Feb 17 (Reuters) – India is launching a 330 billion rupee ($4 billion) fund to provide liquidity to its corporate bond market during periods of stress, curb panic selling and ease redemption pressure, a manager of the corporate bond market said SBI Mutual Fund to Reuters.
The government will provide 90% of the money for the fund and other asset managers would contribute the rest, said deputy chief executive DP Singh.
The SBI Mutual Fund, a unit of India’s largest sovereign lender, the State Bank of India, has been tasked with managing 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 market debt market.
“We’ve seen in the past that whenever there’s a credit event, there’s a run on redemption funds, which in turn puts pressure on liquidity,” Singh said in an emailed response to Reuters questions.
“This fund is created to avoid such a situation in the future and to counteract the redemption pressure in such an event.”
In times of stress, the backstop fund could enter the market to buy relatively illiquid investment-grade bonds.
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The need for a buyer and seller of last resort for corporate bonds was highlighted by Franklin Templeton India’s move to halt six debt fund redemptions in April 2020 as investors withdrew money and the fund house was unable to sell debt investments in the market.
“This backstop fund responds to the peculiarity of the Indian market that the bonds are investment grade and still illiquid,” said Anubhav Shrivastava, partner at Infinity Alternatives, an alternative investment fund (AIF).
“The corporate secondary bond market is thin, so we need the buyer and seller of last resort, the backstop fund will do that.”
Finance Minister Nirmala Sitharaman announced last year that the government had taken up 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 she was not allowed to speak to the media.
The fund is small compared to the 39 trillion rupees ($471 billion) Indian corporate bond market, but its size could be increased later, the source said.
($1 = 82.7420 Indian Rupees)
Reporting by Jayshree P Upadhyay; Edited by Simon Cameron Moore
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