SEBI must help unit-holders decide between instant redemption and delayed gratification.
Investors may have experienced much heartburn after Franklin Templeton wound up six of its schemes and more so with approach of the AMC (asset management company) towards e-voting. Between the Trustees and Deloitte, there isn’t much of a choice for unit-holders. To make matters worse, the AMC has sought to convey that ‘if you vote against the option, you will be responsible for any delay,’ which is an added cause of displeasure for investors. With the Gujarat High Court having stayed the e-voting till SEBI comes out with the outcome of the forensic audit on FT AMC, it implies that the matter is not going to be solved in a hurry.
Why unit holders feel aggrieved?
Let us look at the basic issues, which have led to the grievances.
-To start with, the winding up itself. Open-ended funds are supposed to offer liquidity at all times;
-Not taking unit-holders’ approval before shutting down the funds;
-After the shut-down, the lock-in of funds, i.e., repayments will happen gradually over a long period of time, as and when securities mature and not take your money out in one instalment.
Investors are aggrieved that their money is being held back by the AMC. There are two reasons why people do not like their funds being retained by others:
-Interest: Investors may fear loss of interest till the dues are settled. But, in this case, interest is accruing in the portfolio, at the coupon rate of the respective securities. Hence, there is no loss to investors in that sense;
-Current consumption: Some investors may be in urgent need of liquidity, which is currently absent. Some investors want their money back instantly, either for genuine requirements or due to being aggrieved.
Why wind up?
Now, let us look at it objectively. It is unlikely that the shut-down can be undone. There are clauses in the SEBI Act relating to the provisions for winding up, which is being contested in the Court of Law. Even if the court were to reverse the decision, what is likely to happen? The moment the fund is reopened, there would be a stampede for redemption. According to existing rules, a fund cannot refuse redemption proceeds to unit-holders. The fund house will be forced to do a fire sale of assets to generate the liquidity for meeting the redemption pressure. This would obviously lead to sub-optimal realization, and not benefit unit-holders. This is what FT wanted to avoid, and took the drastic decision to shut-down, which impacts their business in other funds as the negative sentiment rubs off.
To clarify the sub-optimal realization aspect, the secondary market for corporate bonds is a small circle. Trades happen mostly through negotiations done over phone and reported at the settlement systems of the NSE and BSE. Trades in equity shares happen over the trading system of NSE and BSE, which are anonymous-order-driven; hence the identity of the seller is not relevant. Trades on G-Secs too are anonymous-order-driven, on a system provided by the Clearing Corporation of India. For corporate bonds, while listing at the NSE and BSE does happen, anonymous traded volumes are very much on the lower side. Therefore, if the shut schemes of FT are opened, the corporate bond market will come to know and the buy quotes would be less-than-fair. The fact that liquidity in bonds rated less than AAA is a question mark and that in the current situation this market is even more tight, do not help either.
The alternative approach
To address the grievances while being mindful of the practicality of the situation, one alternative solution could be as follows:
-Let’s accept the fact that those schemes have been shut down, though we do not like this fact. Let the competent authority, i.e., SEBI take an e-vote on whether unit-holders want their money back instantly or are willing to wait till maturities happen in the portfolio.
-It should be communicated and agreed upon in the vote that instant money back means selling the assets at a price lower than the valuation price for computation of daily NAV.
-Let SEBI appoint a committee of market experts to oversee the sale of assets, and let it happen through the auction process. One counter-argument against this could be, after the fire sale to the extent people want to move out, the quality of the portfolio would deteriorate further. Answer to that is, the basket of securities identified for sale should be in the same proportion, in terms of credit quality, as the existing portfolio and not done by cherry picking.
-For continuing management of the funds, for investors who are waiting till the maturity of the securities, let SEBI appoint a committee, in line with the IL&FS case, where the Board was reconstituted.