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On 24th January, Franklin Templeton Mutual Fund side pocketed its holdings of Vodafone Idea debt. side pocketing is the creation of a separate portfolio in lieu of troubled debt. Existing investors will benefit from recovery in the bad debt through this separate portfolio while fresh investors will not. The NAV of the schemes will not change since Franklin Templeton MF has already written down the full value of the Vodafone debt. The fund house had previously, on 16th January written down the value of the affected paper completely. It had also imposed a restriction of ₹2 lakh per day per investor into the affected schemes. This restriction has now been lifted, according to a spokesperson from the AMC.
On 16th January, an adverse Supreme Court judgment on telecom dues placed a roughly ₹50,000 crore liability on Vodafone Idea. Franklin Templeton Mutual Fund which held Vodafone Idea debt of around 4-7% in its debt schemes, had written down this value by 100%. The write down was voluntary because the credit ratings agencies had not downgraded the paper in question as of that day below investment grade (BBB rating). The affected Franklin Schemes are Franklin India Low Duration Fund, Franklin India Short Term Income Fund, Franklin India Credit Risk Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund. You can get more details on this here.
The lack of ratings action also prevented Franklin Templeton AMC from side pocketing the exposure. This procedure segregates bad debt and allows investors to exit the rest of the scheme without giving up on the chance of recovery in the bad debt. Fresh investors also cannot take advantage of recovery in the bad debt. Instead Franklin Templeton Mutual Fund imposed a limit of ₹2 lakh per investor per day on inflows into the schemes to reduce the effect of speculators. However on 24th January, CRISIL downgraded Vodafone Idea paper to BB, which falls below investment grade, allowing Franklin Templeton to side pocket the Vodafone Idea exposure.
Investors in the affected schemes as on 24th January will receive units in the segregated portfolios. The move is a positive for existing investors since they will benefit from any eventual recovery in the bad debt in question. Conversely speculators will not now be able to take advantage of recovery. However those who exited the schemes between 16th and 24th January will not benefit. The fund house has come under criticism on social media for this delayed cutoff date for receipt of side pocketed units.
“Vodafone Idea has been written down, but credit risk in debt funds is far from over. Investors should carefully look at portfolios before entering such schemes. If they cannot do this analysis, they must focus on the process being followed and fund manager expertise – is it sufficiently robust?" said Amol Joshi of Plan Rupee Investment Advisors.