Home / Money / Personal Finance /  Franklin Templeton faces default on Essel group paper

Franklin Templeton Mutual Fund in a note to distributors on Friday announced a default on debt issued by Essel Infraprojects Ltd (EIL). At maturity, the issuer was not able to meet the maturity obligation, the note said.

"The value of the collateral is greater than the value at which the debt is currently held," a person with knowledge of the matter said on condition of anonymity. Hence, there has been no impact on the NAV of the schemes in question, the person added.

The paper, which was in the form of non-convertible debentures (NCDs), was backed by shares of Zee Entertainment Enterprises, Dish TV India, unlisted shares of EIL and the personal guarantee of Subhash Chandra, the Franklin note added.

It is not clear if Franklin Templeton AMC has attempted to sell any of this collateral or invoke the personal guarantee of Chandra.

Shares of Zee Entertainment have dropped from 360.45 to 164.90, a fall of around 54% in the past one year. Dish TV India shares have dropped from 30.45 to just 4.6 during the same period. Messages and calls from Mint remained answered by the fund house at the time of writing this report.

The Essel group paper has a maturity value of 616 crore, although it is currently valued at only 92 crore by Franklin Templeton. It constitutes 0.16-1.87% of four Franklin schemes—Dynamic Accrual, Credit Risk, Short Term Income Plan and Low Duration. “We have appointed legal counsel and are actively considering all necessary actions to maximize recovery value," the note said.

Other AMCs were also exposed to Essel group paper in 2019, including HDFC, Kotak, ICICI Prudential and Aditya Birla Sun Life Mutual Fund.

The collective industry exposure stood at around 7,000 crore in February 2019. Some of the fund houses such as ICICI Prudential AMC, Kotak AMC and Aditya Birla Sun Life AMC recovered their money in September 2019 when Invesco Oppenheimer bought an equity stake in Zee Entertainment for 4,224 crore and also in November when the company sold another portion to a clutch of financial investors. Other fund houses recovered a part of their money.

HDFC AMC transferred some Essel papers in their FMPs to their own book. At the end of FY20 they reported a mark-to-market loss of 145 crore on the 500-crore paper they moved.

However, further defaults continued to hit the industry. Aditya Birla Sun Life Asset Management Company faced one such credit event in November 2019 on paper issued by Adilink Infra and Multi Trading Ltd and the fund house side pocketed the paper in question.

Side pocketing is the separation of units in lieu of bad debt. Existing investors can exit the remaining part of the fund without giving up on the chance of recovery in bad debt.

It is unclear whether the fresh default in EIL has affected other AMCs as well.

Franklin Templeton Mutual Fund had recently appointed Kotak Mahindra Bank to oversee the winding up process of the six schemes it closed on 23 April. A recent Sebi circular also set in motion the process of letting investors sell their units on exchanges. The value of such written down paper may affect the prices at which the units of the six schemes are sold.

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