There has been a lot of anguish in the aftermath of shutting down of 6 debt schemes by Franklin Templeton Mutual Fund on April 23, 2020. Over the last 15 months, we have had a series of unprecedented events – closure of six open end debt funds, multiple court cases, the Supreme Court appointing another AMC to take care of liquidation process, SEBI’s order on FT MF and so on. But there is one big positive in the entire episode: Investors’ interests have been preserved.
Why it happened?
Due to heightened volatility in the secondary market after a series of credit events and the pandemic, there was severe redemption pressure on debt funds of Franklin Templeton Mutual Fund.
It was the initial phase of the nation-wide lockdown and market participants did not know where the debt market was headed. As a result, foreign portfolio investors sold off heavily and liquidity in the debt market apart from government securities vanished. In fact, the spread (excess yield to compensate for the credit risk) between G-Secs and corporate bonds increased significantly, indicating the perceived risk level in the market.
Selling bonds during that time, particularly bonds rated less than AAA would have resulted in lower realization. This is due to two reasons:
- Lower valuation of existing bond papers
- Further erosion in price of securities due to liquidity crunch and possibility of rise in yields
Option before FT MF
In this backdrop, FT MF had these choices:
- Let things drift, honour all redemptions and sell securities in the portfolio at whatever price available in the market. Investors would have got lower NAVs and lower price realizations
- Shut the schemes to stop redemptions and pay back gradually as securities mature and sell in the secondary market as the situation normalizes. This would in the long run give optimal returns to investors but would go against liquidity for investors, public sentiments and regulator’s expectations
- Put up the proposal to shut down 6 funds for voting by unit-holders. Now we know, as per the order of Karnataka High Court and Supreme Court that a scheme cannot be shut unilaterally by a mutual fund. However, looking at it practically, if the proposal was rejected in April 2020, FT could not have shut the schemes but there would be an even more distress sale.
What did FT do?
They took the hard decision to shut their schemes. That is, they avoided distress sales which ultimately preserved investors’ interest. After all the heartburn and liquidity being locked, let us look at the outcome.
The securities are being liquidated through SBI Mutual Fund and the amount of money paid back till date, as compared to the corpus size of the funds as on 23 April 2020, is 84% in total that ranges between 62% - 99% across the 6 funds. FT took the hard call, a hit on their reputation and investors went through stress but as we discuss, 62% - 99% of the dues have been paid back and the remaining money in the the six funds is showing handsome returns.
Debtguru Joydeep Sen is a corporate trainer and author. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
