Franklin Templeton MF Replies to SEBI Query on Vodafone Idea Exposure Mark Down
Feb 11, 2020

Author: Divya Grover

 Franklin Templeton MF Replies to SEBI Query on Vodafone-Idea Exposure Mark Down
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You may recall that in my article dated January 24, 2020, I had explained why after the Supreme Court's rejection of telecom operators' petition plea to review the AGR orders, Franklin Templeton mutual fund (FTMF) had immediately marked down its entire exposure in debt securities of Vodafone-Idea (VIL).

The move along with the fund house's decision to restricted fresh inflows in the schemes with exposure to debt securities of VIL was probably a prudent measure to protect value for existing unitholders in its schemes.

It must be noted that mark down by FTMF does not indicate any reduction or write-off of the amount repayable by VIL. The schemes will continuously monitor the developments in VIL and take appropriate steps to recover the investment proceeds in the best interest of its unitholders.

The schemes would have faced huge redemption pressure in case of a rating downgrade below investment grade and FTMF would have been forced to sell its high-rated and liquid securities to meet the demand. Consequently, this would have led to increased overall exposure to VIL in the portfolio.

Even so, market regulator SEBI sought FTMF's reply regarding the mark down of exposure since on that day securities of VIL were still rated above investment grade.

I recently came across an article in the Financial Express where a spokesperson for FTMF stated that they have responded to SEBI's query: "We have responded to a routine query received from the regulator, related to our exposure in Vodafone Idea. We continue to act in accordance with SEBI regulations and the best interest of our investors, and are happy to provide any further information that SEBI may seek in the future."

Earlier SEBI Chief Mr Ajay Tyagi while speaking to Financial Express had said, "We had asked the comments from the fund house regarding the issue of Vodafone Idea, but I don't have any latest update on it."

However, he also stated, "The Association of Mutual Funds in India (AMFI) has prescribed the metrics on what should fund houses do if the debt instruments fall below investment grade. If the debt papers are below the investment grade they have to follow the matrix, but if it is above investment grade it's a call of fund house."

Table: AMFI's standard haircut for below investment grade debt securities

  1. Haircuts for senior, secured securities
    Rating/sector Infrastructure, Real Estate, Hotels, Loan against shares and Hospitals Other Manufacturing and Financial Institutions Trading, Gems & Jewellery and Others
    BB 15% 20% 25%
    B 25% 40% 50%
    C 35% 55% 70%
    D 50% 75% 100%

  2. Haircuts on subordinated and unsecured (or both) securities
    Rating/sector Infrastructure, Real Estate, Hotels, Loan against shares and Hospitals Other Manufacturing and Financial Institutions Trading, Gems & Jewellery and Others
    BB 25% 25% 25%
    B 50% 50% 50%
    C 70% 70% 70%
    D 100% 100% 100%
(Source: AMFI)

It was not until a few days after FTMF marked down its exposure that rating agencies India Rating and CRISIL downgraded the securities of VIL to below investment grade. The agencies sighted weak operating performance and the impact of AGR dues on its liquidity and future plans as the reason for rating downgrade.

After the downgrade, other AMCs with exposure to VIL debt viz. UTI AMC, Aditya Birla SL AMC, and Nippon AMC marked down their exposure to some extent.

However, these fund houses decided against creating a segregated portfolio despite the rating downgrade and are waiting for further developments before taking any decision. FTMF was the only fund house that created side-pocket for six of its schemes with exposure to VIL debt.

[Read: Vodafone Idea Rating Downgrade What should investors of UTI, Aditya Birla SL, and Nippon MF do?]

Meanwhile, Vodafone Group CEO, Nick Read during UK firm's earnings call said the situation in India is critical following the AGR ruling by SC. He reiterated that they will not be injecting any new additional capital into India unit.

VIL is the worst hit by the AGR ruling and owes dues of over Rs 50,000 crore to the government, including interest and penalties. Mr Read said they are seeking relief from the government in the form of waiver of interest and penalties on its adjusted gross revenue (AGR) dues and principal payment over 10 years with a two-year moratorium.

Bharti Airtel, the other telco most affected by AGR dues, posted a net loss of Rs 1,035 crore for December 2019 quarter, its third consecutive quarterly loss, on account of provisioning for AGR dues. The company recently merged with Tata Teleservices to expand its 4G coverage and its ability to compete with rival Jio. Tata Teleservices owes Rs 14,000 crore in AGR dues, while Bharti Airtel owes Rs 35,000 crore.

The telcos are awaiting the outcome of the modification plea they had filed with the Supreme Court.

From my view point, the future prospects of VIL are bleaker if the government does not provide relief measures. Investors having exposure to debt mutual fund schemes with exposure to debt instruments of VIL (other than those belonging to FTMF) could possibly do away with the ones that could potentially prove perilous to their wealth, after conducting a systematic portfolio review.

It is important to approach debt mutual funds with caution. Do not assume that debt mutual funds, including the ones with shorter duration, are risk-free.

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Comments
shailesh.sukhy@gmail.com
Feb 14, 2020

I am a subscriber of Personalfn. With regard to this article, I would like to get clarity on what would happen if an investor withdraws funds from a FT scheme between the date of their NAV reduction (16th Jan 2020) and the date of segregation (24th Jan 2020)? Such an investor has got his funds back at a reduced NAV and has no segregated portfolio. Hence, he will not get the benefit of recovery in case FT is able to recover from Vodafone Idea as he doesn't hold a segregated portfolio. Won't such recovery go towards FTs profits and additional bonuses to their fund managers? If so, it's not right, as it rewards the funds managers for their inefficiency!! Request clarification
amitabhgupta62@gmail.com
Feb 19, 2020

Smart investors invested AFTER the writedown (2 lacs per day per PAN, as per FTIL's ceiling imposed). Panicking investors exited BEFORE the side-pocket was created. The loss of the Panicking investors will get shared by the Smart investors and the third category ie Passive investors (those who did nothing and hence got the benefit of the side pocket). That is why the old adage "Avoid Fear and Greed both, when it comes to markets". It was obvious that a side pocket would get created, once the credit rating of Voda got downgraded, which it did on Jan 27 or thereabouts, it was an error on your part to have exited before that.
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