Franklin chief says tightening of unlisted debt added to pressure

Sebi regulations required fund houses to cap exposure to such papers at 10% of scheme assets

The top management of US-based Franklin Resources has cited tightening of norms around unlisted debt by the Securities and Exchange Board of India (Sebi), as one of the factors that added to the pressure on debt schemes of Franklin Templeton Mutual Fund (MF), culminating in the fund house winding up six of its schemes.
 

“...six funds that were invested with a lot of this kind of private debt. And in October 2019, unfortunately, Sebi came out with new guidelines saying that any investments in unlisted instruments in funds could neither be… you can’t have more than 10 per cent in a fund, and you can’t trade them. So that orphaned about 1/3 of our fund there,” said Jennifer Johnson, president and chief executive officer of Franklin Resources.
 

Johnson was responding to analysts’ questions during the second-quarter earnings call on April 30, giving them background on the recent developments in the firm’s Indian operations.

In October 2019, Sebi said debt MF schemes shall not have more than 10 per cent exposure to unlisted papers, and needed to bring down their outstanding exposure to this limit by June 2020. By March, the MFs were required to bring it down to 15 per cent.
 

“Following this regulatory move, MFs refrained from taking additional exposure to unlisted papers, which led to lower liquidity for this segment,” said a fund manager.
 

Johnson acknowledged the impact the wind-up must have created on domestic investors in India. “…with India being locked down, there are people who need that liquidity. But really it was about selling those assets at a fire sale and very few buyers because of this regulation not permitting trading... as of last night, Sebi just reversed that and is actually allowing some trading and allowing banks to hold that. So, it remains to be seen how well that opens up the market so that we can return that capital to the clients,” Johnson said.

On April 28, Sebi clarified that the grandfathering of unlisted non-convertible debentures (NCDs) was applicable across the MF industry. In light of the challenges created by the lockdown, Sebi also extended timelines for reducing exposure to unlisted NCDs in a phased manner to September 30, and December 31. By September, MFs can bring down exposure to 15 per cent, and 10 per cent by December 31.
 

Johnson also said challenges in specific exposures such as Vodafone India, following the ruling by the Supreme Court, created a run on these schemes. “… the only way to really preserve value for our investors was to halt any kind of subscriptions and redemptions and really go into wind-down mode,” she said. “It was really just a timing of the redemptions versus our ability to create liquidity to meet them,” she added.