Franklin Templeton (FT) was instrumental in bringing the concept of “Accrual Debt Investing” to Indian investors, who otherwise never made fine returns in Debt.

Franklin Templeton – An Alternate View

It is absurd to call the Franklin Templeton (FT) event an isolated one. It is an unfortunate event. FT brought the concept of accrual debt investing to Indian investors who were otherwise always mis-predicting the movement of interest rates and never made fine returns in Debt. First of all, let’s stop calling the corporate bond market as a low-quality debt. Here is the definition of AA, and A-rated corporate bonds as per rating agencies > AA means high credit quality, and A means adequate credit quality. These are considered to be investment-grade corporate bonds as allowed by SEBI for debt mutual funds. Secondly, the rating is not the sole mechanism to understand the quality of the company. ILFS & DHFL were AAA. There are many other factors. Thirdly, India is a developing country. AA and A-rated companies are much more in number and no less important than AAA companies. For that matter, one should check India’s rating. It is BBB-(Fitch). Fourthly, NBFCs are the most imp part of the Indian financial system. Some AA and A-rated NBFCs are very finely working towards stalwart visions of “financial inclusion” set by our honorable PM. Their asset quality is better than many AAA financial companies.

Hence, the AA and A companies that are held by FT should not be blindly termed as low-quality corporations. Most of the companies are large corporates with more than 10-15 years of history, offer strong products & services, with well-established brands, many are listed companies with diversified businesses. Many are leaders in their respective industries. And, some less known ones, have got have a series of PE funding in the last 3 years. The overall portfolio is well diversified across various sectors.

Off-course these companies have a higher risk profile if one just goes by rating and compares to AAA.

The problem at hand is not an isolated event as it’s not the problem of credit crises. It’s the problem of liquidity crises given the unprecedented situation. The reason responsible for liquidity crises is a perceptual risk aversion and flight to safety given the uncertain situation created by Covid-19 and Lockdown.

With this understanding, industry, & regulators need to come together to ensure that the situation is handled properly. Announcements must be made by regulators on steps being taken to ensure the FT investors’ interest is not compromised. Lastly, for god sake, the industry needs to understand that 3.1L investors of FT are common investors to all AMCs. Calling this event an isolation is not at all going to in-force the investors’ trust. Every AMCs, instead of boasting about their AAA portfolio percentages, should spread wisdom on the fact that all AA or A-rated companies are not low-quality debt. Come-on, India’s rating is BBB-. Are we are a low-quality nation? Don’t we see great potential in our Economy? Investors’ fear cannot be addressed by showing them AAA portfolios. It is like running away from reality. The industry needs to take the responsibility of educating investors that AA and A doesn’t necessarily mean a default.

Fear is like darkness. It can only go away by the light of wisdom and not by running away from the fear.


Kamal Manocha

Kamal Manocha
CEO and Chief Strategist,  PMS AIF WORLD