India setting up $4 billion fund to backstop corporate debt market

India is setting up a fund worth Rs 33,000 crore ($4 billion) to provide liquidity to its corporate debt market during bouts of stress, to help stem panic selling and ease redemption pressures, an SBI Mutual Fund executive told Reuters.

The government will provide 90% of the money for the fund, and other asset managers would contribute the rest, deputy managing director D.P. Singh said.

SBI Mutual Fund, a unit of India's largest state-owned lender, State Bank of India, has been tasked with administrating 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 debt market.

"We have seen in the past that whenever there is a credit event, there is a run on the funds for redemption which in turn creates pressure on liquidity," said Singh in an emailed response to questions from Reuters.

"This fund is being created to avoid such a situation in the future and meet the redemption pressure in any such event."

During times of stress, the backstop fund could step into the market to buy relatively illiquid investment grade bonds.

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," said Anubhav Shrivastava, partner, Infinity Alternatives, an alternate investment fund (AIF).

"The market for secondary corporate bonds is thin which is why we need the buyer and seller of last resort, the backstop fund will do this."

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 as they were not allowed to speak to the media.

The fund is small relative to 39 trillion rupees ($471 billion) Indian corporate bond market, but its size could be increased later, the source said.

($1 = 82.7420 Indian rupees)