What is Franklin Templeton?
Franklin Templeton India is a subsidiary of Franklin Resources which is an American multinational holding company. Franklin Templeton India has different schemes of debt funds, and are the country’s 9th largest mutual fund house. They used to invest in the debt of companies rather than the company itself.
Investors can invest in Franklin Templeton through various equity funds and debt funds the company has to offer, and the company in return invests in “high risk – high reward” companies.
Only 6 schemes have been closed (temporarily)
Franklin India Low Duration Fund: AUM - 5386 Crore
Franklin India Dynamic Accrual fund: AUM – 3119 Crore
Franklin India Credit Risk Fund: AUM – 3359 Crore
Franklin India Short Term Income Plan: AUM – 5386 Crore
Franklin India Ultra Short Bond Fund: AUM – 5386 Crore
Franklin India Income Opportunities Fund: AUM – 1678 Crore
These six assets cumulatively managed assets worth 26,000 Cr. These schemes had to be temporarily closed down as most of its investments were in very low rated securities.
When can a fund close down its scheme?
They can close down under 392A of SEBI MUTUAL FUND REGULATION 1996, which is if the trustees of the mutual fund feel something wrong is going to happen then they can shut down a scheme under this act. Many people believe Franklin Templeton used the pandemic as an excuse to close down the funds, and that these funds were already in a vulnerable position.
CRISIL downgraded most of their funds in the last quarter
What went wrong?
Franklin Templeton India sent a letter to its investors, which conveyed the following
“Due to the following reasons we are temporarily closing the fund
- Market Sentiment badly affected due to covid-19, which strongly affected the bond market
- Large redemption of money by investors due to panic, resulted in low cash reserve in the actual mutual fund. Investors need to paid back by selling of existing funds. Redemption requests exceeded the allocated funds”
Basically, Franklin Templeton invested in high risk companies, for potentially high return. But due to covid-19 when investors took back their money, risk increased and led to closing of scheme.
Where did Franklin Templeton India possibly invest?
Some names are Yes Bank, Vodafone-Idea.
Yes Bank is in a bad position, as the Kapurs stepped down as promoters leaving the promoter holding to 1.42% from 8.33%
Vodafone-Idea are having good grasp of customers in the telecom industry but with new strategies of Jio and Airtel, doesn’t look to sustain for long. Currently Jio holds 32.56% of users, followed by Vodafone-Idea with 28.38% of users and Airtel with 28.38% of users. Vodafone-Idea paid back 102.7 Cr to Franklin India as interest.
What happens to existing holders of the mutual fund?
No money redemption for some time and No new investments can be done. Money redemption is only possible when existing debentures reach their maturity period.
What else could Franklin India have done?
Redemption Suspension: Every 90 days, Mutual Funds can suspend redemptions till 10 days
Delay Payment: Delay payment to T+10 days
Loan against securities: Franklin Templeton raised some loans in exchange of securities. Allowing them to loan upto 20% of AUM
Distress Sale of Assets: Sale of assets to secondary market (i.e. 3rd Party Buyer)
Wind Up not a Write-Off: No investment can be done and no Redemption can be done on temporary basis.
Franklin India chose to go for Wind-up as they felt it is a suitable solution on a long-term basis.
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