Sebi fines Franklin MF Rs 5 cr, asks it to return Rs 512 cr fund mgt fees

US-headquartered asset manager has been barred from launching any new debt scheme for two years

The Securities and Exchange Board of India (Sebi) on Monday slapped a penalty of Rs 5 crore on Franklin Templeton Mutual Fund (FT MF) for “several irregularities” in the running of its six debt schemes that were wound up in April 2020.

The market regulator directed the fund house to disgorge Rs 451 crore (Rs 512 crore after interest) it collected as investment management and advisory fees between June 2018 and April 2020.

Further, the US-headquartered asset manager has been prohibited from launching any new debt scheme for a period of two years.

“The findings in the instant proceedings have brought on record several irregularities in the running of the debt schemes inspected, contrary to the interests of the unitholders in such schemes. As brought out above, the irregularities also extend to failures to exercise adequate due diligence, carry out valuation of securities as per the principles of fair valuations and ensure a robust risk management framework,” Sebi said in an order.

In the order, the regulator said it has initiated adjudication proceedings against the chief executive officer, chief compliance officer, and directors of the fund house as they too are liable for the irregularities.

Frankln MF in a statement said, "We strongly disagree with the findings in the Sebi order and intend to file an appeal with the Securities Appellate Tribunal." 

The head of Franklin Templeton Asia Pacific, Vivek Kudva told Business Standard, "I am reviewing the order and considering appropriate next steps, which may include filing an appeal before the Securities Appellate Tribunal (SAT). My personal transactions in the two schemes (under winding-up) have been conducted in good faith and with no intent to gain unfair benefit.

As stated in the Sebi order, I had already placed myself in a similar position as investors in April 2020 and the proceeds of the redemptions were voluntarily set aside such that I and my family will ultimately receive no more than the investors remaining in the Schemes. My interests therefore remain fully aligned with outcomes that investors in the two schemes under winding up will have.”

In defense, a Franklin Templeton spokesperson said, “The schemes under winding up continue to have significant investments from employees and management, as well as from the asset management company and other group companies of Franklin Templeton.”

On April 23, 2020, FT MF announced that it had decided to wind up its six debt schemes, citing liquidity issues due to the Covid-19 outbreak. The move had hit over 300,000 investors and locked up over Rs 25,000 crore of investments.

Based on complaints, Sebi initiated a forensic audit against the fund house to ensure that it was in compliance with regulations. After studying the report, Sebi in November 2020 issued show-cause notices to Franklin seeking explanation on a slew of violations, including allowing a Sebi-barred entity from redeeming units.

Sebi’s investigation found, for instance, that the fund house had not documented in credit notes the basis of scrip-wise investment decisions and also detailed credit analysis. It also had not collected end–use certificates from companies it had invested in. Sebi also found lapses in the security selection process.

Sebi observed that the debt schemes had subscribed to 70 per cent of an issue even if their securities were rated below ‘AA’.

In the order, Sebi alleged that FT MF took exposure to stressed sectors and groups such as Essel, Reliance ADAG, and Edelweiss despite warning signals. The regulator alleged irregularities with respect to the valuation of Future Group securities. In the case of Reliance ADAG group, it was alleged that Franklin failed to seek mandatory prepayment and invoke collateral in 2019. It also failed to produce documents indicating that the decision was deliberated by the investment team.

Similarly, it was alleged that the fund house failed to exercise due diligence in deciding not to participate in the second round of stake sale offered by the Essel promoter group in November 2019 even though certain other lenders participated.

In its reply, Franklin submitted that there was no breach and the decisions were taken with relevant considerations and in the best interests of unitholders. It said the valuations were arrived at in good faith.

Franklin in its submission added that all its investments were monitored on an ongoing basis and decisions were taken in an informed manner and discussed with and recorded in minutes of the investment committee.

Franklin MF allowed one B Hariharan to redeem MF units worth Rs 4 crore despite a Sebi ban. The fund house said the redemption was processed erroneously.

“This is a serious violation and no explanation of oversight can be accepted,” Sebi whole-time member G Mahalingam said in the order.

Action taken by Sebi for irregularities in managing debt schemes

• Franklin MF asked to pay Rs 5 cr penalty
• Ban on launching new debt schemes
• Refund of Rs 451 cr management and advisory fees with 12% interest
• Separate adjudication proceedings against CEO, directors