Wound-up schemes: ED seeks details from Sebi in Franklin Templeton case

Trouble is mounting for Franklin Templeton, as its dealings in six wound-up mutual fund schemes have come under Enforcement Directorate (ED) scanner. 

Sources said the federal agency has sought details of the case from the Securities and Exchange Board of India (Sebi). 

It is already examining Franklin Templeton’s investment strategy, code of conduct, redemptions before announcing the closure of schemes and the role of board members as well as trustees while handling risk. 

“A letter has come from the directorate seeking case details, development in the matter along with findings of the auditors appointed by the regulator to do the forensic audit,” said a regulatory source privy to the development. 

It is learnt that the regulator has responded to the ED, saying that it will share the audit report once it is finalised.

In an email response to Business Standard, Franklin Templeton’s spokesperson said, “We are not aware of any such development. The matter is being heard before the Karnataka High Court. We believe we have acted in the best interest of our unitholders and in accordance with all regulations in this regard.

The ED, which has been entrusted with probing some sensitive and important cases of financial crimes and terror funding, has the power to seek details of any case and start an inquiry. 

Typically, ED picks cases for further scrutiny only after ensuring that there is a certainty of tracing substantial proceeds of a crime, said a senior counsel. He further said that for investigation under money laundering provisions, the agency requires a police complaint in the case. An email sent to Sebi remained unanswered. ED, too, declined to comment. 

Meanwhile, Sebi also sought the fund house’s response to the forensic audit report that was submitted last month. The audit report pointed out certain anomalies in the investment strategies. Based on these observations, Sebi wants to understand the investment strategies of the fund house. 

Sebi also wants the fund house’s response on the six schemes’ exposure to several stressed firms. It also wants to know the role of the trustees and board members as well as how issues are addressed. Franklin Templeton is learnt to have responded to queries where it has mentioned it flagged the matter first in September 2019 to its board. 

In May, Sebi had appointed Chokshi & Chokshi, an accounting and audit firm, to examine possible regulatory violations during the winding-up process. The audit firm was given the mandate to examine any collusion between the fund house and investee companies or large investors.

In April, Franklin Templeton decided to wind up six of its debt schemes oriented towards high-yield investments with a combined asset base of Rs 25,856 crore. For the closure, it cited continued redemption pressure and lack of liquidity in the debt market, amid the lockdown.  

Meanwhile, the fund house updated investors of the six wound up schemes last week. Franklin said between April 24 and August 31, the six schemes received Rs 6,486 crore from maturities, pre-payments and coupons. It said in August, the schemes received cash flows of Rs 2,206 crore from various issuers, including Vedanta.

CASE SO FAR

April: Franklin Templeton shuts six debt schemes 

May: Sebi advises Templeton to focus on returning money to investors 

June: Sebi appoints firm to conduct forensic audit; Investors move Karnataka HC 

August: Sebi-appointed firm submits audit report

September: Regulator seeks Templeton’s response on investment strategy & redemptions, among others