Franklin India came out with a communication dt. May 14, 2020 to its investors, on its 6 debt schemes to be wound up. The communication, after apologizing to investors, had the following key points:
- It confirmed that it is continuing to receive inflows regularly on the underlying instruments in the 6 schemes and that all maturities and commitments have been received as per schedule thus far.
- It confirmed that it is seeing a reduction in its borrowing levels in some funds as cash flows from interest income (coupons), maturities and prepayments happen.
- According to regulations, the schemes to be wound up must discharge its liabilities including borrowings before returning monies to investors.
The letter also stated that the next steps would be about commencing winding up and returning your monies. But this step cannot be started without some procedural aspects being completed.
The AMC will soon announce a unitholder vote, which is nothing but your authorization to the trustees to take the next steps as per SEBI regulations. Once the Trustees receive authorization from you, they will start the process of selling the assets and distributing monies from the respective schemes. This is a mandatory clearance for the AMC to finalize any payment schedule and payouts to you. So, you will soon be hearing from the AMC on the voting.
The following points that I am reproducing from the communication are important:
‘Some investors believe that by voting in the “Negative”, the winding up will be reversed and that the six schemes will recommence the redemption and subscription process.
This is not true. The purpose of the vote is to authorize the trustees to take the next steps for disposal of the assets of the scheme and distribution of the proceeds to the unitholders in accordance with regulations.
If Trustees do not receive authorization to proceed with disposal of assets of the scheme, this may delay the process of monetizing such assets and distribution of proceeds’
What that above essentially means is that not voting in favour could delay getting back your money. Now that it is futile looking back, it may be important for you to do what is needed to get your money as soon as possible.
Franklin funds: your next steps
- Await a mail from the AMC to know how to vote.
- The voting is for each scheme you hold among the 6 schemes. Hence make sure you vote for every single scheme.
Status update on portfolio
With the above communication out of the way, let us look at the cash flows, borrowings and NAV levels of the schemes now.
Coupon payments: According to the AMC’s update as of May 15, 2020, the schemes have been receiving some coupon payments on their papers. The data below (from AMC) will tell you that in 15 days, some coupons have been coming. Wherever the amount is zero, the inflow has been less than 0.5%, according to the AMC. Now, the inflow is a positive as you know that accrual is happening. Although it will be used first towards repayment of borrowings, it may at least prevent severe erosion. It also tells you that the debt papers are paying some interest or in the case of shorter duration funds like Ultra Short, some maturities may have happened. But we will not know if all of them have been receiving coupon on time and whether some schemes have issues with receiving interest. We will know with time.
Borrowings: In the data below, you need to keep in mind that the fund house announced the winding down on April 23. So, any redemptions on April 23 would have been honoured the next day.
As can be seen, the borrowings shot up the next day (April 24) in some schemes, to meet the redemptions. Subsequently, there has been some repayment through just the accruals (cash inflows received from coupons or maturities) in hand. Franklin India Ultra Short Bond and Credit Risk fund have seen the maximum repayment with a 54% and 32% reduction in borrowings respectively between April 24 and May 15, 2020. Dynamic Accrual, which had limited borrowings managed to pay it off. Longer maturity funds like Income Opportunities may well take time to start repayment.
NAV impact: Before we talk of returns, you need to know that the NAV is net of borrowings. That means your NAV should not fall further due to the borrowing. If any, only market gyrations or defaults can cause the NAV to fall.
So how have the funds fared since April 23? The data below will tell you that the funds that fell the most since April 23 were Income Opportunities and Short Duration.
The fall is partly due to the borrowings on April 24 but that does not account for the chunk of the fall since the returns from April 24 too is poor in these 2 funds.
The NAV dips could be due to mark-to-market losses on the papers, given that the debt market is experiencing a yield spike in lower rated papers, with international rating agencies already downgrading lower rated Indian papers or putting them on watch.
Overall, Ultra Short Bond seems to be faring well with Low Duration also not seeing any major hits. Clearly the longer duration ones have taken a higher mark-to-market on their NAV.
Please note that whatever we say here is post mortem as you will not be able to act based on any of these.
Apart from reminding you that you vote to get your money back and providing a status on portfolio and returns, this report is not meant to speculate on how much money you will get back and when.
We think while effort will be made to sell the papers once the voting goes through, simply going by the maturity date or assuming zero defaults would not work in reality.
We need to wait and hope that improved market liquidity, triggered by RBI and economic package measures, would help liquidate the portfolios faster.
Communication from Franklin Templeton
Our previous article on this subject
32 thoughts on “Franklin funds – status and next steps to getting your money back”
What about Equity and ELSS schemes in Franklin?
They are equity schemes. No such issues with them. Thanks, Vidya
Also mam, the communication from franklin says 5 years for returning back the money. Can we expect the complete return much earlier. I hold ultra short fund.
Sir, that is maturity of the underlying papers and is applicable only if they hold it all till maturity. It is likely that they will make all effort to sell it ahead. thanks, Vidya
As per SEBI mandate the maturity for vultrashort us 3 to 6 months. Then why FI says it’s ultrashort will mature only in 5 yrs
Sir, It’s average maturity is not 5 years. A few of the papers it holds have such maturity. What SEBI requires is the residual maturity should be withing the mandate. Not each’s paper’s maturity. thanks, Vidya
Thanks Mam
Hello mam, can we expect the return of the complete invested money with delay.i hold franklin ultra short find.
Hello, We won’t know when you invested to say if you will get all your invested money. What needs to be seen is whether the NAV as of closing (April 23) will at least come back. The table in the article shows returns post Apri23, you will see it has fallen for some funds. If there are no defaults, then there is a higher chance that you will get money closer to April 23. Else, it may be lesser. thanks, Vidya
Thanks for your Article, Mam. Pls.update me whenever you get information on FILF-SIP .
Regards.
Liquid fund is open and running sir. Info is available about it like any other fund. thanks, Vidya
what is the status of other fund
Franklin India Liquid Fund – Super Institutional Plan – DIRECT GROWTH
Thanks
It remains open-ended and is running. Its AUM became Rs 3582 crore due to redemptions but it is managing liquidity fine and did not have any borrowings as of April end. thanks, Vidya
Thank you Vidya Madam ! Explained All Aspects . we also stuck in Franklin India Ultra Short Bond Fund – IP – Growth
Vilas
We are much worried wether our money will be redeemed as per the present NAV or will there be any change in NAV.
It will be at the NAV on the day when you receive your money in instalments. thanks, Vidya
Thank you for simplifying the jargon. This what we expect from experts. Please keep it up.
Thank you sir. Vidya
Hi Vidya
Can you also please let us know what would be the way forward for redemption if overwhelming majority of unit holders vote against the winding up of schemes ???
The scheme cannot sell its papers and in which case, the money cannot go back to investors. You cannot take out your money as this does not mean the fund will become open-ended. So you will be stuck and the AMC will be too. Unless SEBI comes up with any new proposal or it is set for voting again, nothing can happen. Vidya
Hi Vidya
SEBI did come up wit new proposal to list the units on stock market . Can you please let us know how these can be traded ?? Will Franklin add the respective units to my Demat account ???
Hello Sir, no, you will have to trasnfer it to some broker with whom you have a demat account for you to trade or open one. SEBI has simply stated what is being done for closed ended funds today. But AMCs do not and need not do th demat. Investors are required to. Also, It is hardly a viable option as little to no MF units are traded in the stock market. thanks, Vidya
Hi Vidya
Came across an article in Business standard where there was an instance of CANSTAR mutal fund also wound up their schemes but returned the money to all the investors on( pre- determined NAV) few years down the line , can you please let us know why SEBI is not acting in interest of investors by asking the FRANKLIN AMC to return the money of investors on closure dates and take the portfolio on their books and realise it as when they are paid back by borrowers.This already happened in the past so why not atleast trustee is not doing anything . Can you also please shed some light the procedure CANSTAR fund investors followed which may help many small investors like me .
Hello Sir,
Canstar case was entirely different. The fund promised to repay investors at a predetermined NAV from the 6th year (it was a 10-year scheme) and did not keep that promise. It was a blatant case of breaking an assurance. MFs can no longer even make such promises of fixed NAV repurchase. FT did not give any such assurance. So it is not comparable.And what FT did is the only course of action available, although not the best.
thanks
Vidya
So what to do? Give vote in favour?
2nd query if company default to give at the time of redemption then who will bear the loss?
1. I think that is the only way now to ensure you get back your money. 2. if you mean ay of the debt paper defaults, who will bear it? Investors have to. That is true of any fund. thanks, Vidya
Great Analysis Vidya .
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