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Mumbai The statement by Franklin Templeton’s world president, Jennifer M. Johnson, about the regulatory reasons behind the closure of her six debt schemes in India, has not worked well with the Securities and Exchange Board of India (Sebi). In a statement Thursday night, Sebi said he has advised Franklin Templeton India to focus on repaying investors’ money as soon as possible after the closure of its six schemes with more than ₹25,000 cr in assets
He also said that despite enough time to cut investments in unlisted bonds to 10%, some fund schemes have chosen to have a high concentration risk.
“Although regulations are clear, some mutual fund schemes appear to have chosen to have high concentrations of bespoke, opaque, opaque, high-risk structured debt securities with low credit ratings and appear to have chosen not to rebalance their portfolios, even during the 12 months available to them so far, “Sebi said in a press release.
In October 2019, Sebi had changed the regulations governing investment in debt schemes in unlisted bonds and had limited it to 10%. The funds received a period of almost one year to comply with these standards.
The schemes had to meet the investment limits for unlisted non-convertible bonds (ENTs) in 15% and 10% of the debt portfolio before March 31, 2020 and June 30, 2020, respectively.
“In addition, it allowed mutual funds to pay off existing investments in unlisted debt instruments until the maturity of those instruments, so as not to disrupt the market,” Sebi said.
These dates were subsequently extended to September 30, 2020 and December 31, 2020, respectively, in light of the disruptions related to Covid-19.
Franklin Templeton India, on April 23, had closed its six debt schemes due to illiquidity and rescue pressures due to Covid-19. However, Johnson in Franklin Templeton’s second-quarter earnings call on May 1 also blamed this rule on Sebi. The transcript of the call was made public on May 6.
“In India, anything below the AAA rating is considered non-investment grade. The high yield market is still very immature there. So we have had a big fund, actually there are six funds, which were invested with a large amount of this type of private debt. In October 2019, unfortunately, Sebi introduced new guidelines that say any investment in unlisted instruments must be less than 10%. You cannot have more than 10% in a fund and you cannot exchange them. So about a third of our funds were orphaned there, “Johnson had said.” It was really about selling those assets in a liquidation sale and there were very few buyers because this regulation did not allow trade, “he said.
Sebi also highlighted that the 10% limit was imposed due to credit events since September 2018, which led to challenges in the corporate bond markets.
“It was noted that unlisted debt securities, particularly bespoke securities in which only one investor invested, suffered both forms of opacity: opacity of structure and true nature of risk, on the one hand, and lack of continuous disclosure regarding the issuer’s finances on the other, “Sebi said.
Earlier in the day, the Mutual Funds Association in India (AMFI) had also defended Sebi’s risk management measures.
Sebi’s 10% cap on investing in unlisted non-convertible bonds (ENTs) and commercial papers (PCs) guaranteed access to relevant information and improved liquidity in the secondary market, Amfi said in a press release on Thursday.
Globally, listing of bonds on exchanges has been observed to create better dissemination of information, resulting in better price discovery and better liquidity in secondary markets, Amfi said.
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