Following the decision by Franklin Templeton Mutual Fund to wind down six debt fund schemes due to liquidity issues and redemption pressures, the Foundation of Independent Financial Advisors (FIFA) has called for a special purpose vehicle to be set up to take over the portfolios of the schemes at fair value and pay up the investors whose money is stuck in these schemes.
On April 23, Franklin Templeton had decided to wind down six fixed income schemes. That meant, that no new investments could be made in the scheme and existing investors couldn’t withdraw their money from the schemes until the fund house was able to sell the underlying securities and then repay the money.
In a letter written to the RBI, Finance Ministry, Securities and Exchange Board of India and Association of Mutual Funds of India, Dhruv Mehta, chairman of FIFA, said there was an urgent need to provide direct liquidity by government or the RBI by buying the securities from mutual funds at fair value to enable them to meet their redemptions and in turn enable investors to meet their liquidity requirements.
“These entities could also buy the papers of the wound-up Franklin Templeton schemes and provide liquidity to the more than 3.25 lakh investors whose approximately Rs 25,000 crore is stuck,” he said, adding a special purpose vehicle could be set up for the same.
In the backdrop of the COVID-19 pandemic, the related nationwide lockdown and the expected economic impact from the same, there is little appetite in the market to invest in securities (like bonds or commercial papers) with a low (below AA+) credit rating.
The RBI reduced interest rates by 75 basis points and took several steps like conducting Targeted Long Term Repo Operations (TLTRO) to ensure liquidity in the system. However, FIFA, the body representing mutual fund distributors, says it will not address the liquidity issue facing lower rated securities.
“The banks have provided liquidity to AAA segment of the market and not to the space which is stressed and facing liquidity issues,” Mehta said.
On April 27, the central bank stepped in with a special liquidity facility of Rs 50,000 crore, which the banks can use exclusively for the liquidity requirement of mutual funds. However, as of May 4, only Rs 2,430 crore had been availed, according to data on money market operations released by RBI on May 4.
FIFA says the non-AAA segment will need greater and direct liquidity support otherwise there would be a large number of bankruptcies.
“A liquidity crisis would be converted into a solvency crisis unless targeted measures are taken to address the woes of the non AAA segment,” Mehta said in the letter.
On Monday, May 4, RBI Governor Shaktikanta Das held discussions with representatives of the mutual fund industry to discuss various issues, including the impact of measures taken by the Reserve Bank to provide liquidity and review the functioning of bond markets.