Franklin case: Redemptions stayed till 3rd week of Jan, observer to monitor voting, result in sealed envelope
The staying of redemptions means that even after the voting is done on Dec. 28, no redemptions can be done for a minimum of three weeks
Even as the Trustee of Franklin Templeton Mutual Fund in India prepared to approach unitholders to seek consent for the orderly winding up of the six fixed income schemes, the Supreme Court in an interim order has provided further clarity on how the process will be carried on.
According to Sanjay Sapre, President, Franklin Templeton Asset Management (India), as per the interim order, the redemptions continue to be stayed till the date of the next hearing scheduled in the third week of January 2021.
Redemptions being stayed till 3rd week of January means that no money can be redeemed by the unitholders of the six Franklin debt schemes till that date. This is important because previously there was an understanding that if the majority voted against winding up, the six schemes would be required to reopen immediately and cater to redemptions. In essence, the staying of redemptions means that even after the voting is done on Dec. 28, no redemptions can be done for a minimum of three weeks.
“SEBI will appoint an observer to monitor the voting process under regulation 18(15) (c). The voting results and the report of the observer will be submitted to the Hon’ble Supreme Court in a sealed envelope,” Sapre said.
With a court-appointed observer in place, the voting process for seeking consent will be done under strict compliance to apex court norms. Since the Supreme Court has asked the observer to share the report and voting results in a sealed envelope, this could mean that the court will take a call on voting results. Do note that Franklin Trustee had appointed J. Sagar Associates, a reputed law firm, as the scrutiniser to monitor the e-voting process.
These developments assume significance because if a majority of unitholders vote ‘NO’, then there is a fear that a rush of redemptions could be precipitated, forcing a distress sale of the portfolio securities and the resultant reduction in the net asset value (NAV) of the schemes and substantial losses for unitholders.
Franklin will continue to proceed with the next steps to seek unitholder consent for the winding up of the six schemes under regulation 18(15)(c) of SEBI (Mutual Fund) Regulation 1996. The schemes are Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, and Franklin India Income Opportunities Fund.
In order to ensure maximum participation, the process of seeking unitholder’ consent will be through an “Electronic Vote” followed by a meeting through video conference. The Portal will remain open for voting from 09:00 a.m. (IST) on December 26, 2020 till 06:00 p.m. (IST) on December 28, 2020. The electronic voting / e-voting facility will be available at https://evoting.kfintech.com
This will be followed by the Unitholders meeting through Video Conference on December 29, 2020. Unitholders who have not voted previously and are attending the Unitholders meet will be allowed to vote during the time of the meeting.
Over the next few days, unitholders will receive the user id and password from KFin Technologies on their registered email address.
The cash available (for distribution) as of November 27, 2020 stands at Rs 7,226 crore for the four cash positive schemes, subject to fund running expenses.
As of date, there are four cash positive schemes. Individually, Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund and Franklin India Credit Risk Fund have 48%, 46%, 33% and 14% of their respective AUM in cash right now.
Borrowing levels in Franklin India Short Term Income Plan at Rs 943 crore or 17% of AUM and Franklin India Income Opportunities Fund at Rs 497 crore or 29% of AUM continue to come down, but they are not cash positive yet.
In fact, the absolute borrowing amount for both the schemes has remained constant since October 29. Each scheme can return monies to investors only after paying all the obligations/ liabilities towards borrowings/ expenses/provisions.