July 29: Union Minister of Finance and Corporate Affairs Smt. Nirmala Sitharaman inaugurated the Corporate Debt Market Development Fund (CDMDF) and initiated the muhurat trading on Limited Purpose Clearing Corporation mechanism called AMC Repo Clearing Limited (ARCL), in Mumbai today. The Secretary, Department of Economic Affairs (DEA) Shri Ajay Seth; Chairperson, Securities and Exchange Board of India (SEBI) Smt. Madhabi Puri Buch; and many leading market participants were present on the occasion. Both initiatives intend to deepen the functioning of the corporate debt markets.
The Union Finance and Corporate Affairs Minister, in her speech for the Union Budget of 2021-22, had announced the creation of a permanent institutional framework to enhance secondary market liquidity in the Corporate Bond market during stressed and normal times, thereby instilling confidence amongst participants in the corporate bond market. The Budget announcement has today manifested in the form of the Corporate Debt Market Development Fund (CDMDF).
Speaking on the occasion, Union Finance and Corporate Affairs Minister Smt. Nirmala Sitharaman said Indian capital markets have been a trendsetter of sorts in many aspects of trading, including being one of the fastest in terms of settlement of trade and also in certain areas related to risk mitigation and governance. Our equity markets have witnessed broad-based participation from all segments – retail investors with more than 11.5 crores of Demat accounts on one side of the spectrum to Small and Medium Enterprises (SMEs) raising funds through IPOs on the other. We are witnessing a robust and all-around growth of financial markets today, remarked the Finance Minister.
The Finance Minister announced that the Government has decided to enable the direct listing of listed/unlisted companies on IFSC exchanges, which will be operationalised shortly enabling start-ups and companies of like nature to access the global market through GIFT IFSC. This will also facilitate access to global capital and result in better valuations for Indian companies. Smt. Sitharaman said that Government’s vision for GIFT-IFSC transcends much beyond the realm of traditional finance and ventures into the realm of thought leadership. We envision it as the true embodiment of Atma Nirbhar Bharat, a hub of ingenuity and innovation
Corporate Bond Market
Finance Minister Smt. Nirmala Sitharaman said that the growing size of the corporate bond market is accompanied by a growing diversity of issuers and markets. We now have issuances by new types of entities, e.g. REITs and InvITs under the Union Budget 2021 providing a legal framework for these entities to issue corporate debt securities. Another important area is the issue and listing of municipal debt securities which has enabled market-based financing of infrastructure projects. As announced in this year’s budget, through property tax governance reforms and ring-fencing user charges on urban infrastructure, the Government is incentivising cities to improve their creditworthiness for municipal bonds, further stated the Finance Minister.
The Finance Minister said that the market for repo in government securities is one of the most liquid markets in the country. However, for repo in corporate bonds to take off, the lack of a Central counterparty has been cited as one of the reasons.
Smt. Sitharaman stated that setting up of Limited Purpose Repo Clearing Corporation with the triparty repo services and the central counterparty services of AMC Repo Clearing Limited (ARCL) in the bond market are expected to offer better efficiency in collateral and settlement for its members, which will widen and deepen the corporate bond repo market. This institution will serve manifold purposes – will allow market makers to access cost-effective funding for their inventory, holders of bonds to meet their short-term liquidity needs without having to liquidate their assets and the opportunity entities with short-term surpluses to deploy their funds safely and efficiently.
Based on experience gained in regulating the debt market over the years and feedback received on the subject from time to time, and particularly in light of the disruption observed in the corporate debt market due to the impact of the COVID-19 pandemic, the Finance Ministry had proposed to create a permanent institutional framework – a backstop facility – to instil confidence amongst the participants in the Corporate Bond Market during times of stress and to enhance secondary market liquidity. This is a significant initiative as it is borne out of a collaboration of industry, regulator and the Government towards building market institutions where both issuers and investors in the debt market stand to benefit, stated the Finance Minister. In this context, she mentioned that she is extremely happy to inaugurate both the ARCL and CDMDF initiatives today.
The Finance Minister said that quality, proportionality and effectiveness of regulations matter the most for ease of doing business, ease of investing and ease of living. Taking into account national priorities, Smt. Sitharaman urged that the regulatory environment must strive to balance, at all times, the creation of a conducive environment for starting and running businesses, maintenance of market integrity and sustenance of market stability. It is a possible trinity, she stated. The Finance Minister called for constant dialogue, consultation and understanding between policymakers, regulators and market participants and the creation of mechanisms for that to happen with regularity.
The Union Finance Minister also said that the main focus of our financial sector regulation should be market development and investor protection. Our markets should enable ease of raising capital – both equity and debt and ease of doing investment by reducing the cost of intermediation and boosting productive investments, she said.
Speaking on the scale of growth in Capital Markets in recent years, Finance Minister Smt. Sitharaman informed that 10 years ago, our country’s Market Capitalisation stood at Rs. 74 lakh crore. It has almost doubled every 5 years, reaching Rs. 300 lakh crore today. It is now ranked 5th among the top 10 most-valued countries. India’s weight in the MSCI Emerging Markets Index, one of the most followed indices globally, in 2013 was only 6.3%. It has now more than doubled to 14.6% and also, the number of retail Demat accounts has increased from around 2 crores in 2013 to more than 11.5 crores today – more than 6 crores have been added in the last 3 years, she stated. The number of unique Mutual Fund investors has grown from under 1 crore in 2014 to about 4 crore today, stated the Finance Minister. She also said, REITs and InvITs have also witnessed tremendous growth over the last 5 years, with their combined NAV surging from under 10,000 crore to about Rs. 2.5 lakh crore today.
The Department of Economic Affairs, Ministry of Finance, Government of India, has notified the establishment of ‘Guarantee Scheme for Corporate Debt’ (GSCD) to provide guarantee cover against debt to be raised by the Corporate Debt Market Development Fund (CDMDF) which will act as a backstop in the corporate debt market, in times of market dislocation. The genesis of the backstop facility was set forth as part of the Union Budget 2021-22 announcement, wherein the Central Government, to develop the corporate debt market in India announced:
“To instil confidence amongst the participants in the Corporate Bond Market during times of stress and to generally enhance secondary market liquidity, it is proposed to create a permanent institutional framework. The proposed body would purchase investment grade debt securities both in stressed and normal times and help in the development of the Bond market”.
The GSCD is envisaged to be managed by the Guarantee Fund for Corporate Debt (GFCD), a Trust Fund formed by the DEA with a corpus of Rs 310 crore. The GFCD will be managed by National Credit Guarantee Trustee Company Ltd. (NCGTC), a wholly owned company of the Department of Financial Services (DFS), Ministry of Finance, Government of India. The Trust would provide guarantee cover for loans not exceeding Rs. 30,000 crores, to be raised by CDMDF during times of market dislocation. NCGTC will give the guarantee as a standing facility, initially for 15 years. The SEBI Board shall decide the trigger of debt market disruption warranting the Backstop Facility to operate in times of market dislocation and consequently the need for activation of the guarantee by the NGCTC.
CDMDF is notified as an Alternative Investment Fund (AIF) in the form of a Trust under SEBI (AIF) Regulations. It would purchase investment-grade debt securities both in stressed and normal times and help in the development of the bond market. The units of CDMDF shall be subscribed by Asset Management Companies (AMCs) of Mutual Funds (MFs) and “specified debt-oriented MF Schemes. Hence the issue of moral hazard is also addressed by way of ensuring contributions by AMCs and Mutual Fund schemes.
In times of market dislocation, CDMDF shall purchase and hold eligible corporate debt securities from the participating investors (i.e., specified debt-oriented MF schemes to begin with) and sell as markets recover. The Scheme will act as a key enabler for facilitating liquidity in the corporate debt market and respond quickly in times of market dislocation.
Limited Purpose Clearing Corporation:
As another initiative to deepen corporate bond markets, the Limited Purpose Clearing Corporation (LPCC) named AMC Repo Clearing Corporation Limited started functioning with the first transaction done today. LPCC has been set up with the purpose of clearing and settlement of corporate bond repo transactions and developing an active repo market, which will, in turn, improve liquidity in the underlying corporate bond market. This institution will create a vibrant corporate bond repo market that allows market makers to access cost-effective funding for their inventory, that allows holders of bonds to meet their short-term liquidity needs without having to liquidate their assets and the opportunity to entities with short-term surpluses to deploy their funds safely and efficiently, can all be achieved through this institution.