Franklin Templeton has issued an “unconditional apology” to Securities and Exchange Board of India (SEBI) over comments made by Jenny Johnson, president and CEO on Wednesday. Johnson had said in an analyst’s call that regulatory tightening contributed to winding up of the company’s six debt schemes.

Johnson had said, “Unfortunately, SEBI came out with new guidelines saying that any investments in unlisted instruments in funds can’t have more than 10 percent in a fund, and you can’t trade them. So that orphaned about a third of our fund there.”

On late Thursday night, SEBI advised Franklin Templeton to focus on returning investor’s money after the troubled fund house closed six of its debt schemes with assets under management totaling more than Rs 25,000 crore.

The advisory made the regulator’s displeasure clear on media reports quoting Franklin Templeton that SEBI’s move to tighten norms for investment in unlisted debt was one of the factors that added to pressure on the six debt schemes.

On Friday, in response to SEBI’s advisory, the fund house said the remarks made by Johnson during their quarterly earnings call were quoted “out of context” by media outlets.

Franklin Templeton in its letter said, “In response to a question regarding the winding up of six schemes offered in India, Johnson provided general background concerning Franklin Templeton’s experience in the Indian market as it existed before covid-19. The reference to the regulations around unlisted securities was intended to be a part of these background statements to provide context to an audience unfamiliar with Indian markets.”

The letter further explained that the primary reason which forced the decision to wind up the six schemes was “severe market dislocation caused by the Covid-19 pandemic and related lock down which led to severe market illiquidity particularly for papers rated below AAA, combined with heightened redemption during this period.”

On Thursday, SEBI said “some mutual fund schemes” continued to invest in high risk and “opaque” debt securities despite the regulatory framework having been reviewed and amended for safeguarding investors” interest after credit risk events noticed since September 2018, which had led to challenges in the corporate bond market.

Incidentally, these regulatory changes were implemented after taking into account suggestions made by SEBI’s Mutual Fund Advisory Committee, whose members at that time included Franklin Templeton AMC India President Sanjay Sapre, sources said.

“Some mutual fund schemes chose 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.

In a statement, the regulator said it has accordingly “advised Franklin Templeton mutual fund (FT) to focus on returning money to investors, in the context of their winding up six of their debt schemes”.

Last month, the fund house had closed six of its debt funds, citing redemption pressures and lack of liquidity in the bond markets.

These schemes, together having an estimate amount of over Rs 25,000 crore assets under management, were Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund.

The regulator said it has noted that a section of the media has reported quoting FT that tightening of norms for investment in unlisted debt by SEBI was one of the factors that added to pressure on their debt schemes which resulted in winding up of their schemes.

“In this context, it may be noted that in light of credit events since September 2018, that led to challenges in the corporate bond market, a need was felt to review the regulatory framework for Mutual Funds and take necessary steps to safeguard the interest of investors and maintain the orderliness and robustness of their investments,” it said.

In a detailed statement, 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 the one hand and lack of ongoing disclosure in respect of financials of the issuer on the other.

In order to address these issues and improve transparency and disclosure of investments in debt securities made by mutual funds with money entrusted to them by investors, SEBI had constituted various working groups.

Working groups representing asset management companies, industry and academia were set up to review the risk management framework with respect to liquid schemes and to review the existing practices on valuation of money market and debt securities, SEBI said.

Further, an internal working group was constituted to review prudential norms for mutual funds for investment in various debt and money market instruments.

The recommendations of the working groups and other data points were placed in a meeting of Mutual Fund Advisory Committee (MFAC) held in June 2019. Incidentally, FT India Head Sapre was also a member of the committee at that time.

The committee made several recommendations for prudential norms for investment in debt and money market instruments by mutual funds including investments only in listed NCDs and Commercial Papers (CPs) in the interest of greater transparency and accountability.

SEBI board, after deliberations in its meetings held in 2019 and after taking into account the recommendations of MFAC, approved new prudential norms for investment in listed debt securities, PTI said.

These norms mandated that mutual funds should invest only in listed non-convertible debentures (NCDs) and the same would be implemented in a phased manner. It was also approved that all fresh investments in CPs should be made only in listed CPs pursuant to issuance of guidelines by SEBI in this regard.

However, mutual funds were given flexibility to invest in unlisted NCDs up to a maximum of 10 percent of the debt portfolio of the scheme subject to such investments in unlisted NCDs having simple structures as may be specified from time to time, being rated, secured and with monthly coupon payments. This was to be implemented in a phased manner by June 2020.

Later in a circular on 1 October, 2019, SEBI provided a timeline to comply with the new investment limits for unlisted NCDs of 15 percent and 10 percent of the debt portfolio of the scheme as on 31 March, 2020 and 30 June, 2020 respectively, which was over a year from the date of recommendations by the MFAC.

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, 2020 and December 31, 2020 respectively, in view of COVID-19 related disruptions.

Soon after the Franklin issue came to the light, several investors, directly and through various organisations, have been seeking urgent steps for safeguarding their interests.

Seeking urgent steps to safeguard investors” interest due to Franklin Templeton Mutual Fund”s decision to shut down six debt schemes, stock brokers” association ANMI had even asked the government and capital markets regulator SEBI to appoint a high-powered committee to take over the management of the fund house and examine its investment decision.

In a letter dated April 26 the Finance Ministry and SEBI, the Association of National Exchanges Members of India (ANMI), which represents 900 stock brokers, had also requested for steps to safeguard further erosion of investor wealth and to inform the investors of these six schemes in a time-bound manner about modalities for them getting back their investments.

The association had alleged that Franklin Templeton MF had heavily invested in low rated papers in the debt market and had also put money into several lesser known companies.

Besides, substantial investment in low-rated papers, ANMI also alleged that the investment made by the fund house were in contravention to the Securities and Exchange Board of India (SEBI) norms.