'No' vote could mean emergency liquidation of securities: Sanjay Sapre, FT

President of Franklin Templeton India Sanjay Sapre speaks ahead of the vote on whether the fund house should be allowed to wind up troubled schemes

Over 300,000 investors in the six troubled schemes of Franklin Templeton Mutual Fund will cast their votes on whether fund house should be allowed to wind up schemes. Sanjay Sapre, president, Franklin Templeton India, tells Samie Modak that a ‘no’ vote will lead to forced selling. Edited excerpts:

Why are you calling investors to vote in favour of winding up of the schemes?

According to the order issued by the Supreme Court, we are seeking unitholder consent for winding up of the six fixed income schemes. The e-voting for the same will be held from December 26-28, followed by a unitholder meet on December 29, 2020. The objective of the voting exercise is to seek, by ‘simple majority’ of votes cast, consent to implement the decision taken by the trustee to wind up these schemes. Consent will be sought from the unitholders for each scheme separately.

We believe a ‘yes’ vote will help actively monetise over Rs 18,000 crore of assets in an orderly manner. This will result in better outcomes for investors as compared to being forced to sell the same securities in a short period of time.  

What's the rationale given by some investors calling for an ‘against’ vote?

Fixed income markets are gradually returning to normalcy. We see increased interest for many of the securities in our portfolio which were previously illiquid. We have also received large prepayments from issuers recently. On the contrary, a “no” vote may lead to a rush of redemptions which would require the schemes to undertake an emergency liquidation of portfolio securities. In such an eventuality, many of these securities may see a significant loss in value. Thus, there is higher certainty of outcomes in a “yes” vote than a “no” vote. We urge investors to vote keeping in mind the impact of their vote on the value of their investments, and not to be swayed by speculation and rumour.

Can you spell how both the scenarios could play out? How long will it take to liquidate holdings and repay all the investors?

In case of a “yes” vote, the next step is to seek authorisation from unitholders under regulation 41(1) to authorise the trustee, or any other person (in this case, Deloitte), to monetise scheme assets subject to any directions from the Hon’ble Supreme Court.

The authorised person could then make a pro-rata distribution of the cash available in each scheme subject to fund running expenses and extant regulations. Subsequent payments will be made periodically basis cash from asset monetisation, coupons, maturities and pre-payments. Repayments can commence shortly after the results of the authorisation vote.

On the other hand, a negative consent vote will result in the schemes being re-opened for subscription and redemptions. In this case, we anticipate a high volume of redemption requests as investors seek to exit at the earliest opportunity. In this situation, the schemes will be forced to undertake an emergency liquidation of securities, potentially at steep discounts, to generate liquidity. This in turn will lead to value erosion for investors.

Some investor groups are calling for a vote through paper ballots and want the voting to be overseen by a retired judge. Will you accept such demands?

We are following the directions of the Supreme Court in this regard.

There have been some allegations against the fund house of unfair practices ahead of the winding up of these schemes. Any comments on these allegations? Has SEBI initiated any proceedings against the fund house?

We strongly deny these false allegations. We have always maintained high standards of governance. We have followed due process in our investment decisions and in the winding up. We have always acted in the best interest of our investors and in accordance with applicable regulations.

Our focus remains on distributing monies to unitholders at the earliest. The six funds have already generated over Rs 11,907 crore since April 24, 2020. Nearly half of this has been received from securities rated ‘A’. Many of these securities were unlisted, and in many instances, our schemes were majority investors. All this indicates that these securities continue to retain value. Four of the 6 schemes are cash positive and have over Rs 7,488 crore available to return to unitholders. All this cash has been received without any secondary market sales.

How has this episode impacted the fund house? Have others scheme performance been hit due to redemptions?

When we decided to wind-up these schemes, we recognised that this would be at the cost of our reputation built over the past 25 years. We went ahead with the decision only because of our firm belief that this was the right decision to preserve value for our investors. We know that returning money to unitholders at the earliest is the first and most important step towards resurrecting our brand and regaining investor trust.

Any comment on Franklin Templeton’s India commitment?

Franklin Templeton has more than 25 years of history in India, and our commitment to the India business and our investors remains steadfast. We have 33 per cent of our global workforce based in India. We also continue to manage a number of schemes that are not impacted by the winding up in line with their investment mandate. Our immediate priority is to assist the trustee in managing the orderly winding up of these funds. We continue to focus on building a strong asset management business in India.