Should Templeton be held accountable for performance
Templeton has sent a communication to its unit holders to vote on liquidation of the six schemes that were shut down on April 24. Here is a quick background on the Templeton fiasco first.
Templeton fiasco
On 24th April, Franklin Templeton Fund shocked the market by summarily winding up six of its debt scheme. The apparent reason was their exposure to illiquid debt. The sudden spurt in redemption pressure resulted in the fund falling short on liquidity despite borrowing Rs.3000 crore from the call money market. At that point, it became clear that running an open ended fund with that asset quality and redemption pressure was just not feasible. That is when Templeton opted to wind up the schemes. Now for the next steps!
Investors get Hobson’s choice
Investors in the six debt funds of FT are clearly a harried lot. They had put money in these debt funds hoping for safety with slightly better returns. Most investors were shocked to realize that they may end up losing half of their principal. Now Templeton has cautioned that if unit holders do not vote for the liquidation of the scheme, then the exercise may get delayed. So, if they accept the hair-cut it will be a bad loss but if they reject the vote then they will get nothing and it will be worse. SEBI may have to eventually intervene.
What FT could have done?
Clearly, winding up the fund means that the truth is a lot worse than what most of us can imagine. If it was just an issue of a few bad investments, that could have been side-pocketed as is now permitted by SEBI. The regular fund would have continued at a truncated level but it would be clean. The second option would have been to just convert these funds into closed ended funds and wait till maturity. Clearly, these options would have been feasible if the fund was confident that substantial portion of the portfolio was of good quality. But looking at the amount of low grade bonds held by these six funds (40% to 60%), these were not feasible.
Someone needs to answer
Clearly, this is not a case of systemic risk that can be dismissed. Firstly, even if the fund manager is a star manager, there is no reason to allow them to play ducks and drakes with public money. Secondly, time and again, the trustees have not asked the uncomfortable questions. These are clear governance failures that have been highlighted. Thirdly, there must be monetary liability on the AMC. In the case of the Essel bonds, HDFC AMC made the provision to compensate the unit holders. There is no reason why Templeton with its globally deep pockets cannot do the same. It is time SEBI makes AMCs pay up monetarily for such gaffes!
