Why Affected Franklin Investors should vote “Yes” and move on

Published: December 12, 2020 at 6:06 pm

Last Updated on December 12, 2020 at 6:06 pm

The e-vote to decide on the winding up of six affected Franklin Templeton debt funds will be held during 26-29 Dec 2020. Here is why investors should vote “Yes” to the closure and gradual disbursal of withheld funds instead of “No”.

Ideally, SEBI should have played an active role in the matter, told Franklin to close the funds due to force majeure (abnormal) circumstances and not wait for them to conduct an e-vote.  At least, they should have requested to be heard during the legal proceedings and presented this view.

Why? Consider the lack of logic in SEBI rules. For the moment ignore the allegations of reckless investment made by the plaintiffs in the case against Fraklin AMC and let us look at the rules in general.

  • I run a debt fund and want to change it to a small cap fund. Should I ask consent of unit holders –> No (eg. Quant)
  • I run an equity fund that holds 50% equity. I wish to increase it to 80% equity. Should I ask consent of unit holders –> No
  • My AMC is running in loss. I would like to sell it to another AMC. Should I ask consent of unit holders –> No
  • I would like to increase the TER of my fund by 200%. Should I ask consent of unit holders –> No
  • I am tired of running MFs and would like to close the funds. Should I ask consent of unit holders –> Yes. Where is the logic in this arrangement?

Now the allegations of recklessness or big investor or insiders allowed to exit the fund definitely need investigation. This is beyond question. There must be formal enquiry made. Whether something comes out of it or not is a different matter but, it has to be done.

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The key aspect investors should consider is, all transactions are in electronic format maintained by the AMC and the enquiry can proceed independently of the fund closure. Many investors have already suffered for months worried about their money being trapped. A good chunk of the locked-up AUM has been turned into cash as the bonds started gradually redeeming.

What will happen if investors vote “No” and the court orders the funds to open for transactions again? There will be a rush to pull out. The AMC will be forced to sell the bonds that have not yet matured. Many of the low rated bonds practically have no market even on a good day. In today’s climate, it will only make things wore. They will have to sell at a loss the NAV will only fall further.

Instead, if investors vote “yes” and the court orders the funds to close and start graded redemptions; the accumulated cash in the funds would be paid out to investors. As and when the other bonds matures, further payouts will be made. Let an enquiry be conducted independently. If the AMC must face punishment, let them. Why should investors wait for more time and why should they face redemption risk and liquidity risk one more time.

Franklin’s decision in the lead up to the closure must be investigated. However is it necessary for retail investors to face further losses by opening the funds to face redemption risk again?

We strongly recommend that you vote “yes” to fund winding up to maximise the chance of getting your money back sooner. Regardless of the vote, the decision of the supreme court would be final in this regard.

We must take into consideration that the Franklin closure saga was not a result of credit risk. It was a collective fear of credit risk triggered by the lockdown. This is not something that one can plan to prevent against. SEBI was well aware that a market crash would result in a liquidity crisis: How the 2020 debt fund crisis is a repeat of 2008.

SEBI wanted mutual funds to stop private bonds deals (where FT had a dominant presence). It is unfortunate that the lockdown transpired before the deadline to stop! Although Franklin did not handle the lead up to the closure announcement well, they did not have a choice in the matter -the closure decision was mandatory considering the incessant redemptions. Any wrongdoing should be and can be investigated without affecting investors.

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