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After Franklin Templeton Shuts Funds, P Chidambaram Gives 2008 Example

After Franklin Templeton Shuts Funds, P Chidambaram Gives 2008 Example

New Delhi: Former finance minister P Chidambaram has asked the centre to "act promptly" to stop any cascading effect of the unprecedented closure of six debt funds by global giant Franklin Templeton.

Franklin Templeton Mutual Fund, one of India's most prominent mutual fund houses in fixed income, said on Thursday it would wind up six credit funds in India with large exposures to higher-yielding, lower-rated credit securities due to a lack of liquidity amid the coronavirus pandemic.

"Franklin Templeton Mutual Fund's decision to wind up six debt schemes is a matter of grave concern to the investors, mutual fund industry and the financial markets," Mr Chidambaram said in a statement.

"I recall that a similar situation arose in the first week of October 2008 (during the global financial crisis) when mutual funds faced liquidity stress. Government immediately consulted RBI, SEBI, IBA, AMFI and others. An urgent meeting of the FSDC was convened and a solution was found by the end of the day. On the next morning, officers of RBI and SEBI met at 8 am, and RBI announced a 14-day special repo facility and allowed an additional 0.5 per cent of NDTL. The situation was resolved," the former finance minister said.

"Fortunately, the markets will be closed today and tomorrow. I expect that the government will act promptly and resolve the situation quickly," he said.

The closures sparked worries of panic withdrawals from other Franklin Templeton funds as well as credit funds of other asset managers, and triggered a storm on social media with distraught investors calling for regulators to step in.

"It is just like a run on banks. Across debt mutual funds, there will be loss of trust," said Omkeshwar Singh, head of mutual fund advisory firm Rank MF. "Earlier, only corporates were taking out money for cash management. Now, high net worth individuals will go for panic redemption," he said, according to news agency Reuters.

The Association of Mutual Funds in India (AMFI) said on Friday debt schemes of most mutual funds had "superior credit quality" and were "fairly liquid". It called on investors to "not get side-tracked by an isolated event". "There is no need for (investors) to panic and redeem their investments," AMFI chairman Nilesh Shah said in a statement.

With assets worth over Rs 860 billion as of the end of March, Franklin Templeton is the ninth largest mutual fund in India, having set up shop over two decades ago. Franklin Templeton was long known for its focus on lower-rated papers such as "AA" or "A" and in turn higher yields for its investors.

But the tide changed as a string of defaults by a large infrastructure lender in late 2018 led to liquidity in the corporate bond market drying up. That was exacerbated as an economic slowdown triggered more debt defaults last year. Redemptions then soared as many investors looked to preserve cash amid a nationwide lockdown to contain the spread of the coronavirus.

(Inputs and image from ndtv.com)

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