt mutual funds -What Does It Mean For Stock Market investors?

For stock market investors, the introduction of the Corporate Debt Market Development Fund (CDMDF) means added stability in the debt market during times of market turbulence. With the CDMDF acting as a support system for debt mutual funds, investors can be more confident in their debt fund investments, reducing the risk of liquidity issues and potential redemptions being affected during challenging market conditions.



Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.