Recently, the Securities and Exchange Board of India (SEBI) has introduced the ‘Corporate Debt Market Development Fund’ to prevent a financial crisis.
About Corporate Debt Market Development Fund:
- The ‘Corporate Debt Market Development Fund (CDMDF) is a backstop facility for specified debt funds during market dislocations.
- The fund is intended to provide liquidity support in the event of a financial crisis.
- It aims to instil confidence amongst the participants in the corporate bond market and to generally enhance secondary market liquidity.
- The proposed CDMDF will have an initial corpus of Rs 3,000 crore contributed by mutual funds.
- The government has approved a 10-time leverage of the fund (Additional corpus), thus CDMDF may raise funds up to Rs 30,000 crore.
- Contributions to the fund can be done by the specified debt-oriented mutual fund schemes and asset management companies of mutual funds.
- This fund is guaranteed by the National Credit Guarantee Trust Company (NCGTC) and the backstop facility will be managed by SBI Mutual Fund.
- Specified mutual fund schemes will have access to the fund for selling securities during market dislocation.
- This access is proportional to the contribution made to the fund at a mutual fund level.
What is a Backstop facility?
- A backstop is an act of providing last-resort support or security in a securities offering for the unsubscribed portion of shares.
- When a company is trying to raise capital through an issuance, it may get a backstop from an underwriter or a major shareholder, such as an investment bank, to buy any of its unsubscribed shares.
Q1) What is National Credit Guarantee Trustee Company Ltd (NCGTC)?
National Credit Guarantee Trustee Company Ltd (NCGTC) is a private limited company incorporated under the Companies Act 1956 on March 28, 2014, established by the Department of Financial Services, Ministry of Finance, as a wholly owned company of the Government of India, to act as a common trustee company for multiple credit guarantee funds.