One year of Franklin MF debt funds crisis; what led to it
It was evening time. April 23, 2020. The world of debt mutual funds in India changed forever. Just as the Covid pandemic was beginning to rear its ugly head, Franklin Templeton Mutual Fund announced the shocking decision of winding up of six yield-oriented, managed credit debt funds from April 23. The decision was taken by the trustees. The official reason for this step was “severe market dislocation and illiquidity in the fixed income space” caused by the coronavirus outbreak. Unprecedented is the word for it. It was not just the winding up, the 6 schemes were literally locked up i.e. subscriptions and redemptions were stopped immediately. And lakhs of investors realized the true meaning of being trapped, already reeling from the biggest stay-at-home restrictions imposed by the Indian government. April 23, 2021 is just a few days ahead, but Franklin MF unit holders of those 6 fateful schemes are yet to get their money fully. Some money has come in of course, but a lot of it remains unpaid. Sadly, all this happened in an instrument like mutual fund, which prides itself on being a market-linked and easy liquidity option.
Genesis of problem
The 6 schemes in question are Franklin India Ultra Short Bond Fund, Franklin India Low Duration Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund. These funds were one of the top performing for the previous couple of years because of higher risk being taken by them by lending to lower rated corporates. Many of these funds were managed for over a decade, and some, for over fifteen years. But the dream run of the debt fund management team led by Santosh Kamath suddenly stopped. Extreme drop in liquidity in the bond markets, coinciding with very large redemptions following the COVID-19 outbreak did them in.
The winding up and ‘lockdown’ in schemes affected Rs 25,648 crore money in the 6 schemes. All this was investor money. And what was worse, was the way the situation surfaced. Before any monies could be returned to unitholders, the borrowing in the funds was a liability that needed to be taken care of. Due to sustained redemptions, many of the funds were forced to liquidate some of the shorter maturity or more liquid holdings in the portfolio, as well as take loans to immediately repay investors who were lucky enough to get their redemption requests honoured before the gates were closed.
Unit holders fight
Under fire, markets regulator SEBI started looking into the matter. Pertinently, after receipt of the forensic audit report, SEBI even issued a show cause notice to FT. But the contents of the audit report have till date not been made public, although reports of wrongdoings mentioned in the document have been reported.
Some unit holders went to the court. Later, many such cases were bunched up and presented in the Supreme Court. The issues before the court were many. They ranged from allegations of gross mismanagement, failure and dereliction of duty by the AMC and Franklin Templeton Trustee Services, violation of the Securities and Exchange Board of India Act, 1992 Mutual Fund Regulations, manipulation of Net Asset Value (NAV), and also the contentious ‘consent’ issue.
The apex court permitted the trustees to call a meeting of the unitholders to seek their approval/consent for winding up. This was done between 26th December 2020 and 28th December 2020. Results showed 97 per cent of unit holders in each scheme gave their consent. New objections to the consent/e-voting results came in, but they did not curry much favour with the court. Importantly, SBI Funds Management was appointed to undertake the exercise of winding up, which would include liquidation of the holdings/assets/portfolio and distribution/payment to the unitholders. But importantly, the court gave its nod to the 6 schemes to disburse accumulated distributable cash proceeds of Rs 9,122 crores (as on 15th January 2021). This was promptly paid out. Before this cash pay-out, Franklin did also return the money recovered from Vodafone Idea debt exposure.
As per latest data, the 6 Franklin schemes have received total cash flows of Rs 15,776 crore till March 31, 2021 from maturities, coupons, sale and prepayments since winding up. The NAVs of all the six schemes were higher as on March 31, 2021 vis-Ã -vis their respective NAVs on April 23, 2020, the date on which the winding up decision was taken. Also, none of the 6 schemes are cash-negative today i.e. have borrowings to repay.
On April 12, SBI MF also distributed the next tranche of Rs 2,962 crores to unit holders of the 6 Franklin debt schemes. This should help soothe frayed nerves of hapless investors.
But, investor worries have not vanished. Some money is yet to come, and the jury is out on when this will actually arrive. One headache has been the constant speculation that Franklin will wrap up its business in India and exit. The rumour mills spun extra hard when reports surfaced that FT India’s parent sought the diplomatic route for a â€œjust and fairâ€ hearing by SEBI. So, far the AMC has denied leaving India and has reiterated its commitment to remain in the country.
A year ago, things were quite gloomy. That pall of gloom has been lifted to a certain extent, but worries for investors, including those in the 6 schemes, remains. Franklin Templeton MF also seems to have lost a lot of its AUM in the financial year ended March 2021, currently managing Rs 50,000 crore from over Rs 1 lakh crore a year ago.