The Securities and Exchange Board of India (Sebi) on Wednesday allowed Franklin Templeton India to list units of its shuttered schemes on stock exchanges, hoping to provide an alternative exit option for investors currently locked out of their money.
In a circular, the regulator said that the units shall be listed on stock exchanges and investors can exit through this mechanism. The change in rule will also apply to all mutual funds winding up their schemes in future under Sebi regulations.
“There are several steps envisaged with respect to winding up of mutual fund schemes before the scheme ceases to exist," a Sebi circular said. During this process, such units shall be listed and traded on a recognized stock exchange, which may provide an exit to investors, Sebi added.
It is to be seen whether the stock exchange listing can create liquidity for investors holding illiquid units of the shut schemes. Prospective buyers will have to take a call on the assets underlying these units, their intrinsic value and their liquidity in the secondary market. Considering that bulk of the underlying paper is sub-AA, investors may book a loss while exiting, or may not find buyers altogether. On 23 April, Franklin Templeton wound up six credit risk funds which had 300,000 investors and total assets under management (AUM) of ₹25,856 crore. However, investors do not have to mandatorily exit through this platform, and are free to wait until the asset management company (AMC) completes the portfolio monetization and liquidation to refund them, said the markets regulator. Interestingly, these units cannot be bought or sold by Franklin Templeton during the process. So, when investors offer to sell their units on stock exchanges, Franklin Templeton cannot bid for them. “The funds that are undergoing winding up continue to publish their net asset values daily and disclose portfolios periodically. We believe, the move to list these funds on stock exchanges is a positive one, and will help provide liquidity to investors. We are keen to implement this as soon as modalities are worked out with various stakeholders, including the stock exchanges," a Franklin Templeton spokesperson said.
“This is not the best solution," commented Dhirendra Kumar, founder and CEO of Value Research, a mutual fund tracker.
“This circular is in the spirit of mutual fund norms that all mutual fund schemes, barring capital guaranteed funds, must provide liquidity at all times. Due to an unforeseen scenario, these open-ended funds have been rendered as closed-ended. However, this can still help in two ways—a secondary market could evolve for these units as exchange platform will offer an open transparent mechanism; secondly, if I am an investor in these funds and I know of a buyer who is willing to buy these units, then an exchange platform will help in that," said Kumar. However, he added that this may work for only savvy investors or institutions.
The operational steps for settlement and trading of these units will be decided by the regulator and the exchange on which these units will be listed.
“Sebi has changed from what ‘can be listed’ to ‘shall be listed’ in the interest of unit-holders. On one hand, this will reduce some investor anxiety on the quantum of haircut on monetizing of assets of schemes under winding up; on the other, it will lend credibility to the process of winding up. There will be better disclosures as well," said Sumit Agrawal, managing partner, Regstreet Law Advisors.
Separately, Franklin Templeton’s trustees on Wednesday hired Kotak Mahindra Bank to help monetize the portfolio of its shuttered credit risk funds. “The trustees have appointed Kotak Mahindra Bank, who, through its debt capital markets team, will work closely with the Franklin Templeton trustees, to assist with all portfolio actions in these six schemes that are being wound up," the asset manager said in a press statement.
Mint first reported on 4 May that Franklin will appoint an external adviser.