Franklin Templeton's President Sanjay Sapre informed investors that two of the schemes have surplus cash and the fund house will take appropriate steps to distribute the money to the unit holders at the earliest. Here's what else he said
Franklin Templeton Mutual Fund President Sanjay Sapre has written to investors on six schemes that were wound up on April 23, 2020.
These schemes are Franklin India Low Duration Fund (FILDF), 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 (FIIOF).
Fresh subscriptions and redemptions were stopped after fund house said it was not able to sell underlying assets as there was not enough liquidity in the market now.
Investors have challenged Franklin Templeton’s decision in various courts. The case has even reached the Supreme Court.
Sapre’s note to investors had the subject line “An Update on Winding Up of 6 Fixed Income Schemes”.
Giving details on the ongoing cases, he said that all pending litigations will be transferred to the division bench of the Karnataka High Court.
“In this regard, we will file an appeal before the Hon’ble Karnataka High Court seeking vacation of the stay order issued by the Hon’ble Gujarat High Court,” he said.
Sapre informed investors that two of the schemes have surplus cash and the fund house will take appropriate steps to distribute the money to the unit holders at the earliest.
The E-Voting and unit holders’ meet over the schemes cannot be held till the stay order by the Gujarat High Court is vacated.
“In the meanwhile, we have been working to analyse the portfolio of each scheme and develop a monetisation strategy for each of the securities in the portfolio. The schemes continue to receive maturities, pre-payments and coupon payments. However, an efficient monetisation of assets and distribution of investment proceeds will be possible only after obtaining consent of the unit holders under regulation 41 of SEBI (Mutual Fund) Regulation 1996,” Sapre said.
He reassured investors that “while there has been a delay due to various legal cases, we have been making progress”, by outlining the following:
— From April 24, 2020, to June 15, 2020, the schemes have received Rs 1,964.21 crore from maturities, pre-payments, and coupon payments.
— Two of the six schemes (Franklin India Ultra Short Bond Fund & Franklin India Dynamic Accrual Fund) have repaid their bank borrowings and are cash positive. These schemes can start repayments to investors subject to a successful Unit holder Vote.
— We anticipate that Franklin India Ultra Short Bond Fund will have in excess of 7 percent of its AUM available to distribute to unit holders by the end of June 2020, and Franklin India Dynamic Accrual Fund could have in excess of 6 percent of AUM by this same time.
— In one more scheme, Franklin India Credit Risk Fund, the borrowing level has come down to 11.25 percent from its original level of 22.27 percent on April 24, 2020.
— As a reminder, this cash has been generated only through pre-payments, scheduled maturities and coupon payments, and we would be able to accelerate monetisation, post a successful unit holder vote.
The fund house had recently invested in the bond schemes of Essel Infraprojects Ltd and Reliance Big Entertainment, and the two companies had defaulted on their payment obligations.
Regarding the investments, Sapre said: “We have appointed a legal counsel and have initiated necessary legal actions for recovery. The schemes will continuously monitor the developments and take appropriate steps in the best interest of its unitholders. Four of the six impacted schemes have investments in these bonds. These bonds are held in the portfolio at a marked-down value and the equity share collateral is adequate to cover this value as of June 22, 2020,” Sapre stated in a note to investors.
Essel Infraprojects Ltd had failed to honour its principal payment on two bonds on May 22, 2020.
Reliance Big Entertainment could not meet its interest payment obligation due on June 14, 2020. The put option (exercise date of June 15, 2020) has not been exercised as the security is already rated “D” and the next put option date is on September 14, 2020.
“We are exploring options for invocation of pledged shares as well as the corporate guarantee and are taking appropriate legal advice on the same. Five of the six impacted schemes have investments in these bonds. These bonds are held in the portfolio at a marked-down value and the share collateral is adequate to cover this value as of June 22, 2020,” he said.
So far, Franklin Templeton has processed partial payments in the six schemes after Vodafone paid interest to the fund house. On June 18, the fund house had informed unit holders through a message to investors about the processing of part payments.
“Payment in segregated portfolio 1 - 8.25 percent Vodafone Idea Ltd. is processed. Your account statement is being sent separately. For queries contact your advisor if any, or call us at 18002584255," said the message.
There are clauses in the SEBI Act relating to the provisions for winding up, which is being contested in the court of law.
Even if the courts were to reverse the decision, what is likely to happen? The moment the fund is reopened, there would be a stampede for redemption, said experts.
According to the rules, a fund cannot refuse redemption proceeds to unit holders. The fund house will be forced to do a fire sale of assets to generate liquidity. This would obviously lead to sub-optimal realisation, and not benefit unit holders.
“Let’s accept the fact that those schemes have been shut down, though we do not like this fact. Let the competent authority, i.e., SEBI, take an E-vote on whether unit holders want their money back instantly or are willing to wait till maturities in the portfolio,” said Joydeep Sen, Founder, wiseinvestor.“It should be communicated and agreed upon in the vote that instant money back means selling assets at a price lower than the valuation price for the computation of daily NAV,” Sen added.