Franklin Templeton, the mutual fund company which wound up six debt funds a week ago, will have to pay up its lenders first before repaying money to investors as the regulations require the company to do so, said Sanjay Sapre, President of Franklin Templeton India, to investors through a video message that was emailed on April 30.
“The schemes have borrowed money to fund redemptions. Regulations require us to pay these borrowings first. We do have to pay the borrowings first,” said Sapre, adding that the schemes have adequate assets to repay the borrowings. According to industry sources, Franklin has about Rs 3,000-Rs 4,000 crore of borrowings.
Also, Franklin is talking to companies in which it has invested to see if these firms can make advance repayments, Sapre said. The company will make all efforts post the lockdown to sell the underlying securities in these schemes and repay investors, he said in the message titled ‘Frankly speaking’.
No default but liquidity crunch
Sapre asserted that none of the companies the six schemes invested have defaulted on their obligations. “Let me clarify that there was no default in any of those companies we hold that caused us make this decision. It was due to liquidity issues in the market as a direct result of COVID-19 lockdown,” Sapre said. “The lockdown has far-reaching consequences for all of us. Causing dislocations in the market, particularly for this type of securities,” said Sapre.
On April 23, Templeton announced the closure of six funds — 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) effective April 23. Total assets under management of these funds are estimated at around Rs 26,000 crore. This created a panic situation among investors.
“The fund had to resort to borrowing increasing amount of money potentially at a high cost in order to fund redemptions. This situation was unsustainable as it was harming those investors remained in the fund at the cost of those who were leaving,” Sapre said.
When will investors get money back?
Sapre assured investors will get their money back. “The maturity schedule shows some of you can start receiving money as early as June in some of these schemes. Others will have to wait longer,” Sapre said. “What we cannot predict precisely today how quick the market will normalise and how quickly we can liquidate the rest of the holdings. We have already started work on this,” Sapre said.
A Mint analysis shows that the six debt schemes which were wound up on Thursday have high exposure to AA and below rated paper. In one scheme -- Franklin India Low Duration Fund — the exposure is as high as 64.7 percent, Dynamic Accrual Fund has 44.6 percent, Credit Risk Fund 50.2 percent, Short Term Income Plan 58.9 percent, Ultra Short Term Bond Plan 23.9 percent and Income Opportunities Fund 41.3 percent.
Franklin Templeton was the sole lender to 26 of 88 top borrowers in its six debt schemes, according to a report by B&K Securities. In other words, these firms had 100 percent exposure to Franklin schemes for overall borrowing of Rs 7,697 crore. The names include Small Business Fincredit, Incred Financial Services, India Shelter Finance Corp, Renew Solar Power, Xander Finance, OPJ Trading Pvt Ltd, Vistaar Financial Services
Is there risk of losing money?
Sapre said the schemes continue to be invested in debt securities and the risks associated with such securities that were disclosed earlier exist. “Just as when the schemes were open for subscriptions, there was a risk that some company may face delays in paying us. That same risk exists even today.”
Sapre, however, assured that Franklin is committed to remain in India. “There are no impacts on other schemes. Many of you may not be believing us today, but when you start getting money in your bank accounts, you may have greater confidence in what we are telling you.”
Moratorium to Future Group firms
In a separate development, Franklin Templeton said it has agreed to give moratorium to three Future Group companies under the scheme announced by the Reserve Bank of India (RBI) to help borrowers tide over the COVID-19 phase. Franklin has given moratorium to Rivaaz Trade Ventures Pvt Ltd, Nufuture Digital India Ltd and Future Ideas Co Ltd. Franklin has funded these companies through non-convertible debentures (NCD).
“Future Group has requested Fixed Income schemes managed by Franklin Templeton Mutual Fund relief under the moratorium benefit announced by the RBI. This relief is applicable for the following issuers (three companies mentioned above), whose NCDs are held under various schemes of FTMF,” said Franklin in an update on Wednesday night.