Sebi gives exit option to Franklin Templeton's mutual fund investors

Experts say Sebi's move could also help in creating a market, where investors can get some access to liquidity even in stressed debt portfolios

The Securities and Exchange Board of India (Sebi) on Wednesday mandated listing of units of schemes being wound up, giving investors of schemes in Franklin Templeton Mutual Fund (FTMF) an alternative route to access liquidity if they don’t wish to wait for receipts from portfolio investments.

“However, pursuant to listing, trading on the stock exchange mechanism will not be mandatory for investors. Rather, if they so desire, they may avail of an optional channel of exit provided to them,” the markets regulator said in a circular.

Experts say such a route is unlikely to be accessed by all investors, as selling of portfolio units on such a platform is likely to be at stressed valuations.

“The selling of portfolio of wound-up schemes on an exchange platform is likely to be at adverse valuations. While Sebi’s move does give the option of liquidity, only desperate or highly stressed investors would tap into this route to get an exit,” said Joydeep Sen, consultant, PhillipCapital.

"The funds that are undergoing winding up continue to publish their net asset values daily and disclose portfolios periodically. We believe the move to list these funds on stock exchanges is a positive one, and will help provide liquidity to investors. We are keen to implement this as soon as modalities are worked out with various stakeholders, including the stock exchanges," said spokesperson for Fanklin Templeton.

On April 23, FTMF announced the winding up of six of its yield-oriented debt schemes, in light of heightened redemption pressure and lack of liquidity in debt markets, following the Covid-19 outbreak.

Experts say Sebi’s move could also help in creating a market, where investors get some access to liquidity even in stressed debt portfolios.

“The move was needed, as existing regulations already require listing of close-ended schemes, such as fixed maturity plans. Even though trading of units of such schemes is not effective, it gives some access to liquidity,” said Dhirendra Kumar, chief executive officer, Value Research.

“Given the scale of the wound-up schemes, liquidity could still emerge through this option for investors. Some investors may be able to use this option to sell units at discounted valuations, and there could be takers for it. Gradually, we could see an active market emerge for such units, following this move,” he added.

The operational modalities of listing units of such schemes shall include enabling bulk orders to be placed for trading in the units, mechanism for order placement/payment/settlement, and disclosures to be made by the fund house (including daily net asset values and scheme portfolio periodically).

Some market participants remain uncertain over the benefit of this move for investors.

“Through the bulk-order route, distressed funds can also participate in the transactions. But an institutional investor may not be willing take the risks of a stressed portfolio, given the limited liquidity in the markets right now,” said a fund manager.

The circular will come into force with immediate effect.

According to estimates 300,000 investors are impacted by FTMF’s move to wrap up six of its yield-oriented debt schemes.

On Wednesday, the fund house appointed the debt capital markets team of Kotak Mahindra Bank as an independent advisor to expedite the process of monetising assets in the portfolios, while trying to preserve the value of investments.

To kick-start the termination process, unitholders will have to authorise the trustees to monetise the assets. Following which, the payout schedules can be finalised.

In a separate note to unitholders, FTMF had said if trustees are not authorised in the voting process, payouts can get delayed.

Industry experts say if votes are not favourable, the fund house will have to seek guidance from Sebi.