Capital market regulator Securities and Exchange Board of India (Sebi) has found serious lapses in the way Franklin Templeton India mutual fund managed the six debt funds that it wound up suddenly in April 2020. It has instructed the fund house to return fund management fees worth Rs 451.63 crore to the investors of the six debt funds. Plus, it has also levied a 12 percent interest fee on this amount, which sums up the total disgorged fee to Rs 512.50 crore.
Sebi, in its investigation, found that Franklin Templeton did not follow the scheme categorisation in the right spirit. In 2018, Sebi had laid down 36 mutual fund categories, each were given a boundary within which schemes were asked to operate. In its Templeton order, Sebi observed that Franklin Templeton had replicated high-risk strategies across several of its schemes.
It also found that in this period, as the debt market crisis was brewing up, the fund management did not exercise the exit options in illiquid securities, despite an emerging liquidity crisis.
In view of the lapses that the fund houses committed from the date on which Franklin Templeton mutual fund implanted the new Sebi-prescribed categories till April 23, 2020 (the date on which the fund house wound up the six debt funds), Sebi calculated the fund management fees and felt it fit that these be returned to the investors of the said schemes, plus the 12 percent per annum interest.
Additionally, Sebi has also imposed a penalty of Rs 5 crore on Franklin Templeton India Asset Management Company for violations of various SEBI rules and circulars, such as investment and borrowing norms, code of conduct, and principles of fair valuation among others. That's not all. Sebi, in its order, has stated that it has initiated adjudication proceedings against certain senior employees of the fund house for "several irregularities in the running of the debt schemes inspected, contrary to the interests of the unit holders.." These employees include the chief executive officer, chief compliance officer and the directors.
Apart from monetary fines and the directive to return back the fund management fees back to the investors, SEBI has also barred the fund house from launching any new debt scheme for a period of two years.
In a statement, the fund house says that it will appeal against the Sebi order. "We strongly disagree with the findings in the SEBI order and intend to file an appeal with the Honourable Securities Appellate Tribunal", says the Franklin Templeton spokesperson.
"We place great emphasis on compliance and believe that we have always acted in the best interest of unitholders and in accordance with regulations. Our commitment to India remains steadfast. As stated previously, the decision by the Trustee in April 2020 to wind up the funds was due to the severe market dislocation and illiquidity caused by the COVID-19 pandemic and was taken with the sole objective of preserving value for unitholders," the spokesperson added.