Playing the blame game instead of focusing\n on solving problems is a common human tendency when faced with a \ncrisis. The world is debating about who to point the finger at for the \ncoronavirus crisis; in India some people are arguing over whom to blame \nfor the (mis)handling of lockdown implementations.<\/p>\n\n\n\n
Meanwhile, Franklin Templeton MF has found someone to affix blame for the debacle of its six debt schemes.<\/p>\n\n\n\n
The backdrop story is, FTMF wound up six of its debt scheme<\/a>\n on April 23 citing COVID-19 related market dislocation. Franklin’s \nglobal chief, Jennifer Johnson, during a recent conference call with \nanalysts partly blamed the winding up of six of its debt scheme on \nSEBI’s October 2019 rule.<\/p>\n\n\n\n In October 2019, SEBI had asked mutual \nfunds to cap their exposure to unlisted non-convertible debentures \n(NCDs) at 10% of the schemes’ corpus. According to Johnson, the rule \n‘orphaned’ one-third of their funds as these unlisted NCDs could not be \ntraded after the circular.<\/p>\n\n\n\n However, the fund later clarified that \nJohnson’s quote had been taken out of context by media outlets and \nissued an apology to SEBI for any unintentional slight this may have \ncaused.<\/p>\n\n\n\n In my opinion, SEBI’s rule cannot be \nblamed for the debacle of six schemes. In fact, the rule introduced in \nOctober was expected to bring in more transparency, liquidity, and \naccountability.<\/p>\n\n\n\n After the IL&FS default<\/a>\n came to light in September 2018, which put the corporate bond market \nunder pressure, SEBI reviewed the regulatory framework and took \nnecessary steps to safeguard investors’ interest.<\/p>\n\n\n\n SEBI found that unlisted securities lacked\n transparency in terms of structure and true nature of risk on the one \nhand and lack of ongoing disclosure in respect of financials of the \nissuer on the other. Therefore, SEBI decided to cap investment in \nunlisted NCDs.<\/p>\n\n\n\n Furthermore, SEBI had provided adequate \ntimeline to comply with the investment limits. Exposure to unlisted NCDs\n had to be brought down to 15% by March 31, 2020 and 10% by June 2020. \nAdditionally, it permitted mutual funds to grandfather the existing \ninvestments in unlisted debt instruments (as on the date of the \ncircular) till maturity of such instruments, so as to not disrupt the \nmarket.<\/p>\n\n\n\n In view of COVID-19 related disruptions these timeline were extended to Sept 30, 2020 and Dec 31, 2020, respectively.<\/p>\n\n\n\n The market regulator had taken the decision in the best interest of investors, but some fund houses took investors for granted. \n ‘Despite the regulations being clear, some mutual fund schemes seem to \nhave chosen to have high concentrations of high risk, unlisted, opaque, \nbespoke, structured debt securities with low credit ratings and seem to \nhave chosen not to rebalance their portfolios even during the almost 12 \nmonths available to them so far’<\/em>, it said.<\/p>\n\n\n\n SEBI responded to FT’s claims saying it should focus on returning the money of investors as soon as possible.<\/p>\n\n\n\n Who is to blame? <\/strong><\/p>\n\n\n\n Though SEBI lays down the broader \nguideline for mutual funds, it does not micromanage. The final \nresponsibility of risk management lies with the fund manager and the \nfund house.<\/p>\n\n\n\n The high-risk high-return strategy that \nbenefitted the fund so far finally collapsed under the weight of \nCOVID-19. FTMF had high exposure to lower rated securities in the six \nschemes that were wound up. Heightened redemptions amid virus outbreak \nbrought in liquidity challenges for schemes with higher exposure to low \nrated instruments, thus crippling them.<\/p>\n\n\n\n Table: FTMF’s high risk exposure in the wound-up schemes<\/em><\/strong><\/p>\n\n\n\n