₹33000­ cr backstop fund for bonds to be launched

  • July 25, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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₹33000­ cr backstop fund for bonds to be launched

Subject: Economy

Section: Capital Market 

Context:

Finance Minister to launch ₹33,000 crore backstop fund for the corporate bond market and limited purpose clearing corporation for repo transactions in corporate bonds

Key Points:

  • Earlier this year the capital markets regulator had approved setting up a backstop facility for the Corporate Debt Market Development Fund in the form of an alternative investment fund.
  • During times of stress in the bond market the corpus would be utilised to buy illiquid investment grade corporate debt.
  • The fund will be managed by SBI Asset Management Company. The fund is small relative to Rs 39 lakh crore ($471 billion) Indian corporate bond market, but its size could be increased later.

What is the Corporate Debt Market Development Fund ?

  • SEBI introduced the “Corporate Debt Market Development Fund”, a backstop facility for specified debt funds during market dislocations and to prevent recurrences of events such as the one with Franklin Templeton MF.
  • 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 there is a need for a buyer and seller of last resort, which the backstop fund will act as.
What is Backstop?

  • There exists several ways in which a company can raise the required amount of capital. One of the ways is going public. When a company issues shares in the open market to raise the required funds, there is no guarantee that the shares issued will be fully subscribed. The backstop guarantees financial arrangements in case of insufficient funds.
  • The backstop provider takes the risk and thus mitigates the uncertainties of fund requirements. To some extent, it is similar to an insurance policy as it covers the need of scarcity of source of funds.
  • In a Backstop, the underwriter provides the guarantee of full subscription to the issuer, by purchasing an unsubscribed portion of shares. The contract between the issuer company and backstop purchaser is known as a firm-commitment underwriting contract.
  • In other contexts backstop arrangement refers to financier of the last resort, where in the absence of market finance or liquidity the backstop provider steps in.
economy ₹33000­ cr backstop fund for bonds to be launched