Investors in six debt schemes of Franklin Templeton Mutual Fund have had to face torrid times for seven months after the fund house dropped its bombshell in April on plans to wind up these schemes.
Since then, they have been denied access to their money and the way forward has been clouded by the case doing the rounds of courts.
This week, Franklin Templeton (FT) sent out notices to investors seeking their votes for winding up. Here’s an explainer to help you decide how to vote.
Q. I already received a notice from FT on April 24 saying that that six schemes were being wound up. Why are they again seeking my vote?
Because the courts have asked them to get investor permission before they proceed with it. When FT issued its first notice in April, it took the view that under section 39 of SEBI’s mutual fund regulations, its trustees could take a unilateral decision to wind up any scheme. It proposed to take unitholder approval only for asset disposal after this decision.
But activist investors challenged both FT’s winding up decision and this interpretation in the courts. They argued that under Section 18, trustees of a mutual fund cannot wind up any scheme without unit-holders approving it first. The Karnataka High Court has ruled that FT trustees could initiate winding up only after first getting the approval of investors by simple majority.
Q. FT’s trustees have said that voting ‘Yes’ is best for me, will lead to ‘orderly’ winding up and fetch ‘maximum value’. If I vote ‘No’, they say, the scheme will make distress sales which will lead to losses on my NAV. Is this accurate?
This is the FT trustees’ interpretation of the situation. If you vote ‘No’, the trustees’ actions in April will stand invalidated. The fund will then have to re-open the six schemes for fresh redemptions. The fear is that if the six schemes are re-opened now after seven months, investors will rush to redeem their units.
The schemes may need to sell bonds that they hold before maturity. Many of them are lower rated and illiquid and their market sales are unlikely to fetch good value. Remaining closed for redemptions can help FT attempt negotiated sales or hold bonds to maturity hoping for full repayment, though this isn’t guaranteed.
Q. If I vote ‘Yes’, when will I get my money and how much haircut will I take?
There is uncertainty around both. If FT holds its bonds till maturity and gets full repayment, then you can expect your monies back broadly in line with the maturity profile of your scheme disclosed by FT on November 27.
As per this, Ultra Short Bond should be able to encash 82 per cent of its assets by April 2022, Low Duration Fund 79 per cent, Dynamic Accrual 57 per cent and Credit Risk 74 per cent.
For Income Opportunities and Short Term Income, 49 per cent and 77 per cent of repayments are scheduled from May 2023 to April 2025. Schemes that already hold significant cash can make quicker repayments.
As of November 27, Ultra Short Bond Fund held 46 per cent of its assets in cash and call money, Low Duration Fund 48 per cent, Dynamic Accrual 33 per cent and Credit Risk Fund 14 per cent, but Short Term Income and Income Opportunities had borrowings. The amount you get should broadly correspond with the NAVs at the time of repayment. But both the timing and the amount you will get are subject to issuers not defaulting or delaying repayments.
Q. What will be implications of voting ‘No’, as some activist and investor organisations have advised?
This advice is based on three arguments. The organisations believe that FT is guilty of mismanaging its debt schemes. They believe that SEBI was wrong to allow FT to borrow in excess of regulatory limits.
They also believe that if FT is allowed to proceed with its winding up with a ‘Yes’ vote, it will get away scot-free on the timing of repayments and may end up selling its bonds at deep discounts too, shifting the burden of illiquidity and credit losses entirely to its investors.
They, therefore, argue that FT’s debt schemes ought to be investigated for mismanagement, with the AMC or sponsor making good any losses if this is proved. They also argue that unitholders need to be paid the official NAV as of April 23 2020 in a timebound manner with the Court overseeing the process.
If the majority of investors vote ‘No’, the schemes will be re-opened for redemption — unless the court specifically stays it. This could lead to a scramble for redemptions. You will need to wait until the court delivers its judgement and hope for a favourable verdict to get full repayment.
Q. Looks like a devil-and-deep-sea choice.
It certainly is. You can vote ‘Yes’ and still demand that SEBI or the courts act on the results of investigations.