Supreme Court has passed the final ordered authorizing the SBI MF game plan to coordinate the payouts to the unit holders of the six beleaguered MF schemes of Franklin Templeton. This was long needed, but the real effort must be to hold the fund accountable.
Distribution – Phase 1
In the first phase, SBI MF will arrange to distribute Rs.9,122 crore to the unit holders of the six schemes with original AUM of Rs.26,000 crore. The AMC had reported cash of around Rs.14,000 crore as of Dec-20 and that will be used to pay off the Rs.9,122 crore on a pro-rata basis after repaying the remaining loans in the books of these funds. As of Feb-20, only one out of the six funds is still cash-negative and that makes the job of SBI Mutual Fund a lot easier.
Phase 2 – Lot more complex
Phase 2 involves liquidating the balance investments of the six funds. The book value of the balance corpus will be nearly Rs.17,000 crore but the market value will have to be determined by SBI MF after a thorough analysis of the portfolio of the six funds. Clearly, most of the remaining assets are invested in extremely illiquid assets or even bad assets and that will emerge after SBI MF commences efforts to liquidate the full portfolio. The move is good in that it would bring the case to rest, even if it means that investors must take losses.
Haircuts are inevitable
One thing the unit holders must reconcile is to the fact that there are going to be huge losses. The fact that even after 9 months, Templeton has not been able to monetize the remaining assets means that these funds must be invested in really toxic assets with no immediate exit possible. It remains to be seen how much of a waiting period the other investments would have and how much of a cut the unit holders have to take. It is clear that Templeton has monetized the low-hanging fruit and hence the cash value of the balance investments may be extremely low.
Holding the fund accountable
Can the fund be held accountable for risks taken by the fund manager in the normal course of business? That would be a very simplistic question. It glosses over the fact that the fund manager of these funds had been reckless with the funds of the unit holders. Clearly, the kind of unsystematic risk that the fund manager assumed in some of the short duration funds is totally unacceptable. Secondly, SEBI must now raise serious question about the way the AMC handled the situation and why trustees did not play the role of the watchdog that they were supposed to play. The case will raise some real uncomfortable questions. The sooner these questions are raised and addressed, the better it will be for investor confidence in MFs.