A day after Franklin Templeton global president Jennifer M. Johnson’s statement on regulatory reasons being behind the shutting down its six debt schemes became public, the Association of Mutual Funds in India (Amfi) defended the Securities and Exchange Board of India’s (Sebi) risk management measures.
Franklin Templeton India had wound up six yield-oriented credit managed schemes on 23 April.
Sebi’s 10% cap on investment in unlisted non-convertible debentures (NCDs) and commercial papers (CPs) ensured access to relevant information and improved secondary market liquidity, Amfi said in a statement on Thursday.
“These steps were taken to ensure that every market participant had access to relevant information, which will enable fair price discovery and improve secondary market liquidity," said N.S. Venkatesh, chief executive, Amfi. “Measures taken by Sebi over the years, including the one in October 2019, have deepened the debt markets,’’ he said.
In addition to illiquidity and redemption pressures because of covid-19, a Sebi rule that prevents funds from investing more than 10% of their assets in unlisted bonds led to the closure of the six schemes, Johnson had said in Franklin Templeton’s second quarter earnings call on 1 May. The transcript of the call became public on 6 May.
“In India, anything below AAA-rated is considered non-investment grade. The high-yield market is still very immature there. So we’ve had a large fund, it’s actually six funds, that were invested with a lot of this kind of private debt. In October of 2019, unfortunately, Sebi came out with new guidelines saying that any investments in unlisted instruments should be less than 10%. You can’t have more than 10% in a fund and you can’t trade them. So that orphaned about one-third of our funds there," Johnson had said. “It really was about selling those assets at a fire sale and there were very few buyers because this regulation was not permitting trading," she said.
Amfi also clarified that despite unprecedented redemption pressures mutual funds have carried out business as usual. All mutual funds, barring one, have been able to manage day-to-day redemptions through orderly liquidation of portfolios because of acceptability of underlying securities in secondary market and measures taken by Sebi to deepen the debt market, it said.
So far, mutual funds have resorted to borrowing about ₹4,500 crore from the Reserve Bank of India’s special liquidity window, and sold perpetual bonds at high yields to meet the redemption pressures.