Why in news?
The government was urged to act swiftly, before the markets reopen on 27th April, to resolve the situation created by Franklin Templeton Mutual Fund’s decision to wind up six debt schemes.
Background about the Franklin Templeton crisis
- Franklin Templeton Mutual Fund’s decision to wind up six debt schemes is a matter of grave concern to investors, the mutual fund industry and the financial markets.
- The fund has cited a liquidity crisis in the bond markets and an unprecedented level of redemptions following the COVID-19 outbreak as reasons for its decision.
- This decision may ripple through India’s corporate debt markets, with fixed income managers fearing lower liquidity and higher yields for all but top-rated bonds.
- The impact of Franklin Templeton’s decision may be first felt on bonds rated AA and below. Yields on AA-rated bonds had spiked even before the announcement.
- The Association of Mutual Funds in India has started the process of collecting data on outstanding borrowings to ascertain their financial health following the sudden closure of six debt funds by Franklin Templeton on 23rd April.
- The move has raised questions on mutual funds’ ability to handle large-scale redemptions despite SEBI allowing them to borrow up to 20 per cent of their assets to meet redemption pressure.
What can be done?
- Government can immediately consult the RBI, the Securities and Exchange Board of India (SEBI), the Indian Banks’ Association, and the Association of Mutual Funds in India.
- An urgent meeting of the (Financial Stability and Development Council) FSDC can be convened to find a solution.
- In the past, when such a situation arose in 2008, RBI announced a 14-day special repo facility and allowed an additional 0.5% of NDTL (Net Demand and Time Liability) to resolve the issue.
Roles of SEBI
SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-executive.
- It drafts regulations in its legislative capacity.
- It conducts investigation and enforcement action in its executive function.
- It passes rulings and orders in its judicial capacity.
Though this makes it very powerful, there is an appeal process to create accountability.
There is a Securities Appellate Tribunal which is a three-member tribunal.
A second appeal lies directly to the Supreme Court.