BackLessons at the crux of Franklin Templeton fiasco
The Supreme Court on Tuesday directed Franklin Templeton to distribute ₹9,122 crore among unit holders. This is the first repayment investors will see in nearly a year since the shock freezing of six Franklin Templeton Mutual Fund schemes. Mint explains.
PremiumThe Supreme Court on Tuesday directed Franklin Templeton to distribute ₹9,122 crore among unitholders. This is the first repayment investors will see in nearly a year since the shock freezing of six Franklin Templeton Mutual Fund schemes. Mint explains.
What went wrong with the six debt schemes?
The six debt schemes of Franklin Templeton Mutual Fund with assets of around ₹26,000 crore were frozen on 23 April, 2020 after they faced unprecedented redemptions. The schemes were known to invest in relatively risky debt to get high returns. When the covid-19 crisis hit India, a wave of redemptions hit the schemes as investors worried about defaults with the economy taking a nosedive. The schemes initially borrowed money to meet the redemptions, but that did not prove to be sufficient. As a result, the fund house decided to freeze the debt schemes and eventually wind them up.
How did the apex court’s ruling go?
The fund house’s decision to wind up the debt schemes was stayed by the Gujarat high court in June 2020 due to a legal challenge by the Khambatta family, promoters of Rasna, who were investors in the schemes. Later, the apex court transferred all cases challenging the winding up to the Karnataka high court, which in October ruled that investors’ consent was needed. The fund house then challenged the high court’s decision in the Supreme Court. The apex court on Tuesday asked the fund house to disburse the cash accumulated in the schemes to investors, even as it continues to hear Franklin Templeton’s appeal.
How much money has the fund house recovered?
As of 29 January, the six schemes have received cash payments of ₹14,391 crore. Some of this was used to repay money borrowed to meet redemptions, leaving distributable cash at ₹9,770. The recovery percentage varies from scheme to scheme. Some schemes have cash equivalent to 65% of AUM whereas one of them still has borrowings to pay off (see graphic)
What happens next to the Franklin schemes?
Investors voted overwhelmingly in favour of winding up during the e-voting held in December last year. As a result, pending any approvals on the manner of winding up from investors or the Supreme Court, Franklin Templeton Mutual Fund may soon be able to sell securities held in the schemes to return money faster to investors. Many of these securities are illiquid, hence, the process can take time. Even so, there is more legal clarity on the winding up now. A lot depends on the market conditions and overall appetite for high-risk bonds.
What lessons can be drawn from the crisis?
The Franklin Templeton crisis showed investors just how vulnerable debt mutual funds are to market fluctuations. Those who picked funds by looking at yield-to-maturity have got their fingers burnt. Investors are now likely to pay a lot more attention to risk while selecting debt mutual funds. The crisis also spawned curbs by the Securities and Exchange Board of India on mandatory cash holding in debt funds and proposals to create a backstop to buy illiquid debt in the market in times of crisis.
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