In what could have serious repercussions for India's financial markets, the major Indian mutual fund house Franklin Templeton has stopped redemption in six of its schemes due to liquidity issues on the back of the COVID-19 crisis, putting investments worth at least $3.73 billion at stake. There will be no transactions in the schemes with effect starting Friday, 24 March.
“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 lockdown of the Indian economy which was necessary to address the same. At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions”, said Franklin Templeton Mutual Fund.
The funds that have been wound up are: Franklin India Low Duration Fund, Franklin India Ultra Short Fund, Franklin India Short Term Income Fund, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund, and Franklin India Income Opportunities Fund. The assets under management in all these funds are close to $3.73 billion, as per industry sources.
Due to the COVID-19 pandemic uncertainty, India's equity markets have fallen from a high of over 41,000 levels at February-end to a low of 27,000 levels at March-end, only to recover somewhat to the current levels of over 31,000.
Meanwhile, the equity market regulator Securities and Exchange Board of India (SEBI) has tried to ring-fence the valuation of a debt mutual fund if a default happens due to the COVID-19 pandemic.
“If the valuation agencies are of the view that the delay in payment of interest/principal or extension of maturity of a security by the issuer has arisen solely due to COVID-19 pandemic, lockdown creating temporary operational challenges in servicing debt, then valuation agencies may not consider the same as a default for the purpose of valuation of money market or debt securities held by mutual funds”, SEBI said in an official statement late Thursday.