CDMDF Part 2
Section 19Q. Investment conditions for the Corporate Debt Market Development Fund
19Q(1).
The regulation permits the Corporate Debt Market Development Fund (CDMDF) to distribute its assets in-specie to its unit holders.
However, this method of distribution is not the general rule.
It may be adopted only at the time of winding up of the CDMDF and only if unit holders representing at least 75% of the value of investments in the Fund consent to such distribution.
Thus, the regulation lays down both:
A timing restriction (only during winding up).
An approval requirement (75% consent by value).
In-specie Distribution
In-specie distribution means distributing the actual assets of the Fund to the unit holders instead of first selling those assets and distributing cash.
In the context of the CDMDF, the distributed assets may include:
Corporate debt securities.
Government securities.
Other eligible investments held by the Fund.
Instead of converting these securities into money, the Fund transfers ownership of the securities directly to the unit holders.
Cash Distribution and In-specie Distribution
There are two methods by which a fund may distribute its assets upon winding up.
Cash Distribution
The Fund sells all its investments.
The sale proceeds are converted into cash.
The cash is distributed among the unit holders.
In-specie Distribution
The Fund does not sell the assets.
Instead, the securities themselves are transferred directly to the unit holders.
Each unit holder receives a proportionate share of the underlying assets.
Only at the Time of Winding Up
In-specie distribution may be made only at the time of winding up.
So , while the CDMDF continues to operate, it cannot distribute its investment portfolio directly to unit holders.
Such distribution becomes permissible only when the Fund is being dissolved and its affairs are being concluded.
Consent Requirement
An in-specie distribution can take place only with the consent of 75% of the unit holders by the value of their investment in the Fund.
This is a super-majority approval requirement.
Importantly, the regulation measures approval by value of investment, not merely by the number of unit holders.
Consequently, unit holders with larger investments have voting power proportionate to the value of their holdings.
By value of their investment means that the voting threshold is determined according to the monetary value of the units held, rather than the number of investors.
For example:
A unit holder who has invested ₹500 crore carries greater voting weight than a unit holder who has invested ₹50 crore.
Therefore, approval is based on the percentage of the Fund's investment value represented by the consenting unit holders.
During periods of market dislocation, the Corporate Debt Market Development Fund (CDMDF) cannot purchase every corporate debt security available in the market.
The Regulations prescribe specific eligibility conditions that every corporate debt security must satisfy before it can be purchased by the CDMDF.
These conditions ensure that the Fund purchases only high-quality and relatively low-risk securities, thereby protecting the Fund's corpus while fulfilling its objective of providing market liquidity.
(a).
Corporate Debt Securities Shall be Listed
The corporate debt securities must be listed on a recognised stock exchange.
A listed security is one that has been admitted for trading on a recognised stock exchange after satisfying the applicable listing requirements.
Listed securities generally offer:
Greater transparency.
Better price discovery.
Higher regulatory oversight.
Improved market liquidity.
By restricting purchases to listed securities, the Regulations reduce the risks associated with privately issued or unlisted debt instruments.
Investment Grade Rating
The corporate debt securities must have an investment grade rating.
An investment grade rating is a credit rating assigned by a recognised credit rating agency indicating that the issuer has an adequate or strong capacity to meet its financial obligations.
Investment grade securities are considered to have a relatively low risk of default compared to speculative or non-investment grade securities.
The exact rating categories depend upon the credit rating agency, but investment grade generally represents securities that are considered suitable for prudent institutional investment.
(b).
Residual Maturity Shall Not Exceed Five Years
The corporate debt security must have a residual maturity of not more than five years on the date the CDMDF purchases it.
Residual maturity means the remaining period until the debt security becomes due for repayment.
It is calculated from the date of purchase and not from the original date on which the bond was issued.
For example:
A bond originally issued for ten years may have only four years remaining until maturity.
Its residual maturity is therefore four years
(c).
No Material Possibility of Default
The CDMDF may purchase only those securities where there is no material possibility of default.
A default occurs when the issuer fails to fulfil its payment obligations, such as:
Paying interest.
Repaying the principal amount on maturity.
Performing other obligations under the debt instrument.
The word "material" means significant or substantial.
Therefore, the Regulation excludes securities where there is a significant likelihood that the issuer may fail to meet its obligations.
Understanding Adverse Credit News or Views
The regulation also excludes securities that are subject to adverse credit news or views.
This refers to credible information or developments indicating deterioration in the issuer's financial position or creditworthiness.
Examples may include:
Significant financial distress.
Major defaults on other borrowings.
Credit rating downgrades.
Serious governance failures.
Insolvency proceedings.
Material regulatory actions affecting the issuer.
Other developments that may negatively affect the issuer's ability to repay its debt.
The purpose is to ensure that the CDMDF does not purchase securities merely because they are experiencing temporary market illiquidity when, in reality, the issuer faces genuine credit problems.
Example:
Suppose a debt mutual fund wishes to sell three corporate bonds to the CDMDF during a period of market dislocation.
Bond A is listed, rated AA, has three years remaining until maturity, and the issuer has no adverse credit developments.
Bond B is investment grade but has eight years remaining until maturity.
Bond C is listed with four years remaining but the issuer has recently suffered a major credit downgrade and is widely expected to default.
The CDMDF may purchase Bond A because it satisfies all three eligibility conditions.
It cannot purchase Bond B because its residual maturity exceeds five years.
It cannot purchase Bond C because there is a material possibility of default and adverse credit concerns regarding the issuer.
19Q(2).
The Corporate Debt Market Development Fund (CDMDF) is required to purchase corporate debt securities during periods and in the manner prescribed under the SEBI framework.
However, these purchases cannot be made arbitrarily.
The Fund must purchase corporate debt securities in proportion to the contribution made by each Mutual Fund to the CDMDF.
This means that the extent to which a Mutual Fund benefits from the CDMDF is linked to the amount it has contributed to the Fund.
The purchases must also be carried out in accordance with the detailed operational guidelines approved by SEBI (the Board).
The CDMDF allocates its purchases among participating Mutual Funds based on their respective contributions to the Fund.
A Mutual Fund that contributes a larger amount to the CDMDF will generally be entitled to a proportionately larger share of liquidity support.
Similarly, a Mutual Fund that contributes a smaller amount will receive liquidity support in proportion to its smaller contribution.
Example:
Suppose the Corporate Debt Market Development Fund (CDMDF) has ₹1,000 crore available to purchase corporate debt securities during a period of market dislocation.
Three Mutual Funds have contributed to the CDMDF as follows:
Mutual Fund A: ₹500 crore (50%)
Mutual Fund B: ₹300 crore (30%)
Mutual Fund C: ₹200 crore (20%)
If the CDMDF decides to purchase ₹600 crore worth of eligible corporate debt securities, the purchases will be allocated proportionately:
Mutual Fund A: ₹300 crore (50% of ₹600 crore)
Mutual Fund B: ₹180 crore (30% of ₹600 crore)
Mutual Fund C: ₹120 crore (20% of ₹600 crore)
Purchase of Corporate Debt Securities
The CDMDF purchases corporate debt securities from participating Mutual Funds when the corporate debt market experiences stress.
These purchases provide immediate liquidity to Mutual Funds facing redemption pressures.
By purchasing these securities, the CDMDF:
Reduces forced selling.
Prevents fire sales.
Supports orderly market functioning.
Helps stabilise prices in the corporate bond market.
The objective is not to generate profits, but to maintain confidence and liquidity in the market during periods of financial stress.
Compliance with SEBI Guidelines
The regulation also requires that every purchase made by the CDMDF must comply with detailed guidelines approved by SEBI.
These guidelines may prescribe:
The circumstances in which purchases can be made.
The types of eligible corporate debt securities.
The methodology for determining proportional purchases.
Valuation principles.
Operational procedures.
Risk management measures.
Reporting and compliance requirements.
The Manager of the CDMDF cannot independently determine these matters unless they are consistent with SEBI's approved guidelines.
Explanation:
SEBI has the the authority to determine when a market dislocation begins and when it ends.
SEBI decides:
When a market dislocation is triggered.
When the market dislocation has reversed.
These decisions must be based on the parameters specified by SEBI.
Neither the Manager of the CDMDF, Mutual Funds, nor any other market participant can independently declare that a market dislocation exists.
Similarly, they cannot decide when normal market conditions have returned.
Once SEBI determines that a market dislocation has occurred:
The CDMDF can begin purchasing eligible corporate debt securities under Regulation 31B.
The emergency liquidity support mechanism becomes operational.
Once SEBI determines that the market dislocation has reversed:
The CDMDF stops purchasing securities under the emergency framework.
The Fund resumes its normal investment activities..
19Q(3).
The Corporate Debt Market Development Fund (CDMDF) may hold eligible securities until their maturity.
Alternatively, it may sell the eligible securities in the secondary market.
Such sale can take place only after the reversal of market dislocation.
The holding or sale of securities shall be carried out in the manner specified by the Board from time to time.
19Q(4).
During periods other than market dislocation:
The Corporate Debt Market Development Fund (CDMDF) shall invest in liquid and low-risk debt instruments.
The CDMDF may also undertake other activities related to the corporate debt market.
Such investments and activities shall be as specified by the Board from time to time.
19Q(5).
The Corporate Debt Market Development Fund (CDMDF) shall purchase corporate debt securities at a fair price.
The purchase price shall be adjusted for:
Liquidity risk
Interest rate risk
Credit risk
The CDMDF shall not purchase securities at distress prices.
19Q(6).
During periods of market dislocation, sellers of corporate debt securities may be required to bear a higher share of losses when selling securities to the CDMDF.
Their share of the loss may be greater than their pro rata holding in the Alternative Investment Fund (AIF).
So , selling mutual fund does not receive loss protection strictly in proportion to its investment in the CDMDF.
Example:
Assume the CDMDF has 100 unit holders, each with an equal investment (1% each).
One mutual fund sells distressed corporate bonds to the CDMDF during a market dislocation.
Later, the CDMDF incurs a loss on those bonds.
Instead of that mutual fund bearing only 1% of the loss (its pro rata share), it may be required to bear 5% or 10% of the loss, while the remaining investors bear comparatively less.
19(7).
The Corporate Debt Market Development Fund (CDMDF) shall not invest in the securities of companies incorporated outside India.
The CDMDF can invest only in securities issued by companies incorporated in India.
19(8).
The Corporate Debt Market Development Fund (CDMDF) shall not invest more than 5% of its fund capital in a single investee company.
The 5% limit is calculated at the time the investment is made.
Even if the value of that investment later rises above 5% due to market movements, the regulation is concerned with the percentage at the time of investment.
Example:
Assume the CDMDF has a fund capital of ₹2,000 crore.
The maximum investment it can make in the debt securities of one company is 5% of ₹2,000 crore = ₹100 crore.
Therefore:
Investing ₹90 crore in Company A is permitted.
Investing ₹120 crore in Company A is not permitted, as it exceeds the 5% limit.
19(9).
The Corporate Debt Market Development Fund (CDMDF) may borrow funds up to ten times its corpus.
So , the CDMDF can raise additional money through borrowing to increase its capacity to purchase corporate debt securities during periods of market dislocation.
The borrowing is subject to conditions specified by the Board, in consultation with the Government of India.
Example:
Assume the CDMDF has a corpus of ₹5,000 crore.
It may borrow up to ₹50,000 crore (10 × ₹5,000 crore), subject to the conditions prescribed by the Board.
Accordingly, the CDMDF could have up to ₹55,000 crore available (₹5,000 crore corpus + ₹50,000 crore borrowed funds) to support the corporate debt market during a market dislocation.
19(10).
The assets of the Corporate Debt Market Development Fund (CDMDF) shall be valued in accordance with the valuation norms applicable to Mutual Fund schemes.
The valuation procedure and methodology shall be governed by the SEBI (Mutual Funds) Regulations, 1996.
Using the same valuation framework as mutual funds promotes fair valuation, accurate reporting, and investor confidence.
19(11).
The Corporate Debt Market Development Fund (CDMDF) may distribute its assets in-specie (i.e. By transferring the actual securities instead of cash).
In-specie distribution is permitted only at the time of winding up of the CDMDF.
Such distribution requires the consent of at least 75% of the unit holders, calculated by the value of their investment in the fund.
So , approval is based on the value of investments held, not merely the number of unit holders.
Example:
Assume the CDMDF is being wound up and still holds corporate bonds worth ₹1,000 crore.
Instead of selling the bonds and distributing cash, the fund proposes to transfer the bonds directly to the unit holders.
If unit holders representing 75% or more of the total investment value approve the proposal, the CDMDF may make an in-specie distribution.
If this approval threshold is not met, the fund cannot distribute the assets in-specie and would generally have to realize the assets and distribute the proceeds in cash.
19(12).
Any material alteration to the investment strategy of the Corporate Debt Market Development Fund (CDMDF) requires the prior approval of the Board.
A material alteration refers to a significant change in the manner in which the CDMDF invests or manages its investments.
The CDMDF cannot implement such changes on its own without obtaining SEBI's approval in advance.
Example:
Suppose the CDMDF proposes to:
Invest in a new class of debt securities,
Change its investment objectives, or
Significantly modify its investment policy.
Before implementing any such change, SEBI's prior approval is mandatory.
Without the Board's approval, the CDMDF cannot adopt the revised investment strategy.
Section 19R. Disclosures
19R(1).
The Corporate Debt Market Development Fund (CDMDF) shall disclose its portfolio to the unit holders every fortnight.
A fortnightly disclosure means the portfolio must be disclosed once every two weeks.
The disclosure enables unit holders to know the securities and investments held by the CDMDF.
Example:
If the CDMDF discloses its portfolio on 1st August, it must make the next portfolio disclosure approximately two weeks later (e.g., 15th August).
The disclosed portfolio may include details of the corporate bonds and other eligible debt instruments held by the CDMDF at that time.
19R(2).
The Corporate Debt Market Development Fund (CDMDF) shall disclose its Net Asset Value (NAV) to the unit holders every day.
The Net Asset Value (NAV) represents the per-unit value of the fund, calculated after deducting liabilities from the total value of its assets.
Daily disclosure enables unit holders to track the current value of their investment.
Example:
Suppose the CDMDF has:
Total assets of ₹10,000 crore,
Total liabilities of ₹100 crore, and
990 crore units outstanding.
The NAV would be: (₹10,000 crore − ₹100 crore) ÷ 990 crore units = ₹10 per unit
This ₹10 NAV must be disclosed to the unit holders every day, with updates reflecting any changes in the value of the fund's assets or liabilities.
Section 19S. Governance Mechanism for the Corporate Debt Market Development Fund
19S(1).
The Corporate Debt Market Development Fund (CDMDF) shall appoint a trustee company.
The trustee company acts as an independent fiduciary, overseeing the functioning of the CDMDF.
The trustee's role is to:
Protect the interests of the unit holders.
To make sure the CDMDF is managed in accordance with the applicable regulations and the fund documents.
19S(2).
The Board of Directors of the trustee company shall be appointed only with the prior approval of the Board (SEBI).
The Manager of the Corporate Debt Market Development Fund (CDMDF) shall also be appointed only with the prior approval of the Board.
So , SEBI must approve these appointments before they become effective.
19S(3).
The Board of Directors of the trustee company shall be appointed only with the prior approval of the Board (SEBI).
Similarly, the Manager of the Corporate Debt Market Development Fund (CDMDF) shall also be appointed only with the prior approval of the Board.
So , SEBI's approval must be obtained before these appointments become effective.
Example:
Suppose the CDMDF proposes to appoint a new trustee company director or replace its Manager.
Before the appointment can take effect, SEBI's prior approval is mandatory.
Without SEBI's approval, the proposed appointment cannot be finalized.
19S(4).
The trustee company of the CDMDF shall have roles and responsibilities similar to those of trustees under the SEBI (Mutual Funds) Regulations, 1996.
So , the trustee company must perform the same type of oversight and fiduciary functions as trustees of mutual funds.
The trustee company is responsible for ensuring that the CDMDF is managed in compliance with the applicable laws, regulations, and the fund documents.
It must also protect the interests of the unit holders by overseeing the activities of the Manager and ensuring that the fund is operated fairly and transparently.
Even if the Board (SEBI) permits the trustee company to undertake another activity, that activity must not conflict with its role as the trustee of the CDMDF.
The trustee company must always act independently and in the best interests of the CDMDF and its unit holders.
Any additional business must not create a conflict of interest or affect the trustee company's ability to perform its duties impartially.
19S(5).
At least two-thirds of the members of the Board of Directors of the trustee company must be independent directors.
These independent directors must not be associated with the Sponsor or the Manager in any manner whatsoever.
So , they should have no relationship or connection that could affect their independence or impartiality.
Example:
If the trustee company has 9 directors, at least 6 must be independent directors.
These 6 directors cannot be employees, promoters, partners, or otherwise connected with the Sponsor or the Manager.
19S(6).
No person may be appointed as a director of the trustee company without the prior approval of the Board (SEBI).
This requirement applies both at the time of the initial appointment and to any appointment made thereafter.
Every new director must receive SEBI's approval before assuming office.
19S(7).
The trustee company shall constitute an Audit Committee.
The Audit Committee is responsible for reviewing whether:
The Corporate Debt Market Development Fund (CDMDF) complies with the provisions of the Placement Memorandum, as required under the regulations.
The Placement Memorandum is the document that sets out the fund's investment objectives, strategy, risks, and other key terms.
The Audit Committee ensures that the CDMDF operates in accordance with these commitments.
In addition to this, the Audit Committee shall perform any other responsibilities that may be specified by the Board (SEBI) from time to time.
19S(8).
The Manager of the Corporate Debt Market Development Fund (CDMDF) shall appoint a Governance Committee.
The Governance Committee is responsible for overseeing governance-related matters of the CDMDF.
19S(9).
The Governance Committee shall consist of experts from the corporate bond market.
The Committee may include academicians, fund managers or Chief Investment Officers (CIOs), risk management professionals, and independent market experts.
These members bring specialized knowledge and experience to help the CDMDF make informed decisions and maintain strong governance.
Having experts from different backgrounds ensures that investment, risk management, and governance matters are considered from multiple perspectives.
Example:
A Governance Committee may include:
A finance professor (academician).
A Chief Investment Officer (CIO) of a mutual fund.
A risk management specialist.
An independent corporate bond market expert.
Together, they provide expert guidance and oversight to support the effective functioning of the CDMDF.
19S(10).
The Governance Committee, together with the Board of the Manager and the trustee company, shall approve the policies of the Corporate Debt Market Development Fund (CDMDF).
So , the Governance Committee alone cannot approve the policies. The approval must be given jointly by:
The Governance Committee.
The Board of the Manager.
The Board of the trustee company.
This joint approval process ensures that important policies are reviewed from governance, management, and oversight perspectives.
19S(11).
The Governance Committee shall supervise the activities of the Corporate Debt Market Development Fund (CDMDF).
Its role is to oversee the overall functioning of the CDMDF and ensure that it is managed in accordance with the applicable regulations and approved policies.
The Governance Committee shall pay special attention to the management of conflicts of interest, if any.
A conflict of interest arises when a person or entity's personal or business interests could influence decisions made on behalf of the CDMDF.
The Committee must identify, monitor, and ensure that such conflicts are properly managed.
19S(12).
The Governance Committee shall oversee the management of asset-liability mismatches during periods of market dislocation.
An asset-liability mismatch occurs when the timing or value of the fund's assets and liabilities do not align
Example:
The fund may have long-term investments but short-term payment obligations.
During market dislocation, such mismatches can create liquidity and financial risks.
The Governance Committee monitors how these risks are managed.
The Committee ensures that the CDMDF has appropriate measures in place to meet its obligations without compromising its financial stability.
Example:
Suppose the CDMDF holds 5-year corporate bonds (assets) but must repay short-term borrowings within 3 months (liabilities) during a market dislocation.
The Governance Committee oversees how the Manager addresses this mismatch, such as :
By arranging liquidity or restructuring liabilities, so that the CDMDF can meet its obligations without unnecessary financial stress.
Section 19T. Prohibition of Listing
The units of the Corporate Debt Market Development Fund (CDMDF) shall not be listed on any recognised stock exchange.
So , investors cannot buy or sell CDMDF units through stock exchanges such as the NSE or BSE.
The units can only be issued, redeemed, or transferred in the manner permitted under the applicable regulations and the fund documents.
Section 19U. Others
19U(1).
Chapter III-C of the SEBI (AIF) Regulations applies only for the operation of the Corporate Debt Market Development Fund (CDMDF).
Upon the winding up of the CDMDF, the provisions of Chapter III-C shall cease to have effect.
So , once the CDMDF is dissolved, the special regulatory framework governing it also comes to an end.
After winding up, the CDMDF is no longer required to comply with the provisions contained in Chapter III-C, as the fund itself no longer exists.
19U(2).
Even after the winding up of the Corporate Debt Market Development Fund (CDMDF), the Manager continues to remain responsible for certain liabilities.
Specifically, the Manager remains liable for any obligations arising from its investment management activities carried out while managing the CDMDF.
Example:
Assume the CDMDF is wound up.
Later, it is discovered that the Manager breached its investment management obligations, resulting in a financial loss or regulatory liability.
Even though the CDMDF no longer exists, the Manager remains responsible for those liabilities arising from its investment management activities.
