Corporate Debt Market Development Fund Explained For Investors

One of the key risks that investors face when there is a crisis or stress in the debt market is that liquidity in the various instruments might dry up. The impact is seen not just on large investors who directly invest in corporate debt but even on those small investors who indirectly have exposure to such holdings through units in debt funds.

This is where the Corporate Debt Market Development Fund, or CDMDF, which has been launched in India, comes into play and helps to stabilise the situation.

The main objective of the CDMDF is to ensure that there is adequate liquidity in the debt market during periods of stress. During normal times, things go smoothly and trades take place. However, when there is a crisis, it can lead to stress in the corporate debt market, as has been seen multiple times in the past.

For example, during the Lehman crisis, there were huge problems in the debt market not just in India but also globally as everything froze. The low confidence among investors would prevent them from buying such paper, and this can create a problem for those who want to sell such instruments in their portfolio to raise funds for some purpose.

During such times, the CDMDF steps into the picture as a backstop to purchase these instruments. So, the main point is that this fund is meant for stressful situations where it acts as a backstop.

The main thing to note is that CDMDF is not going to be the backstop for all kinds of paper held by debt market participants—it is clearly meant only for investment-grade paper.

This means that only those instruments that are investment grade will be eligible for the purchase, and the details have been listed out in the guidelines given by the Securities and Exchange Board of India.

Again, the goal of the fund is to help the market in a crisis, and this will be done by purchasing the specified quality paper so that those investors who hold these investments do not suffer because of factors beyond their control.

This will provide the necessary liquidity when it is most needed. The fact that it will buy investment-grade paper also gives investors the necessary confidence to put their money into such papers because they know that there is support available if required.

The CDMDF is launched as a 15-year closed-end fund, which is a long period, and asset management companies and specified debt funds can subscribe to its units.

This will be very useful for the investors in debt funds because there will be liquidity for them during periods of stress. The various details related to which securities will be purchased and the valuation that will be arrived at for the purchases have been specified in the guidelines issued.

Arnav Pandya is the founder of Moneyeduschool.

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.