The Enforcement Directorate has registered a money laundering case against Franklin Templeton and senior officials, in the first case by an investigation agency against the asset management company after it unexpectedly closed six debt schemes in April 2020.
Multiple sources connected to the case confirmed the action by ED, which investigates financial crimes, to Moneycontrol.
The ED has registered an Enforcement Case Information Report (ECIR) against Franklin Templeton based on a First Information Report (FIR) filed at the Chennai Police Economic Offences Wing. The FIR against Franklin Templeton was registered on September 29, 2020, in Chennai under Section 420.
The mutual fund and its CIO have been charged with cheating and hatching a criminal conspiracy to defraud innocent investors, causing a wrongful loss to investors, and making unlawful gains themselves.
Moneycontrol reached out to Franklin Templeton for responses on the latest events but the AMC is yet to respond.
Also Read: Franklin Templeton India closes 6 funds. 6 questions answered
Forensic audit weighs heavy on FT
A forensic audit report by Choksi and Choksi stated that there were 23 instances of top executives and entities withdrawing Rs 53 crore between March and April 2020, just before the winding up of the six debt schemes.
One of the persons familiar with the matter said the forensic audit report showed that FT officials sold their investments just before the six debt mutual fund schemes were closed and the investigation will check if the gains from this sale can be treated as ‘proceeds of crime’ under the Prevention of Money Laundering Act (PMLA). “The ED may also look into why the FT officials didn’t use put options when the investment was in a loss. In addition, the directorate will investigate if FT officials got any monetary benefit by not executing the put options.”
All the persons Moneycontrol spoke to did not want to be named.
A put option is a contract that gives the holder the right to sell a certain number of securities at a predetermined price, called the strike price, before the option’s expiry.
Moneycontrol was the first to report on the findings of the forensic audit report, on October 6 last year.
The put option mystery
The ED action is the latest setback for Franklin Templeton as legal troubles mount. It faces cases in the Karnataka High Court and the Supreme Court.
The Securities and Exchange Board of India has issued show cause notices to key management personnel of the fund and its trustees in this case. The capital markets regulator issued notices after the final report submitted by audit firm Choksi and Choksi, which indicated that the fund doled out favours to certain companies it had invested in by not exercising the put option, despite its risk management committee advising the Chief Investment Officer to do so.
The audit report states that the fund managers were inconsistent in exercising the put option. They executed it with some companies but not with others, despite a major downgrade from category A to category D grade in less than a year’s time.
Franklin Templeton officials have so far denied any wrongdoing.
In April 2020, Franklin Templeton had taken the unusual step of winding up six debt funds. It had cited extreme illiquidity in the market, which had been exacerbated by Covid-19. The six schemes had multiple securities, which the fund house had been finding it difficult to sell. The other alternative, the fund house had said, was to sell them at throwaway prices, which would have resulted in massive losses.
The fund house had reached out to unitholders to vote on this matter in May 2020, before the matter became sub-judice and the voting had to be put on the backburner.
The Karnataka High Court, which heard all the cases pertaining to the matter, finally ruled on October 24 that the trustees could not wind up the schemes without investor consent.
Following this, Franklin Templeton appealed to the Supreme Court, maintaining that a trustee has the authority to wind up schemes. However, the fund house also sought permission to seek voting by unitholders, even as the apex court examined whether such voting is mandatory or not.
In December 2020, SEBI gave the go-ahead to the fund house to conduct the voting exercise and appointed former Chief Commissioner TS Krishnamurthy as an observer for the e-voting on Franklin Templeton’s schemes. The voting was held between December 26 and 28, 2020. Unitholders were also allowed to vote during a video conference with trustees on December 29, 2020.
The Supreme Court subsequently ordered the distribution of funds from cash-positive schemes to unitholders. The apex court directed SBI Mutual Fund (SBI MF) to oversee the distribution, and not Franklin Templeton MF. Unitholders will receive the funds in proportion to the units held by them.
Since the winding up, the six Franklin Templeton schemes have received cash flows of Rs 15,048 crore from investments, as of February 26, 2021.