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 six of its debt schemes in India.
Sebi mandated mutual funds to cap their exposure to unlisted non-convertible debentures (NCDs) at 10 per cent 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 could not be traded after the circular.
On April 24, the fund house announced closure of six debt fund schemes and blocked redemptions indefinitely. These included Franklin India Low Duration Fund, Dynamic Accrual Fund, Credit Risk Fund, Short Term Income Plan, Ultra Short Bond Fund and Income Opportunities Fund.
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 mutual funds and take necessary steps to safeguard the interest of investors and maintain the orderliness and robustness of their investments.
“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,” the markets regulator said in a late evening press release.
In order to address these issues and improve transparency and disclosure of investments in debt securities made by mutual funds with money entrusted to them, Sebi said it had constituted various working groups.
Such working groups representing asset management companies (AMCs), industry and academia were set up to review the risk management framework with respect to liquid schemes and to review the existing practices on valuation of money markets and debt securities.
Also, an internal working group was constituted to review prudential norms for mutual funds for investment in various debt and money market instruments. The analysis along with recommendations of the working groups were placed in a meeting of Mutual Fund Advisory Committee (MFAC) held in June 2019.
MFAC had made several recommendations for prudential norms for investment in debt and money market instruments by mutual funds including investments only in listed NCDs and commercial papers (CPs) in the interest of greater transparency and accountability.
Sebi Board after deliberations in its meetings held in 2019, and taking into account the recommendations of MFAC approved that mutual fund schemes will be mandated to invest only in listed non-convertible debentures (NCDs) and the same would be implemented in a phased manner.
However, the mutual funds were allowed the flexibility to invest in unlisted NCDs up to a maximum of 10 per cent of the debt portfolio of the scheme, subject to such investments in unlisted NCDs.
“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,” Sebi said.
“In the current scenario, Franklin Templeton should focus on returning the money of investors as soon as possible,” the regulator added.