Backstop facility a boon for fragile bond market – The Financial Express

The Financial Express
The Securities and Exchange Board of India (Sebi’s) approval for the Rs 33,000-crore backstop facility – the Corporate Debt Market Development Fund that will purchase investment-grade corporate debt securities in times of stress — would provide a shot in the arm for the bond market, said industry players.
The move seeks to shore up confidence by providing mutual funds access to emergency liquidity at times of crisis. Given the fragile nature of the Indian bond markets, where even higher-rated bonds may find no takers even if there is a small hint of trouble, the Sebi move may prove to be an effective one.
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Rajeev Radhakrishnan, fixed income fund manager at SBI MF, said: “Addressing the issue of systemic liquidity in the bond market had become the key. This facility offers fund houses liquidity at a fair price.” He explained that the 10% contribution by fund houses will be liquid in nature to ensure immediate availability, and that fund houses will be required to contribute close to 25 bps of their AUM per debt category (excluding G-Sec and overnight).
This facility will be set up in the form of an alternative investment fund (AIF) for purchase of investment-grade corporate debt securities during times of stress.
In February, deputy MD of SBI Mutual Fund DP Singh had said the government was setting up a Rs 33,000-crore fund to provide liquidity support to the corporate debt market during times of tension, to which the MF industry would contribute 10%. “We have seen in the past that whenever there is a credit event, there is a run on the funds for redemption, which, in turn, creates pressure on liquidity… this fund is being created to avoid such a situation in the future and meet the redemption pressure in any such event,” Singh had said.
The proposal for such a facility was first mooted in the Union Budget 2021, with modalities yet to be worked out at that time. It may be noted that Franklin Templeton in 2021 shut down six of its debt schemes, which together had an estimated AUM of Rs 25,000 crore, citing heavy redemption pressure. The fund house had, at the time, cited the severe liquidity crunch in the bond market, coupled with very large redemptions following the outbreak of the Covid, as reasons behind shutting of the schemes.
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According to the MD and CEO of a fund house, this brings a much-needed comfort, as fund houses will not have to go for aggressive selling to meet redemption pressures, if they arise. “Strengthening the bond market liquidity was the prime intent, by getting Sebi and industry members to collaborate. MFs will be creating infra for themselves via this investment, and the end goal is development and deepening of the bond market.”
He said that given that the contribution is a minor amount of the AUM, it won’t put additional pressure on the industry.
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