India To Set Up $4 Billion Fund To Backstop Corporate Debt Market: Report According to the report, the government will provide 90% of the money for the fund, and other asset managers would contribute the rest
By Teena Jose •
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India is setting up a fund worth $4 billion to provide liquidity to its corporate debt market during bouts of stress, to help stem panic selling and ease redemption pressures, according to a Reuters report citing an SBI Mutual Fund executive. The debt market in India is the financial marketplace where all debt instruments are bought and sold.
The government will provide 90% of the money for the fund, and other asset managers would contribute the rest, deputy managing director D.P. Singh reportedly said in a statement.
When an entity needs funds, it can issue a debt instrument to borrow money from interested investors. SBI Mutual Fund, a unit of India's largest state-owned lender, State Bank of India, has been reportedly tasked with administering the backstop fund, which was first proposed by the Securities and Exchange Board of India (SEBI) in 2020 after high-profile defaults rocked the domestic debt market.
In an emailed response to questions from Reuters, Singh said that, "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."
According to reports, the need for a buyer and seller of last resort for corporate bonds was highlighted by Franklin Templeton India's move to stop redemptions from six debt funds in April 2020 as investors withdrew money and the fund house was unable to sell debt investments in the market.
This backstop facility fund comes out of Indian market peculiarity that the bonds are investment grade and still illiquid. The market for secondary corporate bonds is thin which is why we need the buyer and seller of last resort, the backstop fund will do this," said Anubhav Shrivastava, partner, Infinity Alternatives, an alternate investment fund (AIF), as quoted in the news report.
