CIRCULAR
SEBI/HO/IMD/PoD2/P/CIR/2023/128 July 27, 2023
Asset Management Companies (AMCs)/
Trustee Companies/ Board of Trustees of Mutual Funds/
Trustee Company of CDMDF/
Association of Mutual Funds in India (AMFI)/
Stock Exchanges/
Clearing Corporations
Sir / Madam,
Subject: Framework for Corporate Debt Market Development Fund (CDMDF)
1. Chapter III-C has been inserted vide amendments to SEBI (Alternative
Investment Funds) Regulations, 2012 vide Gazette notification no. SEBI/LAD-
NRO/GN/2023/132 dated June 15, 2023 in order to facilitate constitution of an
Alternative Investment Fund namely, Corporate Debt Market Development Fund
(“CDMDF” or “the Fund”), to act as a Backstop Facility for purchase of
investment grade corporate debt securities, to instil confidence amongst the
participants in the Corporate Debt Market during times of stress and to generally
enhance secondary market liquidity by creating a permanent institutional
framework for activation in times of market stress.
2. CDMDF shall comply with the Guarantee Scheme for Corporate Debt (GSCD)
as notified by Ministry of Finance vide notification no. G.S.R. 559(E) dated July
26, 2023, which includes the Framework for Corporate Debt Market
Development Fund.
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3. In addition to the abovementioned scheme as mentioned at para 2 above,
CDMDF shall comply with following:
3.1. The fund shall deal only in following securities during normal times:
• Low duration Government Securities
• Treasury bills
• Tri-party Repo on G-sec
• Guaranteed corporate bond repo with maturity not exceeding 7 days.
3.2. The fees and expenses of the Fund shall be as follows:
• During Normal times: (0.15% + tax) of the Portfolio Value charged on daily
pro-rata basis.
• During Market stress: (0.20% + tax) of the Portfolio Value charged on
daily pro-rata basis.
• “Portfolio Value” means the aggregate amount of portfolio of investments
including cash balance without netting off of leverage undertaken by the
Fund.
Clarification:
i. The taxes as mentioned above shall include all kinds of taxes.
ii. Transaction costs on securities such as brokerage, clearing charges etc.
shall be charged within the limit of fees and expenses.
iii. Financing charges pertaining to borrowings made by CDMDF (such as
interest, guarantee fees, other fees like bank charges, processing fees
etc.) may be separate from fees and expenses of the fund as provided
above.
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3.3. Corporate debt securities to be bought by CDMDF during market dislocation
include listed money market instruments. The long term rating of issuers
shall be considered for the money market instruments. However, if there is
no long term rating available for the same issuer, then based on credit rating
mapping of CRAs between short term and long term ratings, the most
conservative long term rating shall be taken for a given short term rating.
3.4. CDMDF shall follow the Fair Pricing document as placed at Annexure A
while purchase of corporate debt securities during market dislocation.
3.5. CDMDF shall follow the loss waterfall accounting, as prescribed at Annexure
B.
3.6. CDMDF shall disclose Net Asset Value (NAV) of the fund by 9:30 PM on all
business days on website of its Investment Manager and AMFI. For times
when CDMDF would have exposure to corporate debt, such NAV shall be
disclosed by 11 PM on all business days.
3.7. Purchase allocation and trade settlement of corporate debt securities bought
by CDMDF during market dislocation:
• Keeping in view the prudential limits and various other guidelines as
prescribed in scheme as mentioned at para 2 above, AMFI shall specify
the detailed guidelines for purchase of securities by CDMDF in
consultation with SEBI. Stock exchanges shall provide a separate window
on the existing Request for Quote (RFQ) platform to facilitate the
purchase as per AMFI issued guidelines, within 3 months of issuance of
this circular.
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• Clearing Corporations shall provide required infrastructure to facilitate the
trade settlement of corporate debt trades by CDMDF during market
dislocation, within 3 months of issuance of this circular.
4. This circular is issued in exercise of powers conferred under Section 11 (1) of
the Securities and Exchange Board of India Act, 1992, read with the provisions
of regulations 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the
interest of investors in securities and to promote the development of, and to
regulate the securities market.
5. This Circular is available at www.sebi.gov.in under the link “Legal > Circulars”.
Yours faithfully,
Lakshaya Chawla
Deputy General Manager
Tel no.: 022-26449369
Email: lakshayac@sebi.gov.in
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Annexure A
Approach to purchase pricing:
1. While it may not be possible to pre-empt the events and scenarios prevailing at
the point of time when purchase of securities is being undertaken by CDMDF,
the investment policy may provide for following indicative factors for determining
purchase price of corporate debt securities:
a. Valuation policies prescribed for Mutual Funds (based on the principles of
fair valuation).
b. Previous day’s valuation of securities by valuation agencies before the date
of Purchase.
c. Average 10 days valuation prior to start of market dislocation.
d. Mark-up in yield over previous day may be limited to arrive at floor price.
For eg: it may be 25/50/75 bps over AAA/AA/Below AA securities
respectively.
e. Consideration of Spread over benchmark/ spread over sovereign yields.
f. Qualitative factors that may have bearing on arriving at fair price.
2. The investment policy shall be duly approved & reviewed periodically by the
Board of Trustee, Investment Committee & Governance Committee. CDMDF
shall adhere to investment framework laid down in the investment policy & the
fund documents.
3. However, in case the Investment Manager is at variance from the aforesaid
factors, they may, after recording reasons in writing and approval from
Investment Committee, take such price as deemed fit with an objective of
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achieving the fair pricing (adjusted for liquidity risk, interest rate risk and credit
risk). Such instances shall be apprised to Governance Committee and Board of
Trustees on a regular basis.
4. Investment framework of CDMDF:
(i) CDMDF would buy securities from secondary market of only investment
grade, listed and having residual maturity of upto 5 years.
(ii) CDMDF shall not buy any unlisted, below investment grade or defaulted
debt securities or securities in respect of which there is a material
possibility of default or adverse credit news or views. The rationale for
the same shall be documented.
(iii) Purchase of securities to be done as per the above fair pricing guidelines
to be adjusted if considered appropriate by the IM for liquidity risk, interest
rate risk, and credit risk. Buying/trading to be at fair price but not at
distress price.
(iv) Selling at breakeven/profit as market stabilize, to reduce borrowing as
soon as possible.
(v) Valuation of portfolio shall be governed by existing norms on valuation
under the Mutual Fund regulatory framework.
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Annexure B
Loss Waterfall accounting for CDMDF
Based on deliberations with Mutual Fund industry, the following shall be the
approach for reflection of waterfall in the NAV of units of CDMDF
A. There shall be three classes of units to be allotted by CDMDF, which shall be as
follows:
1. Class A1 and Class B units shall be allotted to AMCs and Sponsor/IM
respectively (against one time contribution of 0.02% of AUM of specified
debt schemes and Sponsor/IM commitment). Class A1 units and Class B
units are treated at par and referred as Class A1 units only.
2. Class A2 units shall be allotted to specified debt schemes (contributing
0.25% of AUM of specified debt schemes)
3. Class A3 units shall be allotted to Mutual Fund schemes selling debt
securities to the Fund (where 10% of the consideration is in the form of
units of CDMDF, called A3 units)
B. Daily NAV should reflect the fair value of each unit class including the effect of
differential treatment of A3 unit class. The loss waterfall based on CDMDF
Framework is as follows:
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Level of loss Hereinafter
Particulars
absorption referred as
Up to 10% by MF schemes selling debt securities to the Class A3 units
Fund (i.e., equivalent to the units outstanding of the
1st
selling MF schemes issued to them against sale of
securities to CDMDF)
Contribution of specified debt oriented MF Schemes Class A1 and
2nd
and AMCs A2 units
3rd Government Guarantee NA
C. The following process shall be followed:
1. All profits/losses/income/gains/expenses to be apportioned to A1 and A2
unit class in ratio of their AUM during the normal times.
2. A3 units to be allotted at the same NAV as that of A1 & A2 at the time of
opening of market dislocation.
3. All profits/losses/income/gains/expenses (including cost of leverage) to
be apportioned to all the 3 class of units during the market dislocation and
subsequently till A3 units exits (i.e A1/A2/A3), except that the NAV of A1
and A2 should not drop below their opening NAV (opening NAV at the
time of market dislocation). Since A1 and A2 units are to be protected at
their opening NAV to that extent the excess/unabsorbed loss/expense
would be debited to only A3 unit class. This would mean the NAV of A3
units could drop below the NAV of A1&A2
4. Any subsequent profits/gains/income will be first credited to the A3 unit
class to an extent that they come back at par with A1 & A2 NAV, and then
the balance to be apportioned to all the three unit class.
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5. A3 units will not get any exit till there is an outstanding portfolio from
market dislocation and leverage is completely paid.
6. Any subsequent allotment of A3 units would be at the same NAV as that
of the existing A3 units (if they exist), otherwise at opening NAV of A1 and
A2. There will be only one class/bucket of A3 units irrespective of whether
they were issued in subsequent tranche of purchase during a particular
phase of market dislocation or were issued during another phase of
market dislocation. Therefore any adjustment for loss/expense will be
carried out to the entire bucket o A3 units irrespective of when they were
allotted.
7. There will not be any segregation of portfolio linking to different phase or
tranches of purchase during the market dislocation, entire portfolio will be
one common pool, both during the normal times or during the market
dislocation including if there is any security that exist from normal times
and is continued during the market dislocation
8. The accounting of A3 and certain adjustments of NAV may require
manual workings by the fund accountant and will not be completely
system driven. Such manual workings can be subject to second check by
the concurrent auditor.
D. The above is as per various scenarios that have been envisaged currently. There
may be a need that may arise with some other scenarios emerging and the same
would be dealt with appropriately through relevant committee.
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Loss Waterfall accounting for CDMDF
Allocation Mechanism
Investment
INR A1 A2 A3 Total GSEC/CBLO MD-INVT A3 Situation System
Subscription 1,000 1,000 - 2,000
Face value 10.00 10.00 -
Number of units 100 100 -
Part A
Scenario - 1 2,000 2,010 Investment in Government Securities and T-Bills System driven calculation
MTM Gain is proportionately allocated to all the unit holders (except A3
MTM Gain 5 5 - 10 doesn't exist as of now)
NAV of the unit 10.05 10.05 -
NAV of the Corpus 1,005 1,005 - 2,010
Scenario - 2 2,002 Investment in Government Securities and T-Bills System driven calculation
MTM loss is proportionately allocated to all the unit holders (except A3
MTM Loss -4 -4 - -8 doesn't exist as of now)
NAV of the unit 10.01 10.01 -
NAV of the corpus 1,001 1,001 - 2,002
Scenario - 3 2,006 Investment in Government Securities and T-Bills System driven calculation
Gain is proportionately allocated to all the unit holders (except A3 doesn't
Realised gain 2 2 - 4 exist as of now)
NAV of the unit 10.03 10.03 -
NAV of the Corpus 1,003 1,003 - 2,006
Scenario - 4 2,004 Investment in Government Securities and T-Bills System driven calculation
loss is proportionately allocated to all the unit holders (except A3 doesn't
Realised loss -1 -1 - -2 exist as of now)
NAV of the unit 10.02 10.02 -
NAV of the corpus 1,002 1,002 - 2,004
Scenario - 5 204 2,000 Market Dislocation triggered System driven calculation
Opening NAV of the Corpus 1,002 1,002 - 2,004
Number of opening units 100 100 -
Opening NAV of the unit 10.02 10.02 -
Additional Capital - - 200 200
A3 NAV assumed to be same as A1 and A2 while allotting the units. A1
NAV at the which the units to be allotted 10.02 10.02 10.02 and A2 NAV will be the opening NAV for the market dislocation trigger
Number of additional units - - 19.96
Total corpus (NAV) 1,002 1,002 200 2,204
Part B
system driven except the FA needs to now start monitoring the NAV of A1 and A2 should not
Scenario - 6 214 2,000 MTM profit drop below their opening NAV of Rs. 10.02 till A3 NAV is positive
MTM Gain 4.5 4.5 0.9 10 MTM gain gets apportioned to all the unit class
NAV of the unit 10.07 10.07 10.07
NAV of the Corpus 1,007 1,007 201 2,214
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system driven except the FA needs to now start monitoring the NAV of A1 and A2 should not
Scenario - 7 206 2,000 MTM Loss drop below their opening NAV of Rs. 10.02 till A3 NAV is positive
MTM gain gets apportioned to all the unit class, however the NAV of A1
MTM Loss -3.6 -3.6 -0.7 -8 and A2 should not drop below opening NAV of 10.02
NAV of the unit 10.03 10.03 10.03
NAV of the corpus 1,003 1,003 200 2,206
system driven except the FA needs to now start monitoring the NAV of A1 and A2 should not
Scenario - 8 710 1,500 Realised Gain drop below their opening NAV of Rs. 10.02 till A3 NAV is positive
Realised gain 1.8 1.8 0.4 4 Realised gain gets apportioned to all the unit class
NAV of the unit 10.05 10.05 10.05
NAV of the Corpus 1,005 1,005 201 2,210
Scenario - 9 908 1,300
system driven except the FA needs to now start monitoring the NAV of A1 and A2 should not drop
Realised loss -0.9 -0.9 -0.2 -2 Realised Loss below their opening NAV of Rs. 10.02 till A3 NAV is positive
NAV of the unit 10.04 10.04 10.04
NAV of the corpus 1,004 1,004 200 2,208 Realised Loss gets apportioned to all the unit class
Scenario - 10 888 1,300 Significant MTM loss Manual working and intervention required
MTM loss -9.1 -9.1 -1.8 -20
with the loss getting apportioned to all the 3 unit classes, the NAV of A1
NAV of the unit 9.95 9.95 9.95 and A2 is falling below their opening NAV of 10.020
NAV of the corpus 995 995 199 2,188
Manual working and adjustment to be carried out 888 1,300
Current NAV of units 10.04 10.04
Less: Protection to opening NAV 10.02 10.02
Surplus to absorb the w/off 0.02 0.02
Number of units 100 100
Loss to be absorbed by A1 and A2 1.82 1.82 3.64
NAV post the loss absorption 10.02 10.02 which is same as the opening NAV
Unabsorbed loss entirely to A3 -16.36 -16.36
Corpus NAV of A3 units post absorbing the
waterfall loss 184
Now A3 unit NAV drops below the NAV of A1 and A2. this is manual
A3 class unit NAV post absorbing the waterfall adjustment to be done in the system where there should be transfer of
loss 9.22 value between the unit class based on such workings
Closing corpus( NAV) 1,002 1,002 184 2,188
Scenario - 11 1,858 300 Significant cash loss (realised loss) Manual working and intervention required
Cash loss -13.7 -13.7 -2.5 -30
with the loss getting apportioned to all the 3 unit classes, the NAV of A1
NAV of the unit 9.88 9.88 9.09 and A2 is falling below their opening NAV of 10.020
NAV of the corpus 988 988 181 2,158
Manual working and adjustment to be carried out
Current NAV of units 10.02 10.02
Less: Protection to opening NAV 10.02 10.02
Surplus to absorb the w.off - -
Number of units 100 100
Loss to be absorbed by A1 and A2 - - -
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NAV post the loss absorption 10.02 10.02 which is same as the opening NAV
Unabsorbed loss entirely to A3 -30 -30
Corpus NAV of A3 units post absorbing the
waterfall loss 154
Now A3 unit NAV drops below the NAV of A1 and A2. this is manual
A3 class unit NAV post absorbing the waterfall adjustment to be done in the system where there should be transfer of
loss 7.72 value between the unit class based on such workings
Closing corpus( NAV) 1,002 1,002 154 2,158
Additional Security of Rs 1000 purchased and A3 units issued for 10%
Scenario -12 1,038 1,300 & MTM Gain of 80 Manual working and intervention required
Current NAV of units 10.02 10.02 7.72
Number of units 100 100 19.96
Additional units 12.96
Additional Capital - - 100 100
Shortfall in A3 NAV Corpus 2.30
Cash profit to be first adjusted to bridge the
shortfall 75.87 80
Corpus NAV post bridging the gap 1,002.00 1,002.00 329.87 2,333.87
Balance Cash profit to be distributed 4.13
Distribution of balance profits 1.77 1.77 0.58 4.13
Closing corpus NAV 1,003.77 1,003.77 330.45 2,338
Number of units 100 100 32.92
NAV per unit 10.04 10.04 10.04
Scenario -13 1,313 1,000 A3 portfolio sold of Rs 300 at Realised loss of Rs 40 & MTM of Rs 15 Manual working and intervention required
MTM Gain - - - 15
Cash Loss -40
Current NAV of units 10.04 10.04 10.04
Less: Protection to opening NAV 10.02 10.02
Surplus to absorb the w/off 0.02 0.02
Number of units 100 100
Loss to be absorbed by A1 and A2 -1.77 -1.77 -3.55
NAV post the loss absorption 10.02 10.02
Unabsorbed loss entirely to A3 -21.45 -21.45
A3 class unit NAV post absorbing the waterfall
loss 9.39
NAV of all unit holders post loss allocation 10.02 10.02 9.39
Number of units across unit holders 100.00 100.00 32.92 232.92
Corpus NAV post bridging the gap 1,002 1,002 309 2,313
-
MTM gain gets apportioned to A3 until the Opening NAV and then to
Scenario -14 1,343 1,000 all remaining unit holders Manual working and intervention required
MTM Gain 30
NAV of the unit 10.02 10.02 9.39
Shortfall in A3 (2)NAV Corpus 0.63
Cash profit to be first adjusted to bridge the
shortfall 20.87
Corpus NAV post bridging the gap 1,002.00 1,002.00 329.87 2,334
Balance Cash profit to be distributed 9.13
Post gains apportioned to A3 balance MTM gain gets apportioned to all the
Distribution of balance profits 3.92 3.92 1.29 9.13 unit class
Corpus AUM post bridging the gap 1,005.92 1,005.92 331.16 2,343
Units Held by unit holders 100.00 100.00 32.92
NAV after distribution 10.06 10.06 10.06
Notes:
1. Post achieving parity in NAV again the normal accounting would start
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