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SEBI advises Franklin Templeton Mutual Fund to focus on returning money to investors

Securities and Exchange Board of India (SEBI) on Thursday advised Franklin Templeton mutual fund (FT) to focus on returning money to investors, in the context of their winding up six of their debt schemes.

In a press release, the market regulator also said that a section of the media has reported quoting FT that tightening of norms for investment in unlisted debt by SEBI was one of the factors that added to pressure on their debt schemes which resulted in winding up of their schemes.

On April 24, Franklin Templeton Mutual Fund 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, it may be noted 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,” SEBI added. 

The regulator said it has 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.

“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 by investors, SEBI had constituted various working groups. Working groups representing 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 market and debt securities,”the market regulator said. 

“Further, an internal working group was constituted to, inter-alia, 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,” SEBI’s statement added. 

SEBI also said that the 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,  inter-alia,  approved  the  following  prudential  norms for investment in listed debt securities,” SEBI said. 

SEBI’s prudential norm said, “Mutual Fund schemes shall be mandated to invest only in listed non-convertible debentures (NCDs) and the same would be implemented in a phased manner. All fresh  investments  in  Commercial  Papers  (CPs)  shall  be  made  only  in  listed  CPs pursuant to issuance of guidelines by SEBI in this regard.

However,  mutual  funds have  flexibility  to  invest  in  unlisted  NCDs  up  to  a maximum of 10% of the debt portfolio of the scheme subject to such investments in unlisted NCDs having simple structures as may be specified from time to time, being rated, secured and with monthly coupon payments. This shall be implemented in a phased manner by June 2020.”

SEBI further noted that, 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.

“In  the  current  scenario,  Franklin  Templeton  should  focus  on  returning the  money  of investors as soon as possible,” SEBI said in the concluding remarks. 

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