In a fresh jolt to investors, Franklin Templeton Mutual Fund (MF) has said that Essel Infraprojects (EIL) has defaulted on its non-convertible debentures (NCDs). Four of the fund house’s debt schemes that are being wound up had made investments in these NCDs.
Though the fund house has said that the event does not have any impact on the net asset value (NAV) of the scheme, it has not entirely marked down its investments. “These NCDs are currently valued at Rs 92 crore in our portfolios, i.e., at 15 per cent of the maturity value after providing a haircut of 85 per cent,” the fund house said in a statement. The four schemes had a maturity value (including redemption premium) of Rs 616 crore.
Debentures backed by shares
“The NCDs are backed by a pledge of listed shares of Zee Entertainment Enterprises (ZEEL), Dish TV India Ltd, unlisted shares of EIL, personal guarantee of (Zee founder) Subhash Chandra and corporate guarantee,” Franklin Templeton said. “This only reflects the realizable value basis the current share cover and does not indicate any reduction or write-off of the amount repayable by EIL,” it said.
While there is no immediate material impact on the investments for unit holders, experts say that there were technical and legal issues involved in selling the underlying collateral, i.e., the pledged shares of ZEEL and its associated entities. “Any share sale will require the approval of the trustees and Kotak Mahindra Bank (the custodian appointed to monetise assets of the schemes that are being wound up),” says Amit Bivalkar, director, Sapient Wealth, a Pune-based wealth management firm. “Investors would have to approve the winding up. Before that they would not be able to get any payments,” he adds.
“They have to take the legal route for invoking the guarantees,” says Kaustubh Belapurkar, director manager, research, Morningstar India. “The value of shares held as collateral is greater than the fair value of the NCDs. So, there is no MTM (mark-to-market) loss. The shares can be sold in the secondary market, but the fund house is aiming for higher recovery,” a person familiar with the development said.
“We have appointed a legal counsel and are actively considering all necessary actions to maximise recovery value,” Franklin Templeton said. “The fund house will continuously monitor the developments in EIL and take appropriate steps in the best interest of its unitholders,” the asset management company stated.
Experts also said that Franklin Templeton has marked down investments in these schemes in accordance with regulations. “There is no need for any further marking down,” Sapient Wealth’s Amit said. Franklin has marked down the EIL securities appropriately, Belapurkar said.
Franklin India Short Term Income Plan, Franklin India Dynamic Accrual Fund, Franklin India Low Duration Fund and Franklin India Credit Risk Fund invested in 0 per cent Essel Infra Series I 22 May 2020 and 0 per cent Essel Infra Series II 22 May 2020 NCDs issued by EIL. At maturity, the issuer was unable to meet the repayment obligation.
On April 23, Franklin Templeton had said that it is winding up six debt schemes: Franklin India Short Term Income Plan, Franklin India Dynamic Accrual Fund, Franklin India Low Duration Fund, Franklin India Credit Risk Fund, Franklin India Short Bond Fund and Franklin India Income Opportunities Fund.
The fund house cited severe illiquidity and redemption pressures caused by the COVID-19 pandemic as the main reasons.
The four schemes cannot invoke the pledge of the underlying shares because the funds have already been wound up and, as per regulations, now need investors’ approval to sell the securities.
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