Franklin update: Collects 2,000 cr in 6 funds being wound up; 2 funds ready to start returning money as legal hurdles pass

From April 24, 2020 to June 15, 2020, the 6 schemes have received Rs 1,964.21 crore from maturities, pre-payments, and coupon payments, according to Sapre

Kumar Shankar Roy Jun 24, 2020

debt mutual fund trendsWith the winding up matter of six debt funds moving from investment room to courtroom, the e-voting process for approving the liquidation has now been stalled till Karnataka High Court rules on the matter. In the latest communication from Sanjay Sapre, President, Franklin Templeton Asset Management (India) via a letter dated June 23, the firm has shared updates on the court battle, the impact on investors and an update on investments in Essel Infra and Reliance Big Entertainment. Read on.

Case update

There are at least half a dozen legal cases that have been filed to contest the Trustees’ decision on the winding up of the six yield-oriented schemes viz. Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund. These have nearly Rs 26,000 crore assets under management.

“As of June 19, 2020, the Hon’ble Supreme Court (SC) has considered the Special Leave Petition and the Transfer Petition filed by Franklin Templeton. All legal cases relating to the winding-up of these six schemes will be transferred to a Division Bench of the Hon’ble Karnataka High Court and the SC has directed that the matter be completed within 3 months. This may reduce the litigation and expedite the resolution,” Sapre writes.

This also includes a Letter Patent Appeal (LPA) filed by the SEBI in the Gujarat High Court against the decision of a single bench to stay the e-voting and unitholders meeting.

Sapre said that the fund-house will file an appeal before the Karnataka High Court seeking vacation of the stay order (on e-voting and unitholder meeting) issued by the Gujarat High Court.

Also read: Franklin MF debt funds court update: 6 cases transferred to Karnataka HC, to decide matter in 3 months

Investor impact

There has been a lingering worry that the legal developments will impact timelines for e-voting, unitholders’ meet and disbursement of monies back to investors.

“The E-Voting and Unitholder’s Meet for the six schemes under winding up cannot be conducted till the stay order issued by the Hon’ble Gujarat High Court is vacated. In the meanwhile, we have been working to analyse the portfolio of each scheme and develop a monetisation strategy for each of the securities in the portfolio. The schemes continue to receive maturities, pre-payments and coupon payments. However, an efficient monetisation of assets and distribution of investment proceeds will be possible only after obtaining consent of the unitholders under regulation 41 of SEBI (Mutual Fund) Regulation 1996,” Sapre wrote in the letter.

From April 24, 2020 to June 15, 2020, the 6 schemes have received Rs 1,964.21 crore from maturities, pre-payments, and coupon payments, according to Sapre. Importantly, two of the six schemes (Franklin India Ultra Short Bond Fund & Franklin India Dynamic Accrual Fund) have repaid their bank borrowings and are cash positive. These schemes can start repayments to investors subject to a successful unitholder vote.

“We anticipate that Franklin India Ultra Short Bond Fund will have in excess of 7% of its AUM available to distribute to Unitholders by the end of June 2020, and Franklin India Dynamic Accrual Fund could have in excess of 6% of AUM by this same time,” Sapre says. In one more scheme, Franklin India Credit Risk Fund, the borrowing level has come down to 11.25% from its original level of 22.27% on April 24, 2020.

The fund-house hopes to accelerate monetisation post a successful unitholder vote.

Also read: Franklin Templeton debt MF e-voting: What are your options, what you should do

Investments in Essel Infra, Reliance Big Entertainment

Sapre also provided an update to two investments in his letter.

Essel Infraprojects – Two bonds issued by the Essel Infraprojects Ltd. were unable to honour their principal payment on May 22, 2020. “We have appointed a legal counsel and have initiated necessary legal actions for recovery. The schemes will continuously monitor the developments and take appropriate steps in the best interest of its unitholders. Four of the six impacted schemes have investments in these bonds. These bonds are held in the portfolio at a marked down value and the equity share collateral is adequate to cover this value as of June 22, 2020,” he wrote.

Reliance Big Entertainment – Bonds issued by Reliance Big Entertainment were unable to meet their interest payment obligation due on June 14, 2020. The put option (exercise date of June 15, 2020) has not been exercised as the security is already rated “D” and the next put option date is on September 14, 2020. “We are exploring options for invocation of pledged shares as well as the corporate guarantee and are taking appropriate legal advice on the same. Five of the six impacted schemes have investments in these bonds. These bonds are held in the portfolio at a marked down value and the share collateral is adequate to cover this value as of June 22, 2020,” Sapre said.

You can read the letter here.


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 kumarsroy@rupeeiq.com.

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