In an effort to bolster the stability of the corporate debt market during times of market dislocation, the Department of Economic Affairs (DEA), Ministry of Finance, Government of India, has introduced the Guarantee Scheme for Corporate Debt (GSCD). This innovative scheme aims to provide a safety net for the Corporate Debt Market Development Fund (CDMDF), an Alternative Investment Fund (AIF) established under SEBI Regulations, and facilitate investments in corporate debt securities. The scheme, managed by the Guarantee Fund for Corporate Debt (GFCD), seeks to stabilize markets and foster investor confidence.
Purpose of the Scheme:
The primary objective of the Guarantee Scheme for Corporate Debt (GSCD) is to offer a 100% guarantee cover against debt raised or to be raised by the Corporate Debt Market Development Fund (CDMDF) during market dislocation. By providing this safety net, the government aims to instill confidence in investors, thereby stabilizing the corporate debt market and fostering economic growth. The guarantee extends to the principal amount, interest accrued, and other bank charges, up to a limit of Rs. 30,000 crore.
Framework and Duration:
The Guarantee Fund for Corporate Debt (GFCD) operates as a Trust Fund formed by the DEA, Ministry of Finance, and is managed by the National Credit Guarantee Trustee Company Ltd. (NCGTC). The scheme guidelines came into force on the date of its issuance and were initially designed for a 15-year period from the initial closing date of CDMDF. The DEA, in consultation with SEBI, has the discretion to extend the duration of the scheme.
Eligible Unitholders and Contributions:
Eligible members of the CDMDF include debt-oriented Mutual Fund schemes, as specified by SEBI, and existing or new Asset Management Companies (AMCs) managing specified debt-oriented MF schemes. Debt-oriented Mutual Fund schemes contribute 25 basis points (bps) of their Assets Under Management (AUM) and provide additional incremental contributions as their AUM grows. On the other hand, AMCs make a one-time contribution equivalent to 2 bps of their AUM. These contributions are held in the form of investments in units of CDMDF by the contributors.
Activities of CDMDF:
During normal times, CDMDF deals only with liquid and low-risk debt instruments using its corpus. However, during times of market dislocation, it is eligible to raise debt up to 10 times its corpus from banks, the bond market, or the repo market, subject to a maximum guarantee of Rs. 30,000 crore. The CDMDF then utilizes its corpus and raised debt to purchase and hold eligible corporate debt securities of investment grade from participating investors, with a residual maturity not exceeding 5 years. After the market dislocation period ends, CDMDF offloads a large part of its holdings within a reasonable time, which can be extended with the approval of SEBI Board.
Guarantee Issue and Monitoring Mechanism:
The process of issuing guarantees and monitoring the scheme involves various stakeholders, including Member Lending Institutions (MLIs) that screen CDMDF’s application and sanction loans. Upon approval, a Guarantee Number is auto-generated, indicating the availability of guarantee on the said loans. The details of loans disbursed and utilization are recorded on NCGTC’s portal. In case of a claim, NCGTC assesses the loss incurred and arranges to pay the guaranteed amount to the MLI within 60 days.
Guarantee Fee:
GFCD charges a guarantee fee of 0.5% per annum on outstanding loans on a daily pro-rata basis until a claim is lodged. The fee is paid by MLIs, and the MLIs recover this guarantee fee from CDMDF.
Management Committee of GFCD:
To oversee the operations of the Trust, a Management Committee (MC) is constituted by the DEA, Ministry of Finance. The MC reviews, supervises, and monitors the functioning of the Trust and provides guidance on policy matters related to the Scheme. The structure of the MC comprises various members, including the Secretary of DEA as the Chairperson, and other experts nominated by the Secretary, DEA.
