Backstop funds can step into the market to buy relatively illiquid investment grade bonds. (file)
India is setting up a 330 billion rupee ($4 billion) fund to provide liquidity to its corporate debt market during times of stress, an executive at SBI Mutual Fund told Reuters, reducing panic selling and redemption pressures. can help reduce it.
Deputy Managing Director DP Singh said the government would provide 90% of the money for the fund and other asset managers would contribute the rest.
SBI Mutual Fund, a unit of India’s largest state-owned lender, State Bank of India, tasked with managing the backstop fund, was first notified by the Securities and Exchange Board of India (SEBI) in 2020 following a high-profile default. ) was proposed by Shook up the domestic debt market.
“We have seen in the past that whenever there is a credit event, there is a run on funds for redemption which creates pressure on liquidity,” Singh said in an emailed response to questions from Reuters.
“This fund is being created to avoid such a situation in future and to meet the redemption pressure in any such event.”
In times of stress, the backstop fund may step into the market to buy relatively illiquid investment grade bonds.
Franklin Templeton India’s move to freeze redemptions from six debt funds in April 2020 highlighted the need for a buyer and seller of last resort for corporate bonds as investors withdrew money and the fund house was unable to sell debt investments in the market .
“This backstop facility fund derives from the peculiarity of the Indian market that the bonds are investment grade and still illiquid,” said Anubhav Srivastava, partner, Alternative Investment Funds (AIFs).
“The market for secondary corporate bonds is thin, so we need a buyer and seller of last resort, backstop funds will do that.”
Finance Minister Nirmala Sitharaman had announced last year that the government had accepted Sebi’s proposal for the fund, without giving details.
The fund will be operational within three months, a person familiar with the plans told Reuters on condition of anonymity because he was not allowed to speak to the media.
The fund is small relative to the Indian corporate bond market of 39 trillion rupees ($471 billion), but its size could be increased later, the source said
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
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