Franklin AMC bought JSPL papers from its schemes
Debentures bought at around 27% discount in two tranches
The mystery buyer of Jindal Steel and Power’s non-convertible debentures in Franklin Templeton’s mutual fund schemes in February March 2016 is finally out. And it is none other than Franklin Templeton Asset Management Company itself. JOYDEEP GHOSH writes
The mystery buyer of Jindal Steel and Power’s (JSPL’s) non-convertible debentures (NCDs) in Franklin Templeton’s mutual fund schemes in February-March 2016 is, finally, out. It is none other than Franklin Templeton Asset Management India (FTAMIL), itself, which bought these papers from its six schemes, according to the fund house’s annual report.
The debentures were valued at around ~1,700 crore — the highest exposure in the mutual fund industry to the company — before credit rating agencies downgraded the instrument in January 2016. FTAMIL bought the debentures for an aggregate value of ~1,240 crore, a 27 per cent discount.
A Franklin Templeton spokesperson said: “FTAMIL was the counterparty for JSPL securities transactions in February and March 2016. The transactions were effected keeping in mind the interest of unit holders and the challenges that could be faced while holding noninvestment grade securities in an open-end fund structure.”
According to the spokesperson, JSPL’s securities were purchased in December 2014 when the long-term rating for JSPL was AA- by rating agency CRISIL, and in March 2015 when these securities were rated AA by CARE, another rating firm.
However, things changed dramatically in January 2016 when CRISIL downgraded JSPL’s NCDs to BB+ and then to D by March; Franklin Templeton was caught on the wrong foot, as its schemes had exposures of two-seven per cent of their corpus in these papers.
According to industry players, after the news of JSPL’s downgrade came out, there was a lot of redemption pressure on the fund house. To resolve the situation, the fund house sold JSPL papers at a discount in two tranches, at ~72.50 and ~67.50 (face value ~100) on February 29 and March 10, respectively, to the AMC.
“While the downgrade saw the scheme’s net asset value fall, the sale led to a further loss for investors,” said a distributor. ICICI Prudential Mutual Fund also had exposure to JSPL. However, it did not sell the papers.
“FTAMIL purchased JSPL securities in two tranches due to the size of the transaction. The first tranche was purchased on February 29, 2016, when the security was rated BB+ which is below investment grade. However, we had to arrange for funding to purchase the balance, which took normal procedural time. The second tranche was purchased on March 10, 2016. In the interim, the rating agency downgraded JSPL’s long-term debt rating from BB+ to Default (D),” said the fund house’s spokesperson.
Experts have raised questions on whether the fund house took the decision in haste, as JSPL had not defaulted till then and the NCDs would start maturing only from 2018.
Another question that they ask is if the NCDs were valued correctly. According to the fund house’s spokesperson, the securities were valued in accordance with regulations and fair valuation principles, and were purchased by FTAMIL at the price at which they were held in the funds and disclosures about these transactions were made to the relevant authorities. Industry players say that this valuation was similar to other fund houses which held these papers.
As far as Securities and Exchange Board of India guidelines go, a fund can classify an underlying asset as a non-performing asset (NPA) three months after a default on interest and principal payments. In case of interest payment defaults, the fund needs to write off the security’s underlying value in phases, every quarter, starting six months from the default date, or three months from the NPA classification date. The fund needs to write off the value in five tranches —10 per cent, 20 per cent, 20 per cent, 25 per cent, and finally 25 per cent.
The good news is that Franklin’s investment hasn’t gone waste. The company has recorded interest income of ~99.7 crore on this investment already and has created provision for another ~14.5 crore.
Dhirendra Kumar, chief executive officer, Value Research, said: “Ideally, in such situations, Sebi should allow fund houses to stop redemption. But it does not happen easily. Therefore, the fund house has little option.”