June 4, 2020

How to talk to clients about new developments in the Franklin Templeton scheme winding up issue?

Network FP Taskforce

Taskforce

There have been a lot of updates and circulars doing the rounds with reference to the 6 wound up debt mutual fund schemes of Franklin Templeton(referred to as the said 6 schemes henceforth). While each of these communications are self-explanatory and comprehensive, they are often ridden with language warranted by disclosures, legal stands as well as SEBI guidelines/compliances. We sometimes find them complicated, confusing, boring and may even fail to keep track of the essence of these communications. It is thus, in the interest of our financial advisor community and their clients that Team ThinkTank attempts to present a simplified update of Franklin Templeton’s recent notifications/circulars.

Before we provide the summary of the notifications/circulars in question, we would like to emphasise on the fact that this article is not a substitute to any of the data/ information provided in the statutory notifications/circulars. This is a mere attempt at summarising their meaning in a simple way and readers are insistently recommended to first read the following notifications/circulars, understand them and then proceed to read the article. The article relates to the following:

1. Franklin Templeton’s notice on e-voting 
2. Franklin Templeton’s notice on appointment of Kotak Mahindra Bank
3. SEBI’s circular on listing of the units of the wound-up schemes 

Now that you have read the above, let’s get to the essence of each of them:

1. E-voting: Franklin Templeton is in the process of reaching out to investors of the said 6 schemes and have them cast their vote about the winding up of these schemes. The voting is NOT for or against the winding up of the said schemes. It is for or against authorising the trustees of the said schemes to carry on with the winding up process. If 75% of the unit holders vote in favour of them, the trustees of t concerned scheme will overlook and handle the winding up and monetisation of the underlying assets. If not, then an entity appointed by SEBI will step in and do the needful. The latter may be a slightly longer process. The decision here has to be on your and your client’s perception of who should be in charge of taking care of these proceedings- the trustees of the scheme-that know the scheme inside out but have been a part of the decision making process thus far, or an unbiased third party appointed by our market regulator who may take a while to understand the picture and move forward. Think over this, explain it to your clients and then decide what the vote should be for.

Advantages of voting in favour of Franklin Templeton taking charge of the winding-up  process
1. Franklin Templeton know about their funds, what papers they have chosen and why. So, they will be in a better position to take appropriate calls for liquidation of the concerned portfolios.
2. Franklin Templeton has a direct interest in ensuring the best possible outcome for their investors, in order to protect their goodwill.

Advantages of voting in favour of a third party appointed by SEBI taking charge of the winding-up process:
1. A third party will conduct the winding up process in in an unbiased way.
2. Credibility of such third party will be backed by SEBI as it will by appointed by SEBI under its regulatory functions.
3. Possible benefits of tact and specialisation possessed by such third party.

2. Appointment of Kotak Mahindra Bank as an Independent Advisor: The trustees of the said 6 schemes of Franklin Templeton have under the guidance of SEBI and based on their own assessment of the situation, appointed Kotak Mahindra Bank to help and advice with monetisation of the assets and instruments held by the said schemes and winding up of the same. Through their Debt Capital Markets team, the bank will help the fund house to achieve the objective of protecting the interest of the unit holders by extracting the best values from the sale/maturities of the underlying assets. There would be a formal approval required in this regard from the unit holders.

How does the appointment of KMB help the unitholders?

The bank through its debt capital markets team will ensure that the liquidation of the assets and papers that will be used to return the money to the investors happens as smoothly as possible. SEBI also has the ultimate objective of protecting the interest of the investors and ensuring minimum impact on their investment. Having an independent advisor for the purpose of advising on monetisation of the assets is like having a specialised task force deal with a problem in a professional and objective-oriented way. Kotak Mahindra Bank is known to have credible governance and a good track record. Their debt capital marker team is bound to possess great skill in dealing with fixed income securities. As per information available in open domain, Kotak Mahindra Bank will act as an advisor and can also act as an agent of Franklin to realise the aim of getting the best possible values upon monetisation of the portfolios. In times when faith in an investment entity gets shaken, having a strong, credible and independent advisor on board goes great lengths in restoring such confidence.

3. Listing of units on stock exchanges: Currently, close ended schemes and segregated portfolios of any existing scheme are allowed to be listed on the stock exchanges as a way of providing liquidity and an exit option to the investors. In order to protect the interest of unit holders of schemes that are wound up (as in the case of the said 6 schemes) and to provide an exit option to them, SEBI can authorise the listing of the units of such schemes on stock exchanges before the schemes cease to exist. The same shall be applicable to the said 6 schemes. It is not mandatory for unit holders of such units to take the exit route, but this is merely an alternative for them. While the units are slated to be listed in demat form, the clarifications about what the process of such listing and transactions will be, how investors in physical units can avail of the exit, what day will the listing take place, etc. are yet to be published. The same should be announced in due course and made amply clear by SEBI, Franklin Templeton as well as the stock exchanges where the listing takes place. The price at which such units would be traded can be expected to be affected by the NAV of the said schemes as well as demand-supply while these units are being traded. Clarification about this too should be available in due course.

 Consequences of listing of units on stock exchanges for investors:

While it is not necessary that upon listing, every investor who wishes to sell their units will find a buyer, it atleast provides a scope of exit/realisation of investment amount(at least part of it) when there is a buyer. There will always be a buyer in every different market scenario, and there is always a seller who benefits from realisation of this sales proceeds. For investors who had parked money in any of these 6 schemes to avoid volatility of the equity market and for short term/high priority goals, this would be a respite, though the realisation value cannot be presumed right away. This is where as advisors we play a critical role in helping our clients make a rational decision.

While none of these points seem to actually give us a sense of the money actually coming back to investors, this is part of the process towards that destination and we ought to keep our investors updated about the same

Hope our readers find this read useful!

Team ThinkTank would like to thank and acknowledge Mr. Amit Trivedi for his guidance and inputs for this article.