The Securities and Exchange Board of India (SEBI) told on Thursday that it has advised Franklin Templeton Mutual Fund to focus on returning money to investors, in the context of their winding up six of their debt schemes. The market regulator’s comments come a day after Franklin Templeton’s global chief partly blamed a rule introduced in October 2019 by SEBI for the fiasco that led to winding up of 6 of its debt schemes in India. SEBI mandated mutual funds to cap the exposure to unlisted non-convertible debentures (NCDs) at OF 10 percent of the schemes’ corpus.
In a conference call after its earnings, Franklin’s CEO ‘Jennifer Johnson’ said the rule orphaned one-third of their funds as these unlisted NCDs can not be traded after the circular. On April 24, the fund house announced closure of six debt fund schemes and blocked redemptions . In this context, Sebi clarified that in light of credit events since September 2018, that led to challenges in the corporate bond market, a need was felt to review the regulatory framework for the mutual funds and take necessary and needy steps to safeguard the interest of the investors and maintain the orderliness and robustness of their particular investments.
It is also noted that the markets regulator said in a late evening press release – “It was observed that unlisted debt securities, particularly bespoke securities in which only a single investor invested, suffered from both forms of opaqueness: opaqueness of structure and true nature of risk on the one hand and lack of ongoing disclosure in respect of financials of the issuer on the other” . MFAC had made several recommendations for prudential norms for investment in the debt and money market instruments by the mutual funds including investments only in listed NCDs and commercial papers (CPs) in the interest of greater the transparency and the accountability. The mutual funds were allowed the flexibility to invest in unlisted NCDs up to a maximum around 10 percent of the debt portfolio of the scheme, subject to such investments in unlisted NCDs.
As sebi said – “Despite the regulations being clear, some mutual fund schemes seem to have chosen to have high concentrations of high risk, unlisted, opaque, bespoke, structured debt securities with low credit ratings and seem to have chosen not to rebalance their portfolios even during the almost 12 months available to them so far”.
And the regulator added – ”In the current scenario, Franklin Templeton should focus on returning the money of investors as soon as possible,” .