Voting ‘Yes’ will allow schemes to monetize assets without resorting to distress sales and will maximise value to Unitholders
Mumbai, December 7, 2020: The Trustee of Franklin Templeton Mutual Fund in India has approached unitholders to seek consent for the orderly winding up of the six* fixed income schemes under regulation 18(15)(c) of SEBI (Mutual Funds) Regulations 1996 as per the interim order issued by the Hon’ble Supreme Court on December 3, 2020.
The Trustee has partnered with ’K Fintech‘ for the electronic voting process and the unitholders meeting to seek unitholders’ consent. Voting will take place from December 26–28, 2020 and the meeting of unitholders of relevant Schemes on December 29, 2020. The details and modalities of the same have been shared with Unitholders through a notice. The objective of the voting exercise is to seek, by ‘simple majority’, consent of the Unitholders for the decision made by the Trustee to wind up the six fixed income schemes in an orderly fashion. Consent will be sought from unitholders for each scheme separately.
The Trustee believes that it will be beneficial for Unitholders to vote ‘YES’ to the proposed resolution. The Trustee is of the view that an orderly liquidation would maximize the value of the portfolio assets for distribution of cash to Unitholders on a pro-rata basis. There is a greater likelihood of realizing fair value from the investments within a reasonable period of time by the person authorized under Regulation 41 in an orderly winding up.
If the decision to wind up the Schemes in an orderly manner is not implemented, it would precipitate a rush of redemptions, which would force a distress sale of the portfolio securities, likely resulting in a reduction in the net asset value (NAV) of the Schemes and substantial losses for Unitholders.
OPTIONS AVAILABLE TO UNITHOLDERS
Unitholders in the six schemes under winding up will have two choices:
· Vote “Yes” in favour of the orderly winding up – This will mean opting for an orderly winding-up of the schemes with a potential to realize fair value from the assets. This will allow the Trustee to proceed with the next step which is to seek further approval from unitholders for appointment of a person under regulation 41(1) to carry out the winding up.
· Vote “No” against the orderly winding up – This will mean opting for the Schemes to be re-opened for purchases and redemptions, potentially leading to an emergency liquidation of securities and resultant loss of value. A distress sale of securities held in the portfolios could result in a rapid and steep decline in the NAV leading to substantial losses for unitholders (irrespective of the market conditions).
Sanjay Sapre, President, Franklin Templeton – India, said, “We seek unitholders consent for the orderly winding up and believe this will result in the best possible outcome for unitholders in these schemes. Unitholders’ vote in favour of the orderly winding up will allow us to maximize return of investment value without resorting to an emergency liquidation of securities. The opportunity to liquidate assets at fair value will increase with time in a normal market environment.”
Sapre added, “An orderly winding up does not mean a lengthy wait for return of monies. Once we receive a majority ‘Yes’ vote in favour of the orderly winding up of the schemes, the Trustee will proceed with a second vote to seek approval of the unitholders as required under regulation 41 of SEBI (Mutual Fund) Regulations 1996 to authorize the Trustee, or any other person to proceed with the winding up of the schemes. The schemes will then be able to distribute the cash already available in the schemes and make further payments at regular intervals as the schemes receive cash-flows from monetization of assets.”
Santosh Kamath, CIO, Franklin Templeton Fixed Income India, said, “From April 24, 2020 to November 27, 2020, the six schemes under winding up have received INR 11,576 crore from maturities, pre-payments, and coupons. Four out of the six schemes are already cash positive and have close to INR 7,226 crore available to return to Unitholders, subject to fund running expenses. All of this cash has been received without any secondary market sale (active monetization) of the securities in these six schemes. This points to the fact that the securities held in the funds continue to retain value.”
Addressing concerns on the quality of the portfolio and the schemes’ ability to monetize assets, Kamath added, “It will be pertinent to note that of the INR 11,576 crore received since April 24, 2020, nearly half of this amount has been received from securities rated ‘A’, followed by securities rated ’AA’. Many of these securities were unlisted, and in many instances, Franklin Templeton Schemes were majority investors. We always retained conviction that these are fundamentally sound businesses. However, with the impact of Covid-19 on the economy, the markets became significantly risk averse and there was little to no secondary market liquidity for many of these issuers in March and April 2020.”
Sapre further added “I would urge and request unitholders to take a judicious decision in the interest of protecting the value of their investments by supporting an orderly winding up. We now see many issuers approaching us with offers of prepayment, and with markets slowly returning to normalcy, secondary market interest for many of the securities held in the scheme portfolios is also increasing. We can accelerate the process of monetizing scheme assets once we have unitholders’ consent for an orderly winding up. We believe that monetizing a large amount of portfolio assets over a period of time in an orderly manner will result in better outcomes for unitholders as compared to being forced to sell the same securities as a ‘distress sale’ in a short period of time.”
Notes:
Voting “Yes” to the Resolution means opting for an orderly Winding-up of the Schemes with a potential to realize fair value from the assets | Voting “No” to the Resolution means opting for the Schemes to be re-opened, potentially leading to distress sale of assets and loss of value |
(i) The securities in the Schemes can be liquidated in an orderly manner without the need to proceed with distress sale (as redemptions are not allowed) therefore enabling an orderly liquidation of the portfolio assets at fair value. The proceeds realized by the Schemes will be distributed to the Unitholders in proportion to the units held by them, at regular intervals. (ii) This option will enable recovery of maximum value of securities held by the Schemes. (iii) The Authorised Person would be in a position to take the most appropriate action with regard to liquidation of each security as there will be no undue haste or selling pressure. (iv) The NAV would not be negatively impacted as liquidation would be orderly and there would be no need for distress sales. (v) Unitholders will not be required to apply for redemptions. Unitholders will receive regular pro-rata distributions of investment proceeds as assets are systematically liquidated by the Schemes.
| (i) The Schemes would be required to reopen immediately and may need an emergency liquidation of securities, if a high volume of redemption is received. (ii) This may entail distress sales of securities in order to meet the redemptions received. The market is unlikely to have the liquidity to absorb such large quantities of securities over a short period of time and it may not be possible to get bids at reasonable prices for all securities in such circumstances. (iii)A distress sale of securities held in the portfolio could result in a rapid and steep decline in the NAV leading to substantial losses for Unitholders (irrespective of market conditions). While the endeavor would be to minimize losses, however there is no assurance that the Schemes will be successful in doing so. (iv) Unitholders will need to apply for redemptions if they wish to receive monies. This may result in disproportionate distribution of any cash generated to Unitholders depending on the time of redemption. (v) An adjustment in valuation and consequential reduction in the NAV may be required on account of the above factors in accordance with applicable regulations. |
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