Securities and Exchange Board of India (SEBI) has directed Franklin Templeton Mutual Fund to focus on returning investors’ money in the six debt schemes it has closed abruptly rather than blaming the regulations for the debacle.

The capital market regulator said fund houses were given enough time to abide by the new norms on investment in unlisted non-convertible debentures implemented last October.

Earlier, in its earnings conference call, Franklin Templeton’s CEO Jennifer Johnson said the rule “orphaned” one-third of their funds as these unlisted NCDs that could not be traded after issuance of the SEBI circular on unlisted NCDs.

The series of defaults in the debt market since September 2018 had led SEBI to take a relook at the regulatory framework for mutual funds.

Justifying its norms and the time given for compliance, SEBI on Thursday said there were some debt securities in which there was only one investor and this trend not only increased the nature of risk but also the lack of disclosure on financials of the issuer.

In order to address the issue, SEBI had constituted various working groups and internal committees to review the risk management of liquid schemes.

Following its recommendations, it was decided to allow mutual funds to invest only in listed NCDs and restrict all fresh investments to listed commercial papers (CPs).

However, SEBI provided a leeway by allowing mutual funds to invest 10 per cent of their debt portfolios in rated, unlisted NCDs with simple secured structures and monthly coupon payments.

This new norm was to be implemented in a phased manner by June 2020.

SEBI, through a circular last October, set deadlines of March 31 and June 30 to comply with the investment limits of 15 per cent and 10 per cent of the debt portfolios in unlisted NCDs.

In addition, it permitted mutual funds to grandfather the existing investments in unlisted debt instruments till maturity of such instruments, so as to not disrupt the market. These dates were subsequently extended to September 30 and December 31 due to Covid-19 related disruptions.

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.

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