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Published on 8 April 2025
SEBI Directs Franklin Templeton to Prioritize Investor Fund Returns
SEBI Directs Franklin Templeton to Prioritize Investor Returns
On May 7, 2020, the Securities and Exchange Board of India (SEBI) issued a directive to Franklin Templeton Mutual Fund (FT) emphasizing the importance of expediently returning funds to investors amid the winding up of six of its debt schemes.
Context of SEBI's Advisory
Recent media reports quoted FT, suggesting that the tightening of investment norms for unlisted debt by SEBI contributed to the mounting pressure on its debt schemes, ultimately leading to their closure.
In response, it is crucial to highlight that in light of various credit events since September 2018, there was a recognized need to reassess the regulatory framework governing Mutual Funds. This initiative aimed to protect investors' interests and ensure the robustness of their investment portfolios.
Transparency Issues in Unlisted Debt Securities
The challenges with unlisted debt securities, particularly bespoke securities which are exclusively held by single investors, stem from a dual lack of transparency. These include:
- Opaqueness regarding their structure and true risk profile.
- Insufficient ongoing financial disclosures from the issuers.
To tackle these concerns and enhance the transparency and disclosure of mutual fund investments in debt securities, SEBI established several working groups. These groups comprised representatives from Asset Management Companies (AMCs), industry stakeholders, and academic experts tasked with reviewing risk management frameworks related to liquid schemes as well as existing valuation practices of money market and debt securities. An internal working group was also constituted to evaluate, among other factors, prudential investment norms for Mutual Funds in various debt and money market instruments.
Recommendations from the Mutual Fund Advisory Committee
The findings and recommendations from these working groups were presented to the Mutual Fund Advisory Committee (MFAC) in June 2019, as detailed in Annex A. The MFAC proposed several prudential norms for investments in Debt and Money Market instruments by Mutual Funds, advocating for investments exclusively in listed Non-Convertible Debentures (NCDs) and Commercial Papers (CPs) to foster greater transparency and accountability.
Following thorough discussions in 2019, the SEBI Board approved these recommendations, specifically mandating:
- Mutual Fund schemes to invest solely in listed NCDs, with a phased implementation.
- Fresh investments in CPs to occur only in listed CPs, in accordance with SEBI's upcoming guidelines.
However, funds may invest up to 10% of their debt portfolio in unlisted NCDs, provided those investments meet specified conditions such as having simple structures, being rated, secured, and offering monthly coupon payments. This phased implementation is expected to be completed by June 2020.
Compliance Timeline and Existing Investments
In a circular dated October 1, 2019, SEBI established timelines for compliance with investment limits for unlisted NCDs set at 15% and 10% of the debt portfolio by March 31, 2020, and June 30, 2020, respectively. To prevent market disruption, mutual funds were allowed to retain existing investments in unlisted debt instruments until maturity. Additionally, these deadlines were later extended to September 30, 2020, and December 31, 2020, due to COVID-19 related impacts.
Current Challenges and Recommendations
Despite the clarity of these regulations, some mutual fund schemes have maintained high concentrations of high-risk, unlisted, opaque, bespoke, structured debt securities with low credit ratings, while neglecting to rebalance their portfolios during the almost 12-month period afforded to them.
In light of this scenario, SEBI strongly advises Franklin Templeton to prioritize the prompt return of investor funds.
Conclusion
It is imperative that Franklin Templeton takes immediate action to ensure the swift return of investor funds. Maintaining investor confidence and adhering to the stipulated regulations will be vital in navigating these challenges effectively.
Annexure A: Members of the Mutual Fund Advisory Committee
| Sr. No. | Members Details | Capacity |
|---|---|---|
| 1 | Ms. Arundhati Bhattacharya | Former Chairman, State Bank of India - Chairperson |
| 2 | Mr. Ananth Narayan | Associate Professor, Finance, SPJIMR - Member |
| 3 | Mr. Brij Gopal Daga | Independent Trustee Director, Motilal Oswal Mutual Fund - Member |
| 4 | Shri. Deepak Ranjan | Deputy Director, Ministry of Finance - Member |
| 5 | Mr. Dhirendra Kumar | CEO, Value Research India Pvt. Ltd - Member |
| 6 | Mr. Kailash Kulkarni | CEO, L&T Investment Management Ltd - Member |
| 7 | Mr. K. N. Vaidyanathan | Chief Risk Officer, Mahindra & Mahindra Ltd - Member |
| 8 | Ms. Monika Halan | Editor, Mint Money - Member |
| 9 | Dr. M. S. Kamath | General Secretary, Consumer Guidance Society of India - Member |
| 10 | Mr. Nilesh Shah | Managing Director, Kotak Mahindra Asset Management Company Ltd - Member |
| 11 | Mr. Nilesh Vikamsey | Partner, Khimji Kunverji & Co. - Member |
| 12 | Mr. Nitin Vyakaranam | CEO, ArthaYantra - Member |
| 13 | Mr. N. S. Venkatesh | Chief Executive, Association of Mutual Funds in India - Member |
| 14 | Mr. Rajnish Narula | CEO, Canara Robeco Asset Management Company Ltd - Member |
| 15 | Mr. Sandeep Parekh | Managing Partner, Finsec Law Advisors - Member |
| 16 | Mr. Sanjay Sapre | President, Franklin Templeton Asset Management (India) Pvt. Ltd. - Member |
| 17 | Mr. Saurabh Mukherjea | CEO, Marcellus Investment Managers Ltd - Member |
| 18 | Mr. S V Muralidhar Rao | Executive Director, SEBI - Member |