After Franklin fiasco, unlisted debt securities come under Sebi scrutiny

The estimates have taken into account debt schemes of larger fund houses
Franklin Templeton Mutual Fund’ s (MF’s) move to wind up six of its debt schemes has put the spotlight on unlisted debt securities held by MF schemes. The Securities and Exchange Board of India (Sebi) has noted that some schemes were yet to rebalance portfolios to reduce riskier exposure, despite enough time given to the MF industry.

Excluding Franklin’s debt schemes, the industry data for available disclosures shows some MF schemes still hold over Rs 5,700 crore exposure to unlisted or privately-placed debt securities, with certain schemes holding over half the assets in such papers.
“Unlisted debt securities have lower liquidity compared to other segments of the debt markets. And funds with larger exposure to these papers are relatively vulnerable if redemption pressure increases again,” said a senior executive of a fund house. “The yields on such papers are already higher to factor in the liquidity discount in this segment.”  

The estimates have taken into account debt schemes of larger fund houses. The overall exposure levels for the industry could be higher.

Responding to Franklin Templeton’s recent remarks on unlisted debt norms, Sebi in a press release said: “Despite the regulations being clear, some mutual fund schemes seem to have chosen to have high concentrations of high-risk, unlisted, opaque, bespoke, and 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.”


“There are certain debt schemes in the industry, where exposure to such securities is in the range of 50-70 per cent. Some of these schemes had seen asset base declining even before the Covid-19 outbreak, which may have forced fund managers to sell the more liquid securities in their portfolios,” said an MF analyst.
“As a result, the share of unlisted papers — which are less liquid — have gone up significantly in such schemes,” he said.  Experts say there are some debt schemes with larger fund houses where unlisted debt exposure is in the range of 11-20 per cent, in excess of the 10 per cent cap announced by Sebi.
In October 2019, Sebi had barred MFs from investing in unlisted debt securities, allowing only limited exposure, as long as the unlisted debt security had a simple structure.

In its recent press release, Sebi said: “It was observed that unlisted debt securities, particularly bespoke securities in which only a single investor invested, suffered from both forms of opaqueness: Opaqueness of structure and true nature of risk on one hand, and lack of ongoing disclosure in respect of financials of the issuer on the other.”

The new norms stated 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 2020, MFs were required to bring it down to 15 per cent.

However, on the MF industry’s request for relaxations in light of the pandemic and lack of liquidity because of the lockdown, Sebi extended the timelines for reducing exposure to 15 per cent by September 30 and 10 per cent by December 31.

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