Wound-up schemes: Sebi quizzes Franklin Templeton over investment bets

Followed due process, says fund house

The Securities and Exchange Board of India (Sebi) has asked Franklin Templeton Mutual Fund to explain investment decisions of the six schemes that were wound up in April. The regulator has sought the fund house’s response to the forensic audit report that was submitted last month.

“The audit findings highlight certain anomalies in 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,” said a regulatory official.

The fund house is learnt to have sent a detailed explanation to the regulator last week. “Our interactions with Sebi as our regulator are confidential and the issue of winding up is sub-judice. Inspections and third-party audits fall within the purview of Sebi’s oversight of mutual funds (MF) and we are cooperating with Sebi. We continue to follow due process, both in making investment decisions and with regard to the winding up of the funds,” a Franklin Templeton spokesperson said.

Sources said Franklin has told Sebi that its investment practices were similar to other MF players. It has also said it had investments in wide-ranging companies and has faced repayment issues with only a small number of firms. The official quoted above said Sebi was examining all the replies and will decide its next course of action soon.

In May, Sebi had appointed accounting and audit firm Chokshi & Chokshi to examine any regulatory violation and to ensure the winding up process was done in a fair and transparent manner.

Meanwhile, the fund house updated the investors of the six wound up schemes on Thursday. 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.

The fund house said “barring payment issues in a small number of issuers such as the Future Group, Essel, and Anil Dhirubhai Ambani Group (ADAG) all other investee companies in our portfolio have made the payments as scheduled, since the day of the winding up.” It said it was actively pursuing all remedies for a full recovery.

The fund house also updated investors on the pleas filed before the Karnataka High Court against the winding up of schemes. Franklin said the HC has finished hearing all petitioners and would now provide a hearing opportunity to Sebi and then Franklin. It said the court was examining the plea to distribute surplus cash to unitholders.

In a letter, Franklin said the decision to wind up the six schemes “was taken with the sole objective of safeguarding the interest of investors”. It said the decision had “significantly impacted” the fund house’s reputation but it remains committed to India and its investors.

On April 23, Franklin decided to wind up six of its debt schemes oriented towards high-yield investments with a combined asset base of around Rs 25,000 crore. It cited continued redemption pressure and lack of liquidity in the debt market for the closure.