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Franklin Templeton Mutual Fund

Sir John Templeton had once famously said, “The four most expensive words in the English language are, “This time it’s different.” We all face this confusion at some point. Be it planning to buy a car or house, we are always at crossroads. Investors are thus no different as the stock market keeps springing surprises. Franklin Templeton Mutual Fund is a very old fund-house in the world. Franklin Mutual Fund in India has been in news for quite some time and we discuss the same in this analysis for the benefit of our readers. Read on!

What is Franklin Templeton Mutual Fund?

Franklin Templeton Mutual Fund is a renowned fund-house that has been in the brokerage business for a long time. It was founded in 1947 by Rupert H. Johnson Sr. in New York, USA. It offers asset management services for retail(individual), institutional and high-value clients. It is present in 34 countries and has over $ 724.1 billion in assets under management globally.

What has happened with the Franklin Mutual Fund in India?

6 debt fund related schemes of Franklin Mutual Fund have been closed down on April 23, 2020. This has been done owing to the poor financial circumstances caused by the ongoing Covid-19 pandemic. The following 6 schemes have been closed, where there is no fresh sale of mutual fund nor redemption taking place,

Scheme  NAV
(Net Asset
Value)
 Fund Size
(In Crores)
Franklin India Low Duration Fund ₹22.35 ₹2529.1 
Franklin India Ultra Short Bond Fund ₹29.11 ₹10121.69
Franklin India Short Term Income Plan ₹3796.03 ₹5436.37 
Franklin India Credit Risk Fund ₹19.60 ₹3567.24 
Franklin India Dynamic Accrual Fund ₹67.44 ₹2518.92
Franklin India Income Opportunities Fund ₹21.54 ₹1688.27

The approximate value of the 6 schemes: Rs 26,000 crore.

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What were the reasons for winding up the 6 schemes of Franklin Mutual Fund?

Franklin Mutual Fund had written a letter to their investors, whereby, they had mentioned two prime reasons for the closure of the 6 schemes. They are discussed as follows,

1. Market sentiment: Due to the Covid-19 situation, all the markets across the world are in a panic and that is why the bond market is also in a panic. All businesses had stopped for some time as they had high fixed costs.

2. Large redemptions: Due to the panic situation, investors started redeeming or withdrawing their money from the fund. Subsequently, MF had lesser cash reserves left, Franklin Templeton had to start paying out of the available cash balance. Thus, as more and more investors were approaching the company to take back their money, the company decided to sell some of the schemes or keep them as collateral to get a loan from the bank.

 

Let's understand it with an example:

So let’s understand this problem through an example. Imagine, that there is a company which specializes in manufacturing mobile phones. All of a sudden, it runs into lawsuits over intellectual property. Suddenly there is news about the legal problems of the company in the media. Consequently, the investors watching T.V. get panicked.

They contact their AMC and request for a redemption of their money and sell off their shares. AMC has already invested the money into the schemes which had bought the mobile company’s shares. The news spreads like a wildfire and soon more people take out their money.

The cash reserves of the AMC start reducing quickly and as more investors come to take back their money, they soon run out of options. The AMC finally decides to close the schemes which had invested in the shares of the sick company. They approach a bank and place the high-value schemes as collateral and secure a loan against them so that they can return the money to the panicked investors.

Where was Franklin Templeton Mutual Fund investing?

The Franklin Mutual Fund is famous for investing in comparatively low rated bonds. Also, the Low rated bonds are not very safe. They have a rating of AA, AAA, or AA-. The risk was therefore high. Generally, a thumb rule for financial management is high risk will have high potential returns. Franklin Mutual Fund was managing this situation well as they earned high interest on these investments and were passing on more money to the investors.

But due to Covid-19, these risky companies, where Franklin Mutual Fund was investing in, started going down (vis a vis their financial situation), they were impacted. To give a brief overview of some of these companies where Franklin Templeton Mutual Fund had invested, were, IL&FS, Vodafone-Idea, Yes Bank to name a few. These companies had raised money by the way of corporate bonds. Subsequently, Franklin Mutual Fund had invested in them.

Also, if a company goes from a good financial position to a bad financial position, not only their equity but also debt will face problems.

What are the court decisions on the Franklin Templeton Mutual Fund case?

1. June 8, 2020: Petitioner Areez Khambatta, an investor in Franklin MF, approached the Gujarat High Court to challenge the Franklin Mutual Fund’s decision to go for an e-voting to shut down the 6 debt schemes. Subsequently, the honorable court heard arguments from both sides and dismissed the application filed by Franklin Mutual Fund which had sought its permission for e-voting. The court had said that a SEBI investigation is pending and without the report of SEBI, investors will not be able to make an informed decision about the e-voting.

2. October 24, 2020: SC had transferred the cases filed in Gujarat, Delhi, and Chennai against Franklin Templeton Mutual Fund to the Karnataka High court on June 19, 2020, and had ordered it to hear the matter expeditiously. Karnataka High Court concluded hearing all the arguments on September 24, 2020 and delivered its judgment on October 24, 2020.

Franklin Mutual Fund AMC had therefore given investors the choice to finalize an administering agency for the e-voting: Deloitte or the trustees of the AMC assisted by the Kotak Mahindra Bank. However, it did not give the investors the option to reject it altogether.

This decision of the AMC was thus proven wrong by the Karnataka High Court order. The hon’ble court had said in its judgment that the consent of a simple majority of unit-holders is necessary for the winding up of the schemes. It had stayed the winding process until voting on the matter takes place.

3. December 3 and 9,2020: The Franklin Mutual Fund AMC thus challenged the Karnataka High Court order in the Supreme Court. The Hon'ble court also had stayed the redemption payment to unit-holders of the AMC on December 3, 2020.

Moreover, the Supreme Court on December 9, 2020, asked the Securities and Exchange Board of India(SEBI) to appoint an observer for the e-voting process of the AMC for the winding up of the 6 schemes. SEBI consequently replied to the court that it had no role in the winding process but has written to the Reserve Bank of India(RBI) for its view.

Total unit-holders of Franklin Templeton Mutual Fund AMC’s 6 schemes: 3,00,000.

Franklin Mutual Fund

What are the provisions in the law regarding this case?

A fund-house is thus allowed to close any of its schemes as per the provisions in section 39(2) of the SEBI Mutual Fund Regulations, 1996.

Also, section 18(15) of SEBI Mutual Fund regulations states that the trustees need to take the consent of unit-holders to wind up or prematurely redeem units.

Should Franklin Mutual Fund investors vote a 'yes' or a 'no'?

The e-voting will finally take place on 26-28 December 2020.

‘Yes’ Vote ‘No’ Vote
It would thus mean that the investors have agreed to allow the AMC to shut the 6 schemes. It would mean that the investors have not agreed to allow the AMC to shut the 6 schemes. They want it to continue.
According to Franklin Mutual Fund AMC, a ‘Yes’ vote would ensure an orderly exit of the investors whereas a ‘No’ vote will force the AMC to sell the scheme’s holdings at huge losses. As per the Chennai Financial Markets and Accountability (CFMA), an investor group, the investors should go for a ‘No’ vote as giving a ‘Yes Vote' will regularize the decisions of the AMC. It would amount to agreeing with the AMC for the losses it will generate.

What will be the impact on other Franklin Templeton Mutual Fund schemes doing?

It can consequently have a negative effect on the other schemes of Franklin Mutual Fund as the investor confidence in the AMC will be low. There would thus be more redemptions by investors which can make it financially tough for the AMC to work.

Conclusion

The 6 debt schemes that are being pushed to be closed by the Franklin Mutual Fund were facing massive redemptions owing to the panic sentiment in the investors. Eventually, the AMC had decided in April 2020 to close them and issued an e-voting proposal for its unitholders. This was challenged in various High Courts of the country and the matter finally came to the Supreme Court.

The apex court on December 9, 2020, finally ordered SEBI to appoint an observer for the e-voting process scheduled for December 26-28,2020 and has stayed the redemption of money from the schemes. There have been mixed views for and against the e-voting process, as the Franklin Templeton Mutual Fund is yet to furnish the details of the schemes and their performance before an informed decision can be taken by the investors. The matter will be further heard by the Supreme Court in the third week of January 2021. Till then, the fate of the investors will depend on the e-voting results.

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