Updates from Franklin Templeton’s President on the Six Shuttered Debt Funds

Jun 26, 2020


Suspension of the voting process for Franklin Templeton's wound-up schemes and other legal cases against the AMC are likely to delay the monetisation of assets and repayment of the money to investors, intensifying their disappointment and inconvenience.

Franklin Templeton's President Mr Sanjay Sapre recently wrote to investors to thank them for their patience in matters related to winding up of the six yield-oriented fixed-income schemes and updated them on the recent developments.

Regarding the cases filed against Franklin Templeton (FT), Sapre informed investors that all legal cases relating to the winding-up of the six schemes will be transferred to a Division Bench of the Karnataka High Court as per order from the Supreme Court. The Supreme Court has directed that the matter must be completed within 3 months. This may reduce the litigations and expedite the resolution.

He added, FT will take appropriate steps in the interest of the unitholders to enable distribution of the proceeds to the unitholders at the earliest. To facilitate this, FT will file an appeal before the Karnataka High Court seeking vacation of the stay order on the voting process issued by the Gujarat High Court.

Sapre addressed the investors' concerns about legal developments and how this would affect disbursement timelines. The voting and unitholders' meet for the six schemes under winding up cannot be conducted till the stay order issued by the Gujarat High Court is vacated. Efficient monetisation of assets and distribution of investment proceeds will be possible only after obtaining the consent of unitholders under regulation 41 of SEBI (Mutual Fund) Regulation 1996.

(Image Source: photo created by katemangostar - www.freepik.com)

However, the AMC has been working to analyse the portfolio of each scheme and develop a monetisation strategy for each of the securities in the portfolio.

Sapre assured investors that while there has been a delay due to the various legal cases, they have made the following progress:

  1. The schemes have received Rs 1,964.21 crore from maturities, pre-payments, and coupon payments between April 24 and June 15

  2. Two of the six schemes, Franklin India Ultra Short Bond Fund & Franklin India Dynamic Accrual Fund have repaid their bank borrowings and have turned cash positive. These schemes can start repayments to investors subject to successful completion of voting process

  3. As per the AMC's estimate Franklin India Ultra Short Bond Fund will have an excess of 7% of its AUM available to distribute to unitholders by the end of June 2020, and Franklin India Dynamic Accrual Fund could have in excess of 6% of AUM by this same time

  4. In Franklin India Credit Risk Fund, the borrowing level has come down to 11.25% from its original level of 22.27% on April 24, 2020

Sapre spoke about the developments regarding investments in Essel Infraprojects and Reliance Big Entertainment. The companies were unable to honour their respective principal payments on the bonds issued by them. Four of the six impacted schemes have investment in the bonds of Essel Infraprojects, while five of the six impacted schemes have investment in the bonds of Reliance Big Entertainment.

The bonds issued by Reliance Big Entertainment had a put option (exercise date of June 15, 2020) which was not exercised because the security was rated 'D'. The next put option date is on September 14, 2020. FT may explore the option of invoking the pledged shares as well as the corporate guarantee to recover money.

[Read: Who Is to Blame for the Franklin Templeton Fiasco?]

The AMC has appointed a legal counsel and initiated necessary legal actions for recovery. The said 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.

Finally, Sapre assured the investors that FT is doing their best to resolve issues at the earliest, so that the schemes can start to efficiently monetise assets and return money to its investors. They will continue to share the progress made on all important matters with the investors.

To conclude...

While FT is trying its best to monetise the assets at the earliest and initiate distribution of proceeds, I believe that for investors in the schemes, the battle for recovery of their money could be long drawn.

[Read:Investors in Franklin Templeton Schemes Receive Partial Payment --- Full Recovery an Uphill Task]

Table: Expected timeline of payout from wound-up schemes of FTMF

(Source: Franklin Templeton Mutual Fund)

Even if one assumes all legal matters at hand will resolve soon, very few schemes are expected to liquidate a significant part of the portfolio in the next 2-3 years.

As seen in the table above, investors in Franklin India Ultra Short Bond Fund (FIUBF) and Franklin India Low Duration Fund (FILDF) will be able to recover a substantial sum in the next 2-3 years. Investors in Franklin India Short Term Income Fund (FISTIP)Franklin India Credit Risk Fund (FICRF), and  Franklin India Dynamic Accrual Fund (FIDA) will receive a major chunk only after 3-4 years.

The wait will be longest for investors in Franklin India Income Opportunities Fund (FIIOF). The scheme is expected to liquidate just around 55% of the portfolio in the next five years, while other schemes may be able to liquidate anywhere around 84-100% of the assets during the same period.

Successful completion of voting process,whenever it takes place, will be an important event that will determine the future course of repayment to investors.

The purpose of the voting process is to enable Trustees to take the next steps towards disposing off the assets of the scheme and distribution of the proceeds to the unitholders in accordance with regulations. If Trustees do not receive authorization to proceed with the disposal of assets of the scheme, it may delay the process of monetizing such assets and distribution of proceeds.

In other words, the liquidation of the schemes will get stuck and payouts to investors will be delayed if investors do not authorize the Trustees to proceed.

In such a case, the only feasible option will be to enable the Trustees to go ahead and expedite the process of returning money by way of voting. FT had earlier stated that the decision to wind-up these six schemes was the only viable way to preserve value for investors, despite the immediate challenges this may bring.

Warm Regards,
Divya Grover
Research Analyst 

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