Frankin Templeton crisis: It’s still wait and watch for FT investors

By Joydeep Sen

Since April 23, 2020, it has been little more than seven months now that Franklin Templeton (FT) Mutual Fund has shut six debt mutual funds citing redemption pressure and lack of liquidity in the bond market. Though investors have not got back their money, there are two positives. One, four of those schemes— Franklin India Ultra Short Bond, Low Duration, Credit Risk and Dynamic Accrual Fund—have turned cash positive. Two, there was a debate whether the trustees can unilaterally shut down a scheme, without unitholders’ consent.

The issue was about interpretation of the provisions of SEBI regulations and FT went with one interpretation. The verdict of Karnataka High Court has set the precedent that no, they cannot. Shutting down a fund requires approval of unitholders.

Where do we stand now?
In a letter dated November 23, 2020, addressed to unit-holders, the AMC said that post the judgement of Karnataka High Court, it considered all possible options to start returning money to unitholders in the shortest possible time in an orderly manner. This included the option of seeking unitholder consent according to the HC judgment.

“However, after detailed deliberations, we have determined that it will be necessary to seek judicial intervention from the Hon’ble Supreme Court to ensure an appropriate implementation of the law in the best interest of unitholders. This action took some time because these steps needed to be carefully and thoughtfully taken to ensure that we can return unitholder monies at the earliest in an equitable manner, without distress sale of securities (at steep discounts) that would occur if there is a rush of redemptions,” it said.

What does it mean?
It means that when put to vote, if unit-holders vote against shutdown, i.e., vote for continuation of the funds, which is more likely, the funds have to be opened up. The moment that happens, there will be a flood of redemptions. To meet that, there will be a fire sale of instruments in the portfolio, that is a distress sale. That would lead to sub-optimal realisation of redemption prices.

One solution is to put a cap on redemptions or graded redemptions as a percentage of holding. However, the way it is going, everything is up to litigation in the court of law or filing of complaints with the police. Hence it is better to clarify, to save further hiccups, with the Supreme Court of India.

What can investors do now?
Nothing, but watch and wait. Till FT goes to the Supreme Court and the final verdict is out, there is nothing investors can do, except track the cash position and other developments in those six portfolios. To be sure, rushing with redemptions with the approach “it is my money, I want it at the earliest” will not help. It will get you less money than the NAV. In the initial phase after 23 April 2020, there were social media posts like “I require the money urgently for parent’s surgery, how can FT stop it”. Since the issue went to the court of law, those posts are not to be seen.
Conclusion

While there were certain flaws on the part of FT, this is not a scam as some people have alleged it to be. Scam means disappearance of money from legit channels and efforts to recover, with or without results. Here the money is very much there is those funds, and the status is being disclosed from time to time. Now it is a matter of time for investors till the final verdict from the Supreme Court, and the consequent process depending on the verdict.

The writer is a corporate trainer (debt markets) and an author