Franklin MF debt funds write down Vodafone Idea exposure after SC refuses to review AGR judgement

The write-off has led to each of the Franklin schemes taking a 4-6% net asset value negative impact individually

Kumar Shankar Roy Jan 17, 2020

PGIM MF NAVWith the Supreme Court dismissing pleas, including those of Bharti Airtel and Vodafone Idea, to review its earlier judgement that had asked telecom operators to pay more than Rs 1 lakh crore of dues to the government, six schemes of Franklin Templeton Mutual Fund have written down the debt worth Rs 2,000 crore given to Vodafone Idea. The write-off has led to each of the Franklin schemes taking a 4-6% net asset value negative impact individually.

Also, the fund house has restricted the ‘minimum application amount’ in the six debt schemes on fresh, additional purchase, switch-in, SIP, STP.

As on 2019-end, Vodafone Idea debt worth Rs 3,400 crore was present in 36 schemes across 4 fund-houses viz. Aditya Birla Sun Life MF, Franklin Templeton MF, Nippon India MF and UTI MF. Vodafone Idea owes the government Rs 50,000 crore in dues, which it will have to surely pay given that legal recourse has been almost exhausted.

The Supreme Court’s refusal to review its own judgement means that the future of Vodafone Idea is uncertain, and so is the status of debt taken by it. Aditya Birla Group chairman Kumar Mangalam Birla has earlier said the group’s telecom unit, Vodafone Idea, would have to “shut shop” if there was no relief from the government following the AGR verdict.

As a matter of internal policy, Franklin Templeton seems to have pre-emptively written off the Vodafone Idea debt exposure in six schemes. Hence, the six funds have witnessed Net Asset Value (NAV) impact on Jan-16 session. Franklin India Low Duration Fund has seen 6.34% decline. Franklin India Income Opportunities Fund has seen 4.51% drop. Franklin India Credit Risk Fund has seen 4.39% decline. Franklin India ST Income Plan saw 4.07% fall. Franklin India Ultra Short Bond Fund-Super Inst. has witnessed 4.3% dip. Franklin India Dynamic Accrual Fund has seen 3.76% decline.

“As a prudent measure, and in order to protect value for existing unitholders in schemes of FTMF, we have taken the following two immediate steps: 1. Debt securities of VIL (Vodafone Idea Ltd) held in the schemes of FTMF have been marked down to zero. The valuation adjustment only reflects the realizable price of the relevant securities on the date of valuation and does not indicate any reduction or write-off of the amount repayable by VIL. The schemes will continuously monitor the developments in VIL and take appropriate steps to recover the investment proceeds in the best interest of its unitholders. 2. Fresh inflows in the scheme have been limited to Rs 2 lacs per day per fund per investor, till further notice. This limit is imposed only on the new applications received after the cut-off time on 16th January 2020,” Franklin Templeton MF said.

NAV decline: The Vodafone Idea effect 

Fund Name Fund AUM (in Rs Cr) Voda Idea debt % of fund AUM Voda Idea debt market value (in Rs Cr) 1-day NAV change%
Franklin India Low Duration Fund(G) 4627.3 6.32 292.7 -6.34
Franklin India Income Opportunities Fund(G) 3100 4.92 152.5 -4.51
Franklin India Credit Risk Fund(G) 5899.5 4.67 275.7 -4.39
Franklin India ST Income Plan(G) 10964.5 4.32 473.8 -4.07
Franklin India Ultra Short Bond Fund-Super Inst(G) 16893.8 4.27 722.1 -4.3
Franklin India Dynamic Accrual Fund(G) 3850.6 4.08 157.2 -3.76
Source: RupeeVest   portfolio details as on Dec-2019, NAV as of Jan 16

Telecom operators had challenged the way the Department of Telecommunications (DoT) calculated Adjusted Gross Revenue (AGR), based on which they pay licence fees and spectrum charges. Licence and spectrum charges are calculated at 8% and 3-5% of AGR, respectively. The 24 October 2019 court order upheld the government’s definition of revenue, which defined AGR as all revenues of a licence holder including those from non-core telecom operations such as rent, dividend and interest income.

Rating agencies have so far not announced any downgrade on Vodafone Idea debt. CRISIL and Care Ratings rated Vodafone Idea as BBB- (minus).

Money recovery chance

Vodafone India securities held by various fixed income schemes of Franklin Templeton remain rated at investment grade, thus limiting the options available to the fund-house, at this point of time, a spokesperson said. Clarity may take some time to emerge even if the company (Vodafone Idea) takes recourse to a curative petition or other measures available to it.

The schemes will continuously monitor developments in VIL and take appropriate steps to recover the investment proceeds in the best interest of its unitholders, the fund spokeperson says.

“We will review these decisions on a regular basis and take appropriate action as clarity emerges,” the spokesperson added.

RupeeIQ take

Investors in the above mentioned Franklin funds, as of now, cannot do much to recover write-down induced NAV loss.

If you now redeem your reduced value of investments, then it will become permanent capital loss. The 4-6% loss due to Vodafone Idea write-down virtually wipes out one year’s returns on such debt funds.

Franklin Templeton MF has not created a side pocket for Vodafone Idea, since rating agencies have not downgraded the debt securities yet after SC development.

If Franklin delayed this valuation change of Vodafone Idea debt securities, then HNI and rich investors may have redeemed ahead of others. In this backdrop, the decision – though painfull for all – does not put any investor ahead of others.

If in future, the situation changes, then valuation may be changed and thus investors can see NAV recovery.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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