Franklin’s debt schemes were in red months ahead of shutdown

PALAK SHAH Mumbai | Updated on March 08, 2021

Disclosures, court filings reveal 91% of investments of the schemes were in ‘illiquid securities’

Franklin Templeton Mutual Fund (FTMF) was in trouble several months ahead of its actual decision to shut the six debt schemes. Data accessed by BusinessLine from disclosures made by FTMF and court filings by investors reveal that even as of September 2019, over 91 per cent of the investments of the six debt schemes were into ‘illiquid securities’ from which it was difficult to retrieve money.

FTMF closed six debt schemes on April 22, 2020 giving the Covid-induced economic slowdown as the key reason for the losses.

The market value of the six debt schemes as of September 2019 was ₹53,399 crore out of which 31 per cent was invested in unlisted securities and 60 per cent in instruments that were never traded even though they were listed.

Non-tradeable instruments

The instruments could not be traded as FTMF was the only investor in them and the companies had got them listed on the bourses by paying a listing fee. In September 2019, only 2 per cent or ₹1,068 crore worth of FTMF’s investments were into listed securities that were actively traded.

Investors of FTMF have argued in the Supreme Court that the data indicate that FTMF’s losses were  not entirely due to Covid-19.

“FTMF was mocking investors, regulators and the government and used Covid  as a shield to get off the tiger by shutting down its six debt schemes that were long bleeding. Data show that authorities turned a blind eye even as quarter on quarter, the FTMF was carrying forward a portfolio of more than 90 per cent illiquid securities. When time came for shutting down the schemes, FTMF even allowed its close associates to redeem their investments first by passing on insider information, as alleged by SEBI in its show cause notice. Can it get more dubious?” said Sanyam Jain of Kaj Associates LLP, one of the petitioners in the Supreme Court.


NAVs marked down

Jain says that even prior to June 2019 the six debt schemes were bleeding. Adding to the investors’ surprise, FTMF even marked down the net asset value  of its six debt schemes by 54 per cent to just ₹24,631 crore by the end of April 2020 compared to ₹53,399 crore in September 2019. Reportedly, FTMF allowed redemptions of over ₹20,000 crore mainly in the few weeks prior to the shutting down of the schemes and even after that. FTMF had to borrow 15 per cent or about ₹4,000 crore of the gross value of the six debt schemes as of April 2020 to meet redemptions.

Wind up to preserve value: FT

When contacted, FTMF said, “We have already explained the reasons for winding up in detail, which was to preserve unit holders’ value. The schemes have followed a consistent investment strategy and were able to meet all redemptions prior to the severe liquidity issues caused by the ‘Covid-19 pandemic’ and related lockdown. We are thankful to investors for having taken the most appropriate decision and voting overwhelmingly in favour of the orderly winding up of all six schemes. Unit-holders may note that the NAVs of all six schemes are now above the NAV as on date of the winding up. We are unable to comment on motivated queries based on innuendo, speculation and factual errors.”.

The Supreme Court  has posted the hearing of the arguments over sections of winding-up for June.

Published on March 08, 2021

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