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Photo: Bloomberg (Bloomberg)
Photo: Bloomberg (Bloomberg)

Four Franklin Templeton debt schemes are now cash positive

  • Investors are yet to get payments due  to  interpretation of winding up rules
  • Cash in Dynamic Accrual, Ultra Short Bond is 12% and 29% of assets while rest have 1%  of  assets cash

A 1,050 crore repayment on debt issued by Vedanta Ltd along with interest has turned four of six frozen Franklin Templeton debt schemes cash positive as of 17 August, a note from Franklin Templeton showed.

Two of the four schemes, Franklin Dynamic Accrual and Franklin Ultra Short Bond Fund, were already cash positive and the repayment has pushed two more, Franklin Credit Risk Fund and Franklin Low Duration Fund, into the positive territory.

The Franklin schemes had borrowed money to meet redemptions in April. Interest and principal repayments on the debt paper held by the schemes have allowed some to completely repay their borrowings and turn cash positive. Cash in Franklin Dynamic Accrual and Franklin Ultra Short Bond Fund is as much 12% and 29% of assets while cash in the other two schemes is 1% of assets each.

Steep borrowing levels, however, remain in the final two schemes with net borrowing at 23.17% for Franklin Short Term Income Plan and 37.22% for Franklin Income Opportunities Fund respectively. This means that the schemes will first have to pay off the borrowing and interest due before distributing any money to investors. In total, however, the six schemes have received 6,072 crore, which is 23% of their combined corpus of around 26,000 crore.

A day after receiving the Vedanta payment, Franklin Templeton Asset Management (India) Pvt Ltd restricted inflows into its fund-of-funds (FoFs), which have exposure to the debt schemes in question. This action was taken to stop speculators from benefiting from recovery in the schemes’ holdings at the expense of existing investors. The FoFs had marked down this exposure by a whopping 50% shortly after the schemes were frozen, meaning that recovery greater than 50% would cause a jump in the net asset values of the FoFs concerned.

However, these cash flows have not actually translated into payments for the investors in the six schemes. Distribution of proceeds will only be possible after successful e-voting, Sanjay Sapre, president, Franklin Templeton Asset Managers India Pvt Ltd, said in a 5 August letter. E-voting a procedure involved in the winding up of the schemes concerned has been stayed by Gujarat High Court. However, Paritosh R. Gupta, a lawyer for the Khambatta family which is a party to the case before Karnataka High Court, said that there is nothing in Securities and Exchange Board of India (Sebi) rules or the Gujarat High Court stay order stopping Franklin Templeton Mutual Fund from distributing the excess funds on a proportionate basis even while the case is being heard in Karnataka High Court. There is no justifiable reason for retaining such amounts, he said. If there was any concern, Franklin Templeton could have sought the court’s permission and it would have been supported by all petitioners, including his clients.

A Sebi proposal envisaging a listing of units in the six schemes to allow their investors sell units and get some money upfront has seen little progress towards implementation.

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