MUMBAI: The Reserve Bank of India’s (RBI) special liquidity facility of ₹50,000 crore for mutual funds is at least a week late and comes only after Franklin Templeton India decided to shutter its six debt schemes. The benefit of the liquidity window is unlikely to be available to these six schemes, considering that redemptions in these schemes were stopped on 23 April.
However, Franklin can still access the window for its other schemes, like all the other fund houses. What needs to be seen is whether banks view the closure of the six schemes as a temporary blip and are willing to lend fresh money to the fund house on the strength of its asset under management.
“The 6 Franklin schemes have stopped redemptions, so they may not use this liquidity facility. Other Franklin schemes will benefit to the same extent as the rest of the debt funds in the industry because liquidity will improve for high quality papers post the RBI announcement,” said Gaurav Awasthi Senior Partner, IIFL Wealth.
Franklin Templeton had announced it was closing down its six credit managed yield-oriented funds on 23 April. These schemes with assets under management (AUM) of ₹25,658 crore were under tremendous redemption pressures.
In the week preceding the winding up decision, these schemes had to contend with ₹7000 crore of redemptions. To meet these redemption pressures, these schemes had to resort to borrowing from banks. They borrowed in excess of ₹2200 crore at 8% Marginal Cost of Funds Based Lending Rates or MCLR rate.
“Had the RBI window opened up earlier, these schemes would have had a fall back option of borrowing. One of the scheme was already nearing the Securities and Exchange Board of India (Sebi) permissible limit of borrowing from banks,” said a CEO of mid-sized fund house.
Sebi regulations allow mutual funds schemes to borrow up to 20% of their assets to meet liquidity needs for redemption / dividend pay-out. One of the schemes being wound up, Franklin India Short Term Income Plan, had already borrowed up to 17.7% of its assets as of 31 March.
“The RBI window is too late for the 6 Franklin Templeton schemes that are winding up. Even if they had not been winding up, banks would not have bought the kind of paper that is held in those schemes. Many of these issuers go to the market when banks have refused to lend to them in the first place. Ideally RBI should have created an Special Purpose Vehicle (SPV) to buy this paper,” said a debt fund manager on condition of anonymity.
These schemes had followed an investment strategy of investing in investment grade papers across the credit rating spectrum, ranging from AAA to lower rated A papers. This strategy had continued to serve the investors well and had generated returns in better market conditions. However, during the past six months, unarguably turbulent times for the credit markets, the strategy of investing in below AA papers backfired and schemes could not raise cash to match the piling up redemption requests.
The current covid-19 pandemic also created a severe market dislocation particularly for the types of investments that these schemes held, though lack of risk appetite, reduced volumes and illiquidity for corporate bonds was a broader market issue.
Out of the ₹25,658 crore AUM, only about ₹8,084 crore worth of maturities are lined up in next one year. So, investors are seemingly in for the long haul to recover their investment.
Even while RBI stepped in to prevent contagion effect on other debt schemes, the Association of National Exchange Members in India (ANMI) has demanded that the finance ministry and Securities and Exchange Board of India (Sebi) appoint a high-power committee to take over Franklin Templeton’s management. The brokers body also asked for Franklin’s investment decisions be examined.
ANMI claims that that the profile of some of the companies Franklin Templeton chose to invest and the terms of those investments are questionable.
These schemes invested in long maturity papers, as well as in several lesser-known companies, such as Aadarshini Real Estate Developers, Small Business Fincredit, Rishant Wholesale Trading, Northern ARC Capital, among others.
