The Association of Mutual Funds in India (AMFI) has made representations to the Securities and Exchange Board of India (SEBI) on the first information report (FIR) registered against Franklin Templeton MF. AMFI has requested the regulator’s intervention to ensure fund managers don’t feel threatened over well-intentioned investment decisions going wrong because of external reasons.
“The fear factor and panic amongst fund managers could lead to an undesirable contagion effect on the entire MF industry, such as mass resignations, over-cautious and over-defensive approach towards investment decisions, resulting in lacklustre performance etc. and must be avoided at any cost,” AMFI’s letter to SEBI read.
On September 25, 2020, the Chennai Financial Markets and Accountability (CFMA) said that it had an FIR registered against Franklin Templeton MF and its top officials with the Economic Offences Wing of Chennai police.
While stating that it was not seeking to pre-judge the issue, the industry body urged SEBI to intervene in the matter and stake claim as the “sole authority to adjudicate all issues pertaining to the conduct of the mutual funds.”
“The aforesaid FIR is unprecedented in the history of mutual funds in India, and all AMCs are concerned that bona-fide decisions and actions of mutual funds, which may go awry due to various extraneous reasons, are translated into criminal action by non-expert bodies, even when an expert regulatory body has been established under an Act of Parliament, viz. SEBI Act…” the letter said.
It said this instance of FIR will not only have a “chillingly detrimental effect” on fund managers, who would worry over the consequences of genuine investment decisions going wrong due to factors beyond their control, but also senior managements of the fund houses, board of directors and trustee companies.
“This is a dangerous precedent, as mutual funds are already well-regulated under various laws, which a normal court may not be able to interpret it correctly. This can have deep ramifications for the mutual fund industry,” said senior executive of a fund house, requesting anonymity.
The letter said this could even impact performances of schemes, as fund managers may adopt an over-defensive or excessively cautious approach due to these fears.
“Exposing the mutual fund industry to various courts can make fund managers over-cautious in their investment decisions,” said Jimmy Patel, managing director and chief executive officer of Quantum MF.
Citing various provisions of the SEBI act, the industry body argued that it was clear that not only did SEBI have the power to criminally prosecute someone for a violation of the SEBI act, but such power is exclusively granted to SEBI, barring “anyone else from approaching the special courts which have the jurisdiction to try criminal offenses under the SEBI act.”
The letter said that the FIR filed against Franklin Templeton deserves to be quashed.
It highlighted section 26 of the SEBI act, which says that no court shall take congnisance of any offence punishable under this act (SEBI act) or any rules and regulations within the act, except if a complaint is made by the board.
“Fund houses are required to follow due procedures and norms laid down by SEBI when making any investment decision. In the case of Franklin, SEBI has already initiated a forensic audit to look into the investments of the wind-up schemes,” the first executive said.