What has been the impact on your brand in India due to this shuttering of schemes?
This decision has clearly impacted our reputation, which we worked so hard to build painstakingly over the last 25 years. We went ahead with the decision because of our firm belief that this was the right thing to do to preserve value for our investors.
Our parent’s long-term commitment to India and our investors remains steadfast. We continue to manage approximately ₹50,000 crore of assets in schemes that are not impacted by the winding-up process. These funds are managed by independent teams of fund managers and continue to perform as per their investment mandate.
While Franklin is making all attempts to start the refund process, we have not heard much on fixing responsibility.
Our focus remains on a quick resolution of the legal issues, seeking vacation of the stay on e-voting and unitholder meet, and commencement of the repayment process to unit holders. We believe this is critical to regaining investor confidence.
Since the decision to shut 6 schemes, legal complications have increased. What do you make of them?
It is true different petitions were filed before various high courts by a small number of unit holders. The decision of the honourable Supreme Court to transfer all such matters to the honourable Karnataka high court will avoid divergent decisions on the same subject. The litigations have delayed the unit holders’ vote and further steps to monetize and distribute the assets of the schemes to the unit holders in accordance with regulation 41 of Sebi (Mutual Fund) Regulation 1996. We have also noticed factually incorrect or biased reports circulating on WhatsApp and other platforms, which mention that investors could face a loss of over ₹20,000 crore. We strongly refute these misleading allegations, and while it is difficult to stop such news from circulating, we wish to once again clarify that winding-up of a scheme doesn’t mean any kind of write-off of investments made by the schemes.
How do these legal battles affect the refund process? Should investors brace for more losses on investment?
The six schemes continue to receive maturities, pre-payments and coupon payments. However, an efficient monetization of assets and distribution of investment proceeds will be possible only after obtaining the consent of unit holders. While there has been a delay due to the various legal cases, we have been making progress. From 24 April to 30 June, the schemes have received ₹3,275 crore via maturities, pre-payments, and coupon payments—which is about 13% of the total AUM in these six schemes. We hope to accelerate monetization post successful completion of the e-voting exercise and the unitholder meets.
Two schemes—Franklin India Ultra Short Bond Fund (FIUBF) & Franklin India Dynamic Accrual Fund (FIDA)—have repaid their bank borrowings and are cash-positive. We have over ₹1,200 crore in FIUBF and over ₹90 crore in FIDA that is available for distribution as of 30 June.
How is the liquidity of the underlying portfolio. How quickly do you expect these funds to refund the entire amount?
The six schemes have followed a consistent strategy of identifying credits early and investing across the credit rating spectrum, and this strategy delivered meaningful outcomes for investors over several market cycles.
During the unprecedented lockdown, the schemes faced liquidity challenges due to a variety of factors—rising redemption pressures triggered by heightened risk aversion due to the environment, mark to market losses following a spike in yields and lower trading volumes in the bond markets. The liquidity issues were more evident in the below AAA bonds segment, and our suite of fixed income funds investing in AAA bonds have not been impacted.
According to our maturity profile disclosure, shorter duration schemes or schemes with a lower borrowing will be able to return monies to investors faster. In addition, the schemes will explore all opportunities to efficiently monetize the underlying assets in the portfolio, without resorting to distress sales, subject to a successful unitholder vote.
Can you elaborate on Sebi’s forensic audit of the six schemes? And on allegations of mismanagement?
We would not like to comment on this as the matter is sub judice and the audit is currently in progress. We continue to fully cooperate and provide all assistance to the auditors.
These alarming increase in court cases, why do you think these happened? Was there a lack of communication from Franklin? Lack of understanding of the process?
We have been communicating transparently and regularly with investors since the winding up decision was made on April 23. Regular updates to all impacted investors through various modes like email, podcasts, detailed security level portfolio and maturity updates every fortnight and a dedicated page on our website which provides all public updates on the winding up process are some of the ways we have been communicating.
This is the first such event in India, though globally, a number of funds have faced similar challenges during this pandemic. While a large majority of our unitholders sought clarification of their doubts directly from us, and we have responded to all of them, a small number of unit holders decided to pursue litigation.
Sebi had made it mandatory for units of the schemes under winding up process to be listed on stock exchanges. How far along is the process? Does the stay on winding up process affect listing of these units?
The move to list these funds on stock exchanges as directed by Sebi is a positive one and will help provide immediate liquidity to investors. We are keen to implement this as soon as modalities are worked out with various stakeholders, including the stock exchanges. The stay on the e-voting and unit holders meeting should not impact the listing of the schemes.
In case some bonds do not find buyers or are unable to repay in certain time frame, is Franklin considering to buy those bonds at a fair value from these schemes (to be recovered at a later stage)?
We would not be in a position to make any forward-looking comments at this juncture.