After marking down the Vodafone Idea debt investments to zero, Franklin Templeton Mutual Fund has now gone ahead and side-pocketed or segregated the bonds of the company that were held in six of its debt schemes.
Known as side-pocketing in mutual fund parlance, this refers to a practice where fund houses isolate risky assets from the rest of their holdings and cap redemption in the segregated assets.
"The Board of Trustees of Franklin Templeton Mutual Fund has approved the creation of segregated portfolios in 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 fund house said in a statement.
The fund house also said that the side-pocketing was done only after CRISIL downgraded the telecom company’s debt securities below investment grade.
On January 24, CRISIL had downgraded the non-convertible debentures (NCDs) of Vodafone Idea to BB, that is considered to below investment grade.
On Jan 16, 2020, debt securities of Vodafone Idea Limited (VIL) held in the schemes of Franklin Templeton Mutual Fund were marked down to a value of zero immediately after Supreme Court dismissed the review petition by telecom players including Vodafone Idea on account of liabilities related to adjusted gross revenue (AGR) dues.
Vodafone Idea has to pay Rs 53,038 crore as AGR to government.
Franklin Templeton MF, which has 62 percent (Rs 1,738 crore) exposure in Vodafone Idea (VIL) - the highest, was also the the first fund house to mark down its investment in the company to zero.
The marking down of exposure in Vodafone Idea had led to a 4-7 percent drop in the net asset value of its schemes.
Investors in the affected schemes as on January 24 will receive separate units in the segregated portfolios, the fund house said.
Franklin Templeton is followed by UTI MF, Nippon India MF and Aditya Birla Sun Life MF in terms of exposure to the company, Morningstar India data showed. The other three have not yet marked down their holdings.
After the credit crisis in IL&FS and DHFL, SEBI issued a comprehensive circular in December 2018 to allow mutual funds to segregate their holdings in stressed securities.
EXPERTS SAY
The side-pocketing is positive for investors as upon recovery of money from the issuer (Vodafone Idea) in the segregated portfolio(s), whether partial or full, it will be distributed to the investors in proportion to their holding in the segregated portfolio.
Mutual fund experts said that the fund industry has now definite guidelines in form of side pocketing SEBI regulations, that saves the remaining scheme from being affected, said an Ex SEBI DGM who worked in mutual fund department .
“It now seems that troubled Vodafone debt papers would generate that part of scheme returns of Vodafone os also able to restructure debt paper with mutual funds for a possible delayed payment after it pays out AGR dues and stays afloat. Segregation of Vodafone papers through side pocketing would be in vogue till then,” the Ex-SEBI DGM added.
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