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Franklin Templeton warns of losses in case of vote against wind-up plan

The Supreme Court last week permitted Franklin Templeton Trustee Services to hold meeting with unitholders of six debt schemes that the company proposed to wind up on April 23, citing difficulties in the bond market due to the Covid pandemic.

By: ENS Economic Bureau | New Delhi | December 8, 2020 3:00:54 am
FT said the facility of electronic voting will be made available to unitholders for the period from December 26, 2020 to December 28.

Franklin Templeton (FT) AMC has warned investors of a fall in net asset values and losses for unitholders if they vote against its decision to wind up six credit guarantee schemes in April this year.

According to FT, the Trustee is of the view that if the decision to wind up the scheme in an orderly manner is not implemented, it will precipitate a rush of redemptions, which will force a distress sale of the portfolio securities — likely resulting in a reduction in the net asset value (NAV) of the scheme and substantial losses for unitholders. Around Rs 26,000 crore of investors’ money is stuck in the six schemes.

FT said the facility of electronic voting will be made available to unitholders for the period from December 26, 2020 to December 28. A meeting of unitholders of the scheme will be held on December 29 from 9.00 am via video conferencing, accompanied by the facility of electronic voting on the same day from 9.00 am until 10.30 am, it said.

“It is also likely that such a large volume of sale in a short period of time would impact the bond market as a whole and compound liquidity issues for securities in the scheme portfolio,” FT said in a letter to the unitholders. Further, if the scheme is opened for redemptions under these circumstances, meeting redemption demand as they come is likely to result in disorderly distributions, besides significant losses for unitholders, it said.

However, a section of unitholders has been demanding immediate redemption of the money as per the net asset value. “How can we trust them again? The US parent of FT should bail out the Indian arm. Indian investors put money in the schemes considering the foreign parentage of the fund house,” said stock broker Pawan Dharnidharka.

On the other hand, the Trustee is of the view that an orderly liquidation would maximise the value of the portfolio assets for distribution of cash to unitholders on a pro-rata basis, FT said. “Thus, in an orderly winding up, there is a greater likelihood of realising fair value from the investments within a reasonable period of time by the person authorised under Regulation 41,” FT said.

“Unitholders may note that a significant portion of the scheme assets is held in securities and the liquidity position of each security, and consequently the value realized may vary depending on the time available to generate liquidity. An orderly liquidation would obtain better value for unitholders,” it said.

“There can be no guarantee that the outcomes will be exactly as the Trustee expects,” FT said.

Explained

Full redemption not guaranteed

Investors complain that Franklin Templeton (FT), which unilaterally decided to close the scheme, is now forcing them to back its decision. There’s demand from investors that FT’s parent in the US should step in and provide funds for redemption. Even if investors vote for winding up, there’s no guarantee that they will get full refund.

The Supreme Court last week permitted Franklin Templeton Trustee Services to hold meeting with unitholders of six debt schemes that the company proposed to wind up on April 23, citing difficulties in the bond market due to the Covid pandemic. The apex court also stayed redemption from the schemes till further orders.

The six schemes that Franklin Templeton had shut since April this year have received total cash flows of Rs 11,576 crore till November 27, 2020 from maturities, pre-payments and coupon payments, of which Rs 2,836 crore was received in the month of November. Individually, Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund and Franklin India Credit Risk Fund have 48 per cent, 46 per cent, 33 per cent and 14 per cent of their respective AUM in cash.

A Bench comprising justices Abdul S Nazeer and Sanjiv Khanna, while seeking response from investors, said, “… without prejudice to rights and contentions of all parties, trustees are permitted to call meeting of unitholders to seek their consent/approval. Steps in this regard will be taken within a period of one week. There will be stay on redemptions till then,” the judges said in its brief order.

The SC Bench also frowned upon the Securities and Exchange Board of India (Sebi) regulations, saying they are not easy to comprehend for the laymen. “Your regulations are so sketchy. All the confusion is because of your regulations. We also interpret these liberally. A layman cannot understand the language of your regulations,” Justice Khanna told the Sebi counsel.

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