With what has been a roller-coaster ride for investors since April 23, 2020, when Franklin Templeton Mutual Fund announced the winding up of six of its debt schemes, there is finally some respite with recent Supreme Court directions. Today, we will look at all the details of what transpired since the announcement of the voluntary wind-up of six schemes on April 23, 2020.
The Latest Developments on the Franklin Templeton case
In a recent development, the Supreme Court bench comprising Justices Sanjiv Khanna and Adbul Nazeer has directed Franklin Templeton Mutual Fund to distribute Rs.9,122 crore (the distributable surplus as of January 15, 2021) to the unitholders of the six schemes that were voluntarily shut down by the fund house in April 2020. The disbursement exercise will be carried out by the SBI Mutual Fund. The SC ruled that the disbursement should be made to unitholders in proportion to their holding in the schemes.
When & How will the disbursement happen?
On February 02, 2021, the SC directed SBI Mutual Fund to carry out the disbursement exercise. On February 09, 2021, SBI Mutual Fund submitted an application detailing the distribution mechanism created in consultation with SEBI and Franklin Templeton. The SC approved the same. According to the proposed plan, SBI will make payments to the unitholders during the week of February 15, 2021, to all investors whose accounts are KYC-compliant. Further, Franklin Templeton also informed investors that it is working closely with SBI MF to ensure that cash is distributed at the earliest.
How much of the investment value can investors expect?
Since this is a partial payment and Franklin Templeton is yet to realize over Rs.17,000 crore worth of assets, unitholders can expect the following parts of their investment value in different schemes:
- Low Duration Fund ~ 63%
- Ultra Short Bond Fund ~ 50%
- Dynamic Accrual Fund ~ 40%
- Credit Risk Fund ~ 25%
- Short Term Income Plan ~ 8%
Here’s a table that explains this better:
|Scheme name||AUM as on 31 Jan 2021 (Rs crores)||Available for distribution (Rs crores)||% of holding value investor will receive|
|Franklin India Low Duration||2,595||1,625||62.6|
|Franklin India Ultra Short Bond||10,220||5,075||49.7|
|Franklin India Dynamic Accrual||2,578||1,025||39.8|
|Franklin India Credit Risk||3,668||926||25.2|
|Franklin India Short Term Income||5,609||469||8.4|
Timeline of the Franklin Templeton case
Here is a timeline of the Franklin Templeton case highlighting some important events:
On April 23, 2020, Franklin Templeton Mutual Fund announced that it would be voluntarily winding up six schemes with a total AUM of more than Rs.25,000 crore:
- Low Duration Fund (borrowings of 8%)
- Ultra Short Bond Fund (6%)
- Short Term Income Plan (28%)
- Credit Risk Fund (16%)
- Dynamic Accrual Fund (1%)
- Income Opportunities Fund (26%)
April 24, 2020: Many Franklin fund of funds that were holding units of one or more of these six funds wrote down around 50% of their exposures, resulting in a massive hit on their NAVs. These funds were Life Stage FoF 20s, Life stage FoF 30s, Life Stage FoF 40s, Life Stage FoF 50s Plus, Dynamic Asset Allocation, and Multi Asset Allocation.
The fund house appointed Kotak Mahindra Bank to assist in the monetization of the six schemes that were wound up. On May 28, 2020, Franklin Templeton released notices on the unitholder’s meet scheduled on June 12, 2020, and e-voting from June 09, 2020, and June 11, 2020. The month of May also saw several investors file writ petitions against the winding-up decision.
- SEBI hired a CA and a forensic audit team to inspect the dealings of the six schemes that were shut down
- On June 03, 2020, The Gujarat High Court issued a stay order on the e-voting scheduled from June 9-11, 2020. Further, on June 5, 2020, the Court stayed the e-voting until SEBI’s forensic audit report was released. Franklin Templeton temporarily suspended the e-voting process and filed a special leave petition before the Supreme Court against the Gujarat High Court.
- By June 19, 2020, the Supreme Court ordered the transfer of all pending cases to the Karnataka High Court with a deadline of three months to reach a decision.
- Also, the borrowing levels in most schemes that were shut down continued to decline.
- Hearing in the Karnataka High Court commenced on July 8, 2020.
- Rumors about investors potentially losing over Rs.20,000 crore were dismissed by Franklin Templeton in a letter to all unitholders on July 13, 2020.
- Two debt schemes faced default from an ADAG firm and Reliance Broadcast Network. Franklin Templeton initiated enforcement action to recover the dues.
- The borrowing levels declined further.
- By the end of July, Franklin Templeton confirmed that the six closed schemes had managed to generate Rs.4,280 crore from maturities, pre-payments, and coupon payments since the announcement of the closure.
- As a result of a successful unitholder vote, by mid-August, the Ultra Short Bond Fund had 21% of its AUM available in cash for distribution. Also, the Dynamic Accrual Fund had 12% available for the same.
- On August 18, 2020, Franklin Templeton capped fresh purchases across some of its Fund of Funds that were invested in its shutdown schemes. This was done to prevent new investors to take advantage of the evolving situation.
- By August 20, 2020, four of the closed schemes turned cash positive. These were the Ultra Short Bond Fund, Dynamic Accrual Fund, Low Duration Fund, and Credit Risk Fund.
- Khambatta family, the owners of Rasna, had filed an RTI plea soliciting details about the date on which Franklin Templeton received permission from SEBI for winding up the schemes. The RTI response was received in early August and revealed that Franklin Templeton did not take any approval from SEBI before initiating the winding-up process.
- By the end of August, the total cash flows from the closed schemes stood at Rs.6,486 crore since April 23, 2020.
- In September, Franklin Templeton requested investors to not react to unverified media reports and reassured them that they were auditing the books of all six closed schemes regularly and there have been no mis-utilization of funds.
- By September 28, 2020, the Karnataka High Court completed hearing all arguments. The focus was on maximizing value for unitholders and returning their money.
- The borrowing levels continued to decline and the total cash flows across the six closed schemes since the announcement of their closure stood at Rs.8,262 crore.
- Franklin Templeton announced that out of the Rs.8,262 crore cash flows reported at the end of September, the fund house had utilized some amount to repay borrowings and now had Rs.5.084 crore for distribution.
- There was a lot of speculation with respect to the audit report and Franklin Templeton urged people to resist making publications regarding the inspection report until it is formally released.
- On October 24, 2020, the Karnataka High Court released a judgment stating that the fund house should have ensured that they seek consent from unitholders before winding up the schemes. It restrained the trustees from taking any further decisions until the fund house obtains consent from the unitholders. It also stopped the AMC from making any borrowings, and investors from redeeming units for six weeks. Franklin Templeton said that it might have to file an appeal with the Supreme Court.
- By the end of the month, borrowings declined and the total cash flows across the six closed schemes from April 23, 2020, increased to Rs.5,441 crore.
- On November 23, 2020, Franklin Templeton informed investors that it had decided to file an appeal with the Supreme Court to ensure that the six schemes are liquidated in an orderly manner generating maximum value to investors.
- By the end of November, the six closed schemes had generated distributable cash flows of Rs.8,277 crore since the announcement of the winding up in April.
- On December 03, 2020, the Supreme Court heard the case and ordered Franklin Templeton to hold a meeting of the unitholders for approval in the winding-up process. The Apex Court gave the AMC one week to take steps in this regard.
- On December 04, 2020, Franklin Templeton announced that it would be seeking votes from unitholders electronically, followed by a meeting via video conferencing. It confirmed that it will seek consent separately for each scheme and a ‘No’ vote would mean that the scheme(s) will have to be reopened.
- Franklin Templeton partnered with K Fintech and scheduled the e-voting process to be held from December 26-28, 2020. The unitholder’s meeting was scheduled to be held on December 29, 2020.
- The Supreme Court ordered SEBI to appoint an observer for the electronic voting process.
- By the end of the month, the six closed schemes managed to generate distributable cash flows of Rs.9,821 crore since the winding-up was announced.
- Franklin Templeton announced that the inflows received across the six closed schemes till December 31, 2020, were nearly 41% higher than what was anticipated at the time of closure. Also, the result of the e-voting, along with the report of the observer appointed by SEBI was scheduled to be submitted to the Supreme Court.
- The e-voting results were revealed to the Supreme Court on January 18, 2021. As per the report, around 96% of the unitholders voted in favor of an orderly winding-up of the six schemes.
- In a major development, on February 02, 2021, the Supreme Court directed the AMC to distribute the cash available under the six schemes to unitholders. It also assigned SBI Mutual Fund to carry out the distribution. The Apex Court also instructed the AMC to ensure that the money is distributed to unitholders within twenty days from the date of the order.
- The total distributable cash flow was Rs.9,122 crore as of January 15, 2021. Franklin Templeton also informed investors that the NAV of five of the six closed schemes was higher than the NAV on the date of closure of the schemes.
- On February 09, 2021, SBI Mutual Fund submitted an application detailing the distribution mechanism created in consultation with SEBI and Franklin Templeton. The SC approved the same. According to the proposed plan, SBI will make payments to the unitholders during the week of February 15, 2021, to all investors whose accounts are KYC-compliant.
- Further, Franklin Templeton also informed investors that it is working closely with SBI MF to ensure that cash is distributed at the earliest.
- The cash flows in five cash-positive schemes are:
- Ultra Short Bond Fund – Rs.5075 crore
- Low Duration Plan – Rs.1625 crore
- Short Term Income Plan – Rs.469 crore
- Credit Risk Plan – Rs.926 crore
- Dynamic Accrual Plan – Rs.1025 crore
- On February 15, 2021, SBI Funds Management Private Limited confirmed that it has made the payment to all KYC-compliant unitholders. The balance amount will be distributed in tranches without waiting for the AMC to liquidate all securities.