Sebi glare on Voda Idea writedown by mutual funds after AGR verdict

Franklin Templeton MF announced 100% mark-down; others followed valuation metric after SC rejected telcos' petition

The Securities and Exchange Board of India (Sebi) is probing the writedowns carried out by mutual funds (MFs) on their exposure to Vodafone Idea following the Supreme Court’s rejection of the view petition in the adjusted gross revenue (AGR) matter. 

Immediately after the SC verdict, Franklin Templeton Mutual Fund had announced a 100 per cent writedown, resulting in a 4-7 per cent erosion in value for its six schemes exposed to Vodafone Idea debt. The action differed from its peers UTI MF, Nippon MF, and Birla MF, which went for writedowns in accordance with the valuation metrics provided by rating agencies.

Sources say Sebi is probing whether Franklin’s action could have compromised the interest of existing investors.

“In the absence of any rating action, the 100 per cent write-down prima facie amounts to speculation. The regulator will soon gather inputs from the fund house on the matter,” said a person with direct knowledge of the development.

“Would like to clarify that we have not received any query from Sebi in this regard,” said Franklin Templeton in a statement.

In an earlier statement, the fund house had termed the action a prudent measure for protecting value of existing unitholders. Franklin also limited fresh inflows into schemes exposed to Vodafone Idea at Rs 2 lakh, a move to prevent investors from taking large speculative bets on the mark-down valuation.

Dhirendra Kumar, CEO, Value Research, a mutual fund tracker, says the actions taken by respective fund houses were “right in their own way”.

“Trustees have all the right to be prudent with their valuations. Franklin has been more conservative and proactive. They have done what they felt was necessary to guard the interests of existing investors. Without the measure, investors who would have walked out first after the SC verdict would have been the beneficiaries at the cost of remaining investors,” he said.

Kumar said the move to restrict fresh flows was a compromise on the liquidity and the fund house would have to figure out a solution to this.

The MF industry has a total exposure of Rs 3,389 crore to the telecom firm. Among the fund houses, Franklin holds papers worth over Rs 2,000 crore, Aditya Birla MF and UTI MF a little over Rs 500 crore each, and Nippon India of nearly Rs 200 crore, shows Value Research data. In total, 45 debt MF schemes hold Vodafone Idea debentures.

In recent months, most rating agencies have downgraded Vodafone Idea’s debentures, given its weakening credit profile. The papers are still rated as “investment grade” but have been put on a “rating watch”, implying high risk of default.

While the company remains on precarious grounds, given the impending Rs 53,000-crore payment of AGR dues and network investments, some equity analysts still remain hopeful.

“[Vodafone Idea] is the biggest beneficiary of tariff hikes in India. If the AGR payment is reduced significantly, market share stabilises after the completion of integration in large circles and tariff hikes continue, it could offer a significant upside,” BNP analyst Kunal Vora wrote in note on Tuesday. On Friday, shares of VIL had tanked 25 per cent after the SC verdict. This week they have rebounded sharply almost recouping most of Friday’s loss.