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HC says investor consent needed for winding up

The winding up of six Franklin schemes was unprecedented. As events continue to unfold, we bring to you a timeline of all major developments. So watch this space.

Franklin fiasco - A timeline

October

  • 24th October: Finally, the judgement is out and it categorically highlights that investor is the king. The Karnataka High Court (HC) stated that unitholders' consent should have preceded the announcement of winding up. From this perspective, the trustees of FT have been in violation of SEBI provisions.
  • HC restrained trustees from taking any further actions till consent of unit holders is obtained. Further, HC stayed the operation of the judgment for a period of 6 weeks, during which neither investors can redeem, nor the AMC can make any borrowings.
  • Thus, it remains to be seen what further actions the investor community will take and how the AMC pursues after the 6-week period.
  • Releasing a statement on today's judgement, Franklin said "We are considering the order and will take appropriate steps in consultation with our legal experts in the best interest of the unitholders. Our focus remains on maximizing value for unitholders in these schemes and returning monies as soon as possible."
  • 22nd October: The Franklin litigation has been going on for quite a while now. The wait will soon be over as The Karnataka High Court will pronounce the judgment on Saturday, 24th October at 11 a.m.
  • 16th October: As per the mid-month update released by FT, the six schemes, as of 15th October, have received a total of about Rs 8302 crore since closure. As part of this amount has been utilized to repay borrowings, FT has Rs 5116 crore for distribution in the four cash positive schemes, subject to fund running expenses.
  • The four cash positive schemes - Ultra Short Bond Fund, Dynamic Accrual Fund, Low Duration Fund and Credit Risk Fund have 40,19,19 and 4 per cent of their respective AUM available in cash to distribute to unitholders.
  • Based on the mid-October portfolio, borrowing levels in Short Term Income Plan and Income Opportunities Fund stood at 19 and 31 per cent respectively.
  • FT reiterated that the AMC remains focused on generating maximum value and returning investor's monies at the earliest in accordance with the applicable regulations, subject to the decision of the court. The AMC is currently awaiting the court's judgment.
  • 8th October: Refuting media reports about the findings of the forensic audit initiated by SEBI, FT in a letter to investors said that it is improper to make any publications regarding the inspection report as the matter is subjudice. FT added that the auditors have acknowledged in the original submission to SEBI that the report is subject to modification based on responses to be provided by FT.
  • The AMC reiterated that it's employees who had made investments in the six shuttered schemes continue to hold substantial investments.
  • Regarding the news reports of inconsistency in exercising put options, FT said that the decision to exercise or not exercise a put option rests with the investment management team which considers many factors to maximize recovery of proceeds while taking such decisions. FT said that the reports highlighting investments made in certain issuers where the AMC didn't exercise put options ignore the fact that the AMC has already initiated legal recovery proceedings against few of these issuers.
  • Based on the September-end portfolio, the total cash across the six schemes stood at Rs 8262 crore. In the note, FT informed investors that a part of this amount has been utilized to repay borrowings and the AMC has Rs 5084 crore for distribution in the four cash positive schemes namely - Ultra Short Bond Fund, Dynamic Accrual Fund, Low Duration Fund and Credit Risk Fund.
  • 6th October: Soon after FT fell into litigation, SEBI had ordered a special audit into the case and hired Choksi & Choksi for the same. Now Moneycontrol has reported that Choksi & Choksi's forensic audit has revealed several lapses in dealings of the six schemes. The report has highlighted that some key personnel had redeemed their investments right before the closure announcement had come out. Further, the AMC had favoured certain companies they had invested in by not exercising the put option, despite the opposite being suggested by the risk management committee.
  • The report has also pointed out that the AMC was heavily invested in unlisted securities, which were mainly illiquid and some of them newly incorporated.
  • 5th October: Many were expecting the Karnataka High Court to pronounce the judgment today on matters related to six shuttered schemes. However, the hearing was only a procedural one. Further, since FT filed two additional affidavits, the Court directed the AMC to serve copies to petitioners. The next hearing date is yet to be announced.

September

  • 30th September: Franklin's six shutdown schemes collectively received Rs 1078 crore during the second half of September. The total cash flows till date now stands at Rs 8262 crore.
  • Based on the September-end portfolio, borrowings in the Short Term Income Plan and Income Opportunities Fund stood at 19 and 32 per cent of their AUM, respectively.
  • Ultra Short Bond Fund, Dynamic Accrual Fund, Low Duration Fund and Credit Risk Fund are already cash positive and have 40, 19, 19 and 4 per cent of their AUM respectively.
  • 28th September: In a letter released late in the evening, FT informed investors that the Karnataka High Court has finished hearing all the arguments and the AMC is now awaiting the judgement. Maximising value for unitholders and returning their money remains the focus for the AMC.
  • Referring to media reports relating to an FIR filed with Economic Offences Wing (EOW), Chennai, based on complaints by Chennai Financial Markets & Accountancy (CFMA), FT said that while they haven't seen the FIR contents, the press release issued by CFMA citing the FIR, is replete with various misleading and baseless allegations, besides being inappropriate, as the matter is currently subjudice. Further, while the AMC respects authorities like EOW, they believe SEBI is best fit to handle issues pertaining to mutual fund investments.
  • Requesting investors to not get influenced by unverified media reports, FT said that the books of the 6 shut schemes are regularly audited and auditors have never made any observations of misutilisation of funds by the schemes.
  • 24th September: The Karnataka High Court has set 25th September as the preferable timeline for the completion of arguments by all parties.
  • 17th September: Based on the mid-month portfolio, FT informed that the total cash flow received by the 6 schemes till date now stands at Rs 7184 crore, with Rs. 698 crore received during September 1-15. The four cash-positive schemes, i.e, Ultra Short Bond Fund, Dynamic Accrual Fund, Low Duration Fund and Credit Risk Fund have 35, 17, 9 and 2 per cent of their respective AUM available in cash for distribution subject to a successful unitholder vote. Further, borrowing levels in Short Term Income Plan and Income Opportunities Fund continue to decline steadily and currently stand at 22 and 33 per cent respectively.
  • FT also communicated that following to the decision of the Delhi High Court that allowed FT to sell pledged shares of Zee Entertainment Enterprises Ltd to recover dues from the Essel group, debenture trustees sold the entire shares and recovered Rs. 92.35 crore across the 4 exposed schemes. FT further said that the recovery amount was slightly higher than the value at which the Essel Infraprojects NCDs were valued in schemes namely - Dynamic Accrual Fund, Credit Risk Fund, Short Term Income Plan and Low Duration Fund.
  • 10th September: In a letter to investors, FT assured that barring issues in payment by some issuers like Future Group, Essel, and ADAG group, all other companies in their portfolios have made payments as scheduled since the time of closure of the six schemes.
  • Giving an update on the legal cases, FT said that the court has finished hearing the petitioners from the Delhi, Gujarat and Madras High Courts and the court is expected to hear FT after SEBI completes their arguments.
  • 8th September: The court hearings in the Franklin episode have been resumed in the Karnataka High Court and will be done through video conferencing.
  • 4th September: Court cases against Franklin Templeton have been regularly heard in the Karnataka High Court since 12th August. The last hearing was held on 31st August and was to continue on Wednesday, 2nd September. However, due to Covid concerns, the Karnataka High Court has adjourned the hearing in the winding-up matter for a week.
  • 3rd September: In a note released, Franklin Templeton informed investors that five shut schemes have received Rs 146 crore as interest payment from Vodafone Idea Ltd. for NCDs held in their segregated portfolios. The amount will be distributed to the investors in proportion to their holdings in the plans of the segregated portfolio. The five schemes include Low Duration Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund and Income Opportunities Fund.

August

  • 31st August: In an update to investors, FT communicated that the 6 shut schemes received Rs 1498 crore from maturities, pre-payments and coupon payments during 15-31 August. The total cash flows now stands at Rs 6486 crore since the closure announcement in April.
  • Based on the August-end portfolio, Ultra Short Bond Fund, Dynamic Accrual Fund, Low Duration Fund and Credit Risk Fund have about 31,14, 5 and 1 per cent of their respective AUM available in cash for distribution subject to a successful unitholder vote.
  • Borrowing levels in Short Term Income Plan and Income Opportunities Fund stood at 23 and 38 per cent respectively.
  • In a note released, FT informed investors that Rivaaz Trade Ventures Pvt. Ltd, a Future Group entity, defaulted on its obligations on 31 August. Of the six schemes, Short Term Income Plan, Dynamic Accrual Fund, Income Opportunities Fund and Credit Risk Fund were exposed to the non-convertible debentures (NCDs) of the company. Owing to the default, FT marked its debt to zero. As a result, the NAVs of the schemes fell by about 5, 3, 6 and 0.03 per cent, respectively.
  • FT further informed that on 29 August, Reliance Retail had announced acquisition of the retail and wholesale business and logistics and warehousing business of the Future Group, on a slump sale basis for Rs 24,713 crore. As part of the acquisition, Future Group will amalgamate certain companies into Future Enterprises Limited (FEL) and then FEL will conclude the slump sale. In the note, FT said that based on representations from the Future Group, NCDs are proposed to be repaid from proceeds of the transaction. While the fund house believes this is a positive, the proposed slump sale and restructuring will be subject to regulatory approvals by the National Company Law Tribunal (NCLT), Stock exchanges, SEBI, Competition Commission of India, shareholders and creditors of the transferor and transferee companies.
  • 26th August: While the court cases against Franklin Templeton are regularly being heard in Karnataka High Court, a new angle has come about. Reportedly, one of the petitioners - Khambatta family, owners of Rasna -had filed a right to information (RTI) plea, soliciting details about the date on which SEBI had granted permission to FT for the winding up of its six schemes and the date on which such permission was applied for. This family was the petitioner in the case filed in Gujarat High Court which led to a stay on the liquidation process.
    In its RTI query, the petitioner had said that FT had claimed before the Gujarat High Court and Supreme Court that all appropriate permissions for winding up of the six schemes were taken from SEBI. The RTI response, received in early August, apparently revealed that FT did not take any approval from SEBI before initiating the winding up process.
  • 20th August: In an update to investors, FT informed that four schemes have received the maturity proceeds and interest payments from Vedanta Ltd. On August 17, Low Duration Fund, Ultra Short Bond Fund, Credit Risk Fund and Dynamic Accrual Fund received Rs 49 crore, Rs 864 crore, Rs 120 crore and Rs 16 crore, respectively including interest. The total cash flow (from April 24 till August 17) of the six schemes now stands at Rs 6072 crore.
    Further, while Ultra Short Bond Fund (cash of 29%) and Dynamic Accrual Fund (cash of 12%) were already cash positive, Low Duration Fund and Credit Risk Fund have also turned cash positive with 1 per cent of their respective AUM available in cash.
  • 18th August: FT has capped fresh purchases across a few of its funds of funds which had investments in two of the shutdown schemes. An investor can now only invest up to Rs 2 lakh and Rs 1 lakh per day, in Dynamic Asset Allocation and Multi Asset Solution FoF respectively. For the Life stage FoF, an investor can invest only up to Rs 50,000 per day in the 20s and 40s Plan and Rs 25,000 in 30s Plan and 50s Plus Plan. The gating is understood to be done to safeguard the interests of existing investors of these FoFs and prevent new investors from taking undue advantage of the evolving situation.
  • 17th August: Giving a mid-month update, FT communicated that the 6 schemes under winding up received Rs 708 crore during 1-14 August, taking the total cash flows to Rs 4,988 crore till date.
  • Based on the mid-month portfolio, Ultra Short Bond Fund had 21 per cent and Dynamic Accrual Fund had 12 per cent of their respective AUM available in cash for distribution subject to a successful unitholder vote.
  • Borrowing levels in Low Duration Fund, Credit Risk Fund, Short Term Income Plan and Income Opportunities Fund stood at 1, 4, 23 and 37 per cent of their AUM, respectively.
  • In its 6th August hearing, as requested by the petitioners, the Karnataka High Court granted time till 10th August to file responses. Further, reportedly, daily hearings would commence from 12th August.
  • In its affidavit, FT reportedly said that according to SEBI, duration norms are to be met at the portfolio level and other AMCs also do so. Further, it mentioned that it labelled some funds as moderate-risk, even when other AMCs labelled the same funds as low-risk. Also, it said that the issuers it invested in were stable, with good credit history, at the time of investment.

July

  • Based on the July-end portfolio, FT communicated, the six closed schemes had received a total of Rs 4,280 crore from maturities, pre-payments and coupon payments since the announcement of their closure in April. Rs 1,005 crore was received in July alone.
  • Out of the six FT schemes, Low Duration Fund, Credit Risk Fund, Short Term Income Plan and Income Opportunities Fund had 1, 4, 26 and 38 per cent borrowings, respectively.
  • 29th July: Brickworks downgraded NCDs of three future group firms. Two of these - Nufuture Digital (India) and Future Ideas - defaulted on payments. Rivaaz Trade Ventures, however, made payments of its dues on 31st July. On 31st July, the NAVs of Income Opportunities Fund, Credit Risk Fund, Short Term Income Plan and Dynamic Accrual Fund fell by 4.9, 2.3, 1.7 and 1.3 per cent, respectively.
  • 23rd July: FT informed investors that two debt schemes faced default from Reliance Broadcast Network, an ADAG firm, after the issuer was unable to meet payment obligation due on its NCDs. One of the schemes was Short Term Income Plan. The fund house is in the process of initiating an appropriate enforcement action to recover dues.
  • The Karnataka High Court rescheduled the hearing of the FT cases to 7th August.
  • 13th July: In a letter to investors, FT refuted reports circulating on WhatsApp and other platforms that investors could face a loss of over Rs 20,000 crore in the schemes being wound up.
  • On 10th July: The affected funds received the principal and the remaining interest payment of Rs 1252.88 crore for the security '8.25% Vodafone Idea Ltd. (10-July-2020)' held in the segregated portfolios. Full and final payment was made to investors.
  • 8th July: The Karnataka High Court considered the matters related to the winding-up of six debt schemes and issued notices to the parties concerned. The parties were directed to file counter affidavit and responses, if any, by July 22, 2020 and July 29, 2020, respectively. The next hearing was scheduled for 15th July.

June

  • 30 June: A few funds witnessed a small blip in NAV. FT informed investors that this was as the result of a maturity date reset for the securities of Edelweiss Rural & Corporate Services Ltd.
  • Based on the June-end portfolio, FT communicated that the six schemes had received Rs 3,275 crore from maturities, pre-payments, and coupon payments from 24th April to 30th June.
  • As of 30th June, Ultra Short Bond Fund had 13 per cent and Dynamic Accrual Fund had 4 per cent of their respective AUMs available to distribute to unitholders subject to a successful unitholder vote post legal clearances.
  • Borrowing levels in Low Duration Fund, Credit Risk Fund, Short Term Income Plan and Income Opportunities Fund stood at 7, 9, 29 and 37 per cent of their AUM, respectively.
  • 23rd June: In an update to investors, FT said Reliance Big Entertainment (already rated default grade) had defaulted on its obligations on 14th June. Five of the six impacted schemes had investments in these bonds. FT said that the share collateral was adequate to cover the current valuation of bonds.
  • 19th June: The Supreme Court considered the special leave petition filed by FT and directed transfer of all pending cases to the Karnataka High Court and gave a three-month deadline. With this, all pending litigations (including SEBI's LPA) would now be heard in Karnataka High Court.
  • 16th June: SEBI filed a Letter Patent Appeal (LPA) in the Gujarat High Court against the decision to stay the e-voting process.
  • 12th June: The affected funds received interest payments of Rs 102.71 crore for the period June 12, 2019 to June 11, 2020 for the security '8.25% Vodafone Idea Ltd. (10-July-2020)' held in the segregated portfolios of the six schemes.
  • FT filed a special leave petition before the Supreme Court against the Gujarat High Court.
  • 8th June: The Gujarat High Court stayed FT's e-voting and unitholders' meet till forensic audit report was out. Further, the next hearing was scheduled on 12th June. Thus, the fund house temporarily suspended the e-voting process, where investors were to authorise the entire distribution process.
  • 3rd June: Gujarat High Court issued a stay order on the upcoming e-voting. In response, on 5th June, FT filed a petition to vacate the stay.
  • SEBI ordered a special audit into the FT case and hired a forensic audit firm and a chartered accountant to inspect the dealings of the six schemes.

May

  • By May-end, borrowing levels in the other funds continued to decline. Low Duration Fund, Credit Risk Fund, Short Term Income Plan and Income Opportunities Fund had outstanding borrowings of 11, 11, 33 and 39 per cent of their AUM, respectively.
  • Ultra Short Bond Fund and Dynamic Accrual Fund turned cash positive after repaying their outstanding borrowings.
  • Various investors filed writ petitions in Chennai, Delhi, Ahmedabad High Courts and in the Supreme Court against FT's winding-up decision.
  • 28th May: The trustees released notices on e-voting and unitholder's meet. Unitholders were provided a three-day window, from 9th June to 11th June to participate in e-voting, while the unitholder meet was to happen on 12th June.
  • 22nd May: FT informed that Essel Infraprojects defaulted on payments to four of its shutdown schemes: Dynamic Accrual Fund, Credit Risk Fund, Short Term Income Plan and Low Duration Fund. There was no impact on the NAVs as the value of the shares held as collateral was greater than the current valuation of bonds.
  • To facilitate an exit route for investors, SEBI put out a notice enabling schemes that are winding up to list their units on the stock exchange. The move came in the wake of FT's 23rd April decision.
  • 20th May: FT Trustees said to have appointed Kotak Mahindra Bank to assist in the monetisation of the assets in the six schemes being wound up.

April

  • 29th April: FT allowed moratorium to NCDs of three Future Group companies: Rivaaz Trade Ventures, Nufuture Digital (India) and Future Ideas.
  • 24th April: The funds of funds which held the shutdown funds as the underlying wrote down about 50 per cent of the respective exposures, leading to massive one-day hit on their NAVs. These were Life Stage FoF 50s Plus, Multi Asset Solution, Life Stage FoF 40s, Dynamic Asset Allocation FoF, Life Stage FoF 30s and Life Stage FoF 20s.
  • 23rd April: Franklin Templeton Mutual Fund (FT) announced the voluntary wind-up of six schemes: Low Duration Fund (borrowings of 8 per cent), Ultra Short Bond Fund (6 per cent), Short Term Income Plan (28 per cent), Credit Risk Fund (16 per cent), Dynamic Accrual Fund (1 per cent) and Income Opportunities Fund (26 per cent). These funds had AUM of over Rs 25,000 crore.