BackSebi crafting new rules to avert Franklin-like cases
It wants to ensure that debt funds have sufficient liquidity to meet redemption stress
PremiumThe abrupt closure of six Franklin Templeton credit risk funds in April continues to reverberate on mutual fund regulation, with the Securities and Exchange Board of India (Sebi) planning more changes to prevent a repeat of the debacle.
The regulator is working on rules to ensure debt funds have sufficient liquidity to meet redemption stress, dissuade excessive redemptions by imposing an additional charge on redemptions in stressed schemes, and install a mechanism where asset managers could take up illiquid paper on their books, a Sebi official said.
On 24 April, Franklin Templeton wound up six credit risk schemes amid extreme redemptions and severe illiquidity, stranding investors, sparking lawsuits, and triggering massive outflows from similar schemes of other funds. In the aftermath of the Franklin fiasco, assets under management for these schemes fell by about half.
“It’s an open secret that beyond the top-rated paper, the secondary market is fairly illiquid. As against banks, mutual funds who subscribe to these bonds have to disclose daily NAVs and provide liquidity even if the underlying paper is illiquid. This is a structural and fundamental issue; as long as new investors are added, these issues can be managed but in the face of heavy redemptions, this becomes a tough task to manage. Sebi is working with the industry to solve this conundrum," the official cited earlier said on condition of anonymity.
“These frequent changes seem to be a case of Sebi finding an opportunity in the crisis. All these are what Sebi, in its wisdom, considers imperative for growth of debt funds and corporate bond market," said the chief investment officer of fixed income at a large AMC.
“The markets are ever-changing, which requires regulations to be ever dynamic. Since October 2018, the industry has seen a number of regulatory and operational gaps which needed to be filled, the regulator is taking care of those now. Some of the changes are very telling and will forever alter the way mutual funds were conducting their business. For instance, the changes on resource framework for trustees and the riskometer. The riskometer on portfolio level has kick-started the risk discussion among stakeholders and investors," said Swarup Mohanty, CEO, Mirae Asset Mutual Fund.
Since 1 May, the market regulator has introduced no less than 10 rule changes to curb similar meltdowns. The first was allowing listing of the units of the schemes under winding-up on stock exchange platforms. It was followed by allowing debt schemes to invest an additional 15% in liquid assets to meet the temporary redemption stress.
Sebi further raised transparency for debt mutual funds by ensuring that they disclose their portfolio every fortnight.
The market regulator also gave unlisted non-convertible debentures (NCDs), where mutual funds are investors, a one-time window of three months to get listed. The step was meant to ensure that debt mutual fund schemes hold only 10% in unlisted debt.
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