Franklin freezes $4.1 billion of investor cash in Indian debt
One of the first global financial firms to launch asset management operations in India more than two decades ago is taking unprecedented steps to lock in investor money as the coronavirus pandemic worsens credit market strains.
Franklin Templeton is shutting six fixed-income and credit-risk funds run by its Indian unit, locking in 308 billion rupees ($4.1 billion) of investor monies. India’s debt markets have been reeling since the pandemic prompted authorities to institute the world’s biggest stay-at-home restrictions, which worsened liquidity in some corporate bond trading.
Winding up the funds is the “only viable option to preserve value for investors and to enable an orderly and equitable exit” for all unit holders, the asset manager said in a statement posted on its website on Thursday. “There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the Covid-19 crisis and the resultant lock-down of the Indian economy.”
Credit markets globally have been jolted by the pandemic, and the main bond fund run by Franklin Templeton’s Michael Hasenstab posted its biggest quarterly drop in assets since 2016. Indian debt markets are particularly vulnerable as they have yet to recover from the collapse of a major infrastructure financier in 2018. The Reserve Bank of India recently moved to provide cheap cash to shadow bankers, but the offerings failed to elicit enough response on Thursday, underscoring the challenges to policy makers.
“The closure of Franklin Templeton debt funds will be a jolt to the corporate debt market in India,” said Abhimanyu Sofat, head of research at IIFL Securities Ltd. in Mumbai. “These funds were one of the top performing for last couple of years due to higher risk being taken by them by lending to lower-rated corporates. We believe it’s time for RBI to be even more strong in its intervention in the credit market.”
Franklin is shutting down the Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund.
“The winding up of as many as six funds is unprecedented,” said Vidya Bala, head of research and co-founder at Chennai-based Primeinvestor.in. “Having already used up the liquidity to meet large redemptions, they had no choice but to wind up to prevent a run on the funds that would have induced them to sell good-quality paper and hold on to the bad ones.”