How it all happened

In late April 2020, Franklin Templeton summarily stopped fresh purchase and redemptions in six of their debt funds. While the ostensible reason was market liquidity and redemption pressure, the actual reason was that some investors had sensed that the portfolio of these funds was a mess. When redemptions started picking up, the fund realized it did not have the ability to meet such a pressure. Hence they opted to shut the redemption window altogether. Nearly Rs.28,000 crore is stuck since April. 

My way or the highway

When a clutch of investors in the fund approached the High Court against the winding up, it actually backfired. The court ordered that winding up could not happen without the consent of the unit holders. The result was that the fund put the onus on either voting in favor of the winding up or bid farewell to their money. The 91% vote in favor of the winding up of the 6 schemes is really not a choice exercised, but an absence of choice. It was like Templeton Fund telling the unit holders, “It is my way or the highway”. The vote was obvious! 

What happens next?

The court would lay out the detailed procedure but the fact of the matter remains that unit holders are going to lose a lot of money. The fund has said that it has collected about Rs.13,000 crore against the total outstanding sum of Rs.28,000 crore. That could still be misleading. This excludes the loans that still remain unpaid, compensation for the interim period and the legal plus administrative charges. In a best case scenario, it does look like unit holders may get around 40-50% of their capital in this winding–up offer. For most unit holders that is still a good bargain as it, at least, releases locked–up liquidity. 

Where is fund accountability?

big issue is that the fund gets away without any accountability. Templeton may have a great global reputation but allowing a star debt fund manager to play ducks and drakes with the money of unit holders is ridiculous. The least is to get those accountable for the scam to book. Templeton cannot get away with some claptrap on market risk. Everyone knows about market risk and even the fund knows very well that what these funds took on was anything but market risk. It will impact future flows into the fund and that is already obvious in the last few months. This was actually an opportunity to get to the core of a much bigger problem in which debt funds are managed. That has been missed out!