Market regulator Securities and Exchange Board of India (Sebi) has tweaked its rules and allowed Franklin Templeton India to list its six shut schemes on the stock exchanges to provide an alternative exit option to 300,000 investors of these schemes.
It is to be seen whether the stock exchange listing can create some liquidity for investors holding illiquid units of the shut schemes. Prospective buyers will have to take a judgement call on the assets underlying these units, their intrinsic value and their liquidity in the secondary market.
The units of the schemes that are in the process of being wound up ‘shall’ be listed on stock exchanges and investors can exit through this mechanism, said Sebi. This process will be followed prospectively for all mutual funds which propose to wind up their schemes under Sebi regulations.
“There are several steps envisaged with respect to winding up of mutual fund schemes before the scheme ceases to exist. During this process, such units can be listed and traded on a recognized stock exchange, which may provide an exit to investors,” said Sebi in a circular.
Franklin Templeton had wound up six debt schemes on 23 April with total assets under management (AUM) of ₹25,856 crore.
However, pursuant to listing, trading on the stock exchange will not be mandatory for investors who are free to opt for this channel as an exit or wait for the asset management company (AMC) to complete the entire portfolio monetisation/ liquidation and refund process, said the markets regulator.
Interestingly these units cannot be bought or sold by Franklin Templeton during the process. So when investors offer to sell their units on stock exchanges, Franklin Templeton cannot bid for them.
Considering that bulk of the underlying paper is sub-AA, the investors may book a loss while exiting or may not find buyers for their units.
According to Dhirendra Kumar, CEO, Founder & CEO, Value Research, a mutual fund tracker ‘this is not the best solution’.
“This circular is in the spirit of mutual fund norms that all mutual fund schemes, barring capital guaranteed funds, must provide liquidity at all times. Due to an unforeseen scenario, these open-ended funds have been rendered as closed-ended. However, this can still help in two ways – a secondary market could evolve for these units as exchange platform will offer an open transparent on the st mechanism; secondly, if I am an investor in these funds and I know of a buyer who is willing to buy these units then an exchange platform will help in that,” said Kumar
However, he added that this may work for only savvy or institutional investor.
The operational steps for settlement and trading of these units will be decided by the regulator and the exchange on which these units will be listed.
These steps will include how the order will be placed, paid, executed and settled. They will also include enabling bulk orders for trading of the units, disclosure by the asset management company — Franklin Templeton India, in this case — about the net asset value, scheme portfolio and who are the eligible investors.
“Sebi has changed from what ‘can be listed’ to ‘shall be listed’ in the interest of unit-holders. On one hand, this will reduce some investor anxiety on the quantum of haircut on monetising of assets of schemes under winding up, on the other it will lend credibility to the process of winding up. There will be better disclosures as well,” said Sumit Agrawal, managing partner, Regstreet Law Advisors.
The current winding-up process involves the approval from trustees, 50% of unit holders authorising trustees to begin the process of winding down, Sebi approval, monetising the portfolio and refunding investors.