Market regulator Securities and Exchange Board of India (SEBI) may conduct a special inspection of Franklin Templeton India after the company wound up six schemes abruptly.
Through this special inspection, SEBI aims to check if trustees and management have carried out their duty properly or if there were any lapses.
The six schemes shut down by the asset management company (AMC) had over Rs 26,000 crore of fund holders' money. Among the six closed schemes, Franklin India ultra short-term fund was the largest with assets worth Rs 9,679 crore.
“The mutual fund has invested in longer date maturity paper. Around 7 percent of the total AUM of the six schemes has a maturity of 7-10 years. Only 26 percent of their portfolio will mature in the next year. So, clearly there is a mismatch between assets and liabilities. It needs to be seen whether there any violation of SEBI regulations or not,” a source told Moneycontrol.
Although funds are guided by average maturity of the portfolio and not individual scrips, as per a B&K Securities report, “Franklin Templeton was the sole investor in 26 issues totalling Rs 7,697 crore. These 26 were part of the six debt schemes.”
On April 27, the Association of National Exchanges of Members of India (ANMI), an association of members of the National Stock Exchange, wrote to the Finance Ministry and SEBI on the Franklin Templeton issue. It sought the appointment of a high power committee to take over the management, examine its investment decisions, safeguard against any further erosion of investor wealth and inform investors in these six schemes how they will get their investments back in a time-bound manner.
The report by the institutional broking house also listed other issuers -- Five Star, Aptus Value Housing Finance, Aadarshhini Real Estate Developers, Vastu Housing Finance, Hero Wind Energy, Small Business Fincredit India, Incred Financial Service, Nufuture Digital (India), Rishnath Wholesale Trading Pvt, Xander Finance, OPJ Trading and Future Ideas Company -- apart from Rivaaz Trade Venture that received the entire amount sought from Franklin Templeton.
Vijay Bhushan, President of ANMI, said, “Franklin Templeton invested Rs 644 crore in the papers of some unknown entities like Rivaaz Trade Venture, subscribing to nearly 100 percent of its total borrowing. Such investments may not be the only ones and are illiquid in nature.”
SEBI should investigate the reason for the fund's investment in such low-rated paper, especially in companies that are not known in the market. In the current scenario, who will buy these low rated paper having longer maturities,” Bhushan questioned.
SEBI may also investigate any conflict of interests between the fund managers and issuers “as the fund invested large amounts in unrated papers,” another source told Moneycontrol.
The market regulator can’t question the investment decision of a fund manager, a third source said, but added: “It can certainly check whether any corrective steps have been taken after October 2018 when the IL&FS scam broke out. It can also look into the role played by trustees. These facts can only come out if SEBI conducts a special inspection of the fund."
Rajeev Agarwal, former whole-time member of SEBI, said, “I can’t comment on specifics as I don’t have all the facts. However, prima-facie it appears to be a liquidity issue, which is fund-specific and not an industry issue."
Overall, the exposure of the industry to fixed income assets under management is around Rs 13.11 lakh crore. Of this, around 83 percent is invested in AAA rated securities, sovereign and cash. Only 5.26 percent is in sub AA category instruments, spread over all funds. Franklin Ultra Short Bond fund had invested 22.56 percent of their portfolio in A rated or lower category bonds.Note: The earlier version of this story inadvertently mentioned 'audit' instead of 'inspection'. The error is regretted.