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SEBI fines Franklin Templeton's CEO, fund managers, trustees and compliance officers

In continuation of its investigation into Franklin Templeton's conduct with its debt schemes, SEBI imposed monetary fine of Rs 3 crore on CEO Sanjay Sapre, and CIO, Fixed Income Santosh Kamath.

June 14, 2021 / 08:23 PM IST
File image

File image

In a follow-up to its order issued last week, the capital market regulator Securities and Exchange Board of India (SEBI) on June 14 imposed monetary penalties on Sanjay  Sapre, its chief executive officer, and its debt fund managers, among other top officials.

It fined Sapre and Santosh Kamath, the chief investment officer of its fixed income management, a sum of Rs 3 crore each. SEBI also fined other debt fund managers of Franklin Templeton, namely Kunal Agarwal, Sumit Gupta, Pallab Roy, Sachin Padwal Desai and Umesh Sharma a sum of Rs 1.50 crore each.

As stated in its last week's order against the fund house, SEBI observed that there were similarities in the way the six wound-up debt funds were managed. It had observed that all the six schemes had atleast 65 percent of their assets in securities that were rated AA and below. It had also incorrectly calculated the Macaulay Duration (MD); a statistic that measures a debt fund's sensitivity to interest rates. An incorrect calculation of MD makes the fund look, for instance, less riskier than it actually is. In the case of Franklin Templeton, SEBI observed that it had pushed many long-dated securities as short-dated, and thereby the MD os schemes looked artificially lower than what they ought to have been.

In response to the fund manager and senior employees' penalties, a Franklin Templeton Spokesperson said: "We believe the company and employees have acted in compliance with regulations and in the best interest of unitholders in discharging their responsibilities. Based on our initial review of the order, we are considering all options with regard to next steps which may include filing an appeal before the Hon’ble Securities Appellate Tribunal (SAT)."

SEBI docks trustees and compliance officer, too

In addition, SEBI has also fined the trustee company a sum of Rs 3 crore and Saurabh Gangrade, the fund house's chief compliance officer, a sum of Rs 50 lakh. "Evidences available do not indicate actions / directions to establish that the Trustees had exercised high standards of service, exercised due diligence, ensure proper care and exercised independent professional judgment to address these risks," says the SEBI order. 

The Franklin Templeton spokesperson confirms that the trustees and the fund house intends to file an appeal with the Securities Appellate Tribunal. "We place great emphasis on compliance and believe we have always acted in the best interest of unitholders and in accordance with regulations. As stated previously, the decision to wind up the schemes was a result of the severe market dislocation and illiquidity caused by the COVID-19 pandemic. The difficult decision to wind up these schemes was taken after due consideration of available options to avoid distressed sales of portfolio holdings to meet heightened redemptions and with the sole objective of preserving value for unitholders," says the FT spokesperson.

The background

The SEBI order pertains to the the Franklin Templeton case where the fund house had suddenly wound-up six of its debt schemes in April 2020. The fund house did not give a choice to investors whether or not the schemes should be wound up, despite SEBI's mutual fund regulations  having laid down the guidelines. Instead, it appointed liquidators and asked investors to choose between the two options.

Investors  were angry. Meanwhile, presumably on the basis of the complaints filed by the investors in various High Courts, SEBI started its investigation in the way the funds were managed. It appointed an external auditor to inspect the fund house, its registrar and transfer agent and its trustees.

Also read: Franklin Templeton verdict: When will side-pocket unitholders get their money?

In October, the Karnataka HC ruled – later upheld by the SC – that the trustees must take unitholders’ consent before winding up the schemes. This closed one of the two chapters in the Franklin Templeton case. A majority of the investors approved the winding up and money began to get distributed. So far, the fund house has returned Rs 17,214 crore to investors.

The second chapter of the Franklin Templeton saga was to establish whether the fund house mismanaged its schemes. After a lot of back and forth among all stakeholders, SEBI finally issued its order last week, where it found Franklin Templeton guilty of mismanaging its funds.

While SEBI directed the first round of penalties to the fund house in its last week order, today's order is directed at the individuals at the helm of affairs at the fund house.

In today's order, it reiterated what it had said in its first order. "For a fund house which has been in this industry in India for over two and a half decades, it is surprising that its systems to monitor and manage critical risks like liquidity, credit and concentration are less than robust. The effectiveness of these systems stand compromised in the process of the Noticee’s (Franklin Templeton India AMC, trustees, fund managers and senior employees) single minded pursuit of reaping high yield," said today's SEBI order.

This is a breaking story. Please check back for updates.
Moneycontrol PF Team
first published: Jun 14, 2021 07:33 pm