According to an SBI Mutual Fund official who spoke to Reuters, India is establishing a fund worth Rs 33,000 crore ($4 billion) to offer liquidity to its corporate debt market at times of stress, help stop panic selling, and lessen redemption pressures according to an SBI Mutual Fund official who spoke to Reuters.
According to D.P. Singh, deputy managing director, the government will contribute 90% of the fund’s funding, with other asset managers providing the remaining 10%.
The Securities and Exchange Board of India (SEBI) originally recommended the backup fund in 2020, following high-profile defaults that shook the domestic debt market. SBI Mutual Fund, a division of India’s largest state-owned lender, State Bank of India, has been tasked with managing the fund.
In an email response to inquiries from Reuters, Singh said that whenever a credit event occurs, there is a run on the funds for redemption, which in turn puts strain on liquidity.
“This fund is being established to prevent a similar circumstance in the future and to satisfy the redemption pressure in any such circumstance.”
The backstop fund might enter the market in times of crisis and purchase relatively scarce investment grade bonds.
Franklin Templeton India decided to halt redemptions from six debt funds in April 2020 due to investor withdrawals and the fund house’s inability to sell debt investments on the market, underscoring the necessity for a buyer and seller of last resort for corporate bonds.
Anubhav Shrivastava, the partner at Infinity Alternatives, an alternative investment fund, said: “This backstop facility fund comes out of the uniqueness of the Indian market that the bonds are investment grade and nevertheless illiquid” (AIF).
Because there is a limited supply of secondary corporate bonds, the backup fund will act as the buyer and seller of last resort.
Nirmala Sitharaman, the minister of finance, stated without providing any information last year that the government has accepted SEBI’s proposal for the fund.
On condition of anonymity, because they were not authorized to speak to the media, a person familiar with the plans told Reuters that the fund will be functioning in three months.
The source stated that although the fund is minor in comparison to the $471 billion ($39 trillion) Indian corporate bond market, it may eventually grow in size.