Several officials redeemed personal investments just before the company wound up six debt schemes on April 23, 2020. Choksi & Choksi’s forensic audit says that the fund favoured several firms by not exercising the put option, disregarding a management committee advice.
In more trouble for Franklin Templeton Asset Management (India), a forensic audit has indicated several wrongdoings, including insider trading, by the key management personnel of the asset management firm.
Certain key officials of the fund had redeemed their personal investments just before the formal announcement of the closure of six debt schemes and made money during that time, the audit report by Choksi & Choksi pointed out.
According to sources, “capital markets regulator Securities & Exchange Board of India (Sebi) may look into these redemptions from the perspective of insider trading regulations.”
The fund is currently facing several court cases and investigations, including one by Sebi, for allegedly closing six schemes in an abrupt manner.
Put options not exercised
The Choksi & Choksi report indicates that the fund gave favours to certain companies it had invested in by not exercising the put option, despite the suggestions given by the risk management committee to its Chief Investment Officer to do so.
A put option is a contract that gives its holder the right to sell a number of equity shares at a pre-determined price, called the strike price, before the option’s expiry.
As per the report, fund managers were inconsistent in exercising the put option. With some companies, they executed it, but with some others, they didn’t, despite a major downgrade from category A to category D grade in less than a year’s time.
Moneycontrol has reviewed the forensic report.
“Fund managers were investing in bonds of illiquid companies and were not using the put option. This raises several questions and needs to be answered in Sebi investigation,” a source told Moneycontrol.
Rules permit fund managers to execute the put option when investments are downgraded by credit rating agencies.
Amit Tandon, Managing Director, IIAS Proxy Advisory, firm told Moneycontrol: "Clearly, it appears that a lot was going on in the back-end. If something is too good to be true, you need to look under the hood. This holds not just for investors, but even the board and trustees.”
Closure of six debt schemes
On April 23, 2020, Franklin Templeton wound up six debt schemes that were meant for high-yield investments, with a total asset under management of over Rs 25,000 crore. The company cited inadequate liquidity in the debt market as a reason.
The forensic audit pointed that the firm invested heavily in unlisted debt securities, which were mainly illiquid. Some of those companies were newly incorporated.
“Sebi has wide powers under the Sebi Act but the regulator has not executed it in this case. It would have saved 3.15 lakh investors,” said Manoj K Sheth, President, Chennai Financial Markets and Accountability.
Franklin Templeton reacts
A Franklin Templeton spokesperson said: “Our interactions with Sebi are confidential. Inspections and third-party audits fall within the purview of Sebi and we are cooperating fully with them. The statements appearing in your email are not accurate, nor has Sebi come to any such findings at this time.”
“Employees who made investments in FTMF schemes continue to hold substantial investments in the affected schemes. We have already communicated the reasons for winding up and request our investors not to be swayed by unverified or speculative reports. We continue to follow due process, both in making investment decisions and with regard to the winding up of funds,” the spokesperson said.Currently, all eyes are on the Karnataka High Court where a clutch of investors are seeking multiple reliefs, including directing the firm to release the money that it owes to investors.