The courtroom drama over shutting down six of Franklin Templeton’s local Indian mutual funds will soon come to an end, but the denouement shines an unkind light on how the country is running its capital markets.
Almost 97% of unitholders have voted in favor of winding up the plans, which the U.S. fund house abruptly put into suspended animation during a nationwide Covid-19 lockdown last April. But what choice did investors really have?
As the website Moneylife reported, the Yes button in the e-voting form promised “a potential to realize fair value.” The option marked No threatened a “distress sale of assets.” In deference to behavioral economist Richard Thaler’s Nudge theory, the alternatives were color-coded green and red, respectively.
More than the nudge, however, it’s the winks that can do long-term damage. Unitholders were scared into voting, as Moneylife editor and shareholder activist Sucheta Dalal put it, “without any information about the extent of loss, the culpability of fund managers, the failure of trustees, what investors can hope to get back and the payment schedule.” It was the regulator’s job to insist on these details, and the failure to do so won’t inspire confidence.
For years now, faith in the integrity of India’s markets has hemorrhaged, with everyone from rating firms to auditors, fund managers and trustees putting their own commercial interests above – and often against – those of the investing public. The Templeton episode was yet another opportunity to start setting things right. By the looks of it, the chance has been blown.
When I first wrote about the now-failed mutual funds in late 2018, it was in the context of their bet on then-Yes Bank Chief Executive Officer Rana Kapoor’s family investment vehicle. Nominally, the exposure was via zero-coupon bonds, but they didn’t trade and in most cases were held in their entirety by Templeton. Worse, this was symptomatic of an industry that had come around to stuffing risky, illiquid securities in short-maturity debt mutual fund portfolios to make their yields look attractive.