The Franklin Templeton (India) debt fund saga took a bizarre turn as media reported intervention by its United States parent seeking the diplomatic route for a “just and fair” hearing by market regulator the Securities and Exchange Board of India (SEBI). Almost a year ago, Franklin Templeton Investment’s India asset management arm announced the winding up of six debt schemes, locking up investor funds indefinitely.
Thus, transpired a yearlong sequence of events, leading up to the action mentioned above; court cases filed by investors, subsequent responsibility for monetisation of wound-up schemes to the SBI Mutual Fund, and media reports on findings from SEBI’s forensic audit which claim allegations of insider trading, transgressions by the fund management team and biased handling favouring interests of promoters of bond-issuing companies.
When the news of winding up of the six schemes came last year, it shocked the industry as it was the worst-case risk scenario being played out among debt funds. The shock was also around the seeming lapse in fiduciary duty that Franklin Templeton India displayed and the lack of urgency in the regulator’s response. Almost a year on, SEBI has not found any reason to levy penalties, albeit a show cause notice has been issued to the Franklin Templeton India AMC and its trustees for code of conduct violations.
A Strange Tone
Given this, the media report mentioned at the beginning turned shock to disbelief.
Franklin Templeton’s Global Chief Executive and President Jennifer M Johnson’s comment, taken from her note to the Indian Ambassador in Washington, read like a threat. “If we are hit by unfairly large penalties — whether by fine or disgorgement — that not only would discriminate against a major US-based global investment manager, it would also cause us to cut jobs and otherwise pull back our India operations.” the quote read.
It's strange to see such a tone taken, given how events have transpired so far. If SEBI is asking for disgorgement of fees, it is a recognition of mismanagement in the running of these schemes. If that is indeed the case, forget withdrawing, the penalty needs to be harsh enough for the business to question its viability.
The added issue, as pointed out by an industry insider, is that a foreign-owned fund house perhaps has no real skin in the game. Consequently, senior management action is guided solely by incentives or bonus derived from profit contributions to the global parent. This is not something that can be penalised, but it does speak to the intent in managing mutual fund schemes.
It does not imply that a domestic asset manager guarantees fool proof investor accountability, neither do all foreign-owned asset managers shirk this responsibility. It’s only that incentives may differ where there are interlinkages with domestic group companies who service a large domestic consumer base versus where profits are simply shipped overseas.
Harsh penalties by the regulator are needed to dis-incentivise any reason that corroborates low accountability towards the investor. Whatever the ownership pattern, ultimately, mutual funds operate as a trust, where fiduciary responsibility to the investor/unit holder should be a priority.
This brings us to the question: where do investors feature in Franklin Templeton’s process around this event?
Investors are in the process of getting some of their money back now that the SBI Mutual Fund has taken over the winding up of the schemes and is selling securities with due diligence. This was court ordered, and not driven by Franklin Templeton.
What we got to see instead, from Franklin Templeton, is insensitivity in handling of the entire episode. From poor communication at the start, shifting blame to COVID-19-led economic pressures and now the refusal to acknowledge that there may have been wrongdoing on the part of its senior management, it all shows low level of commitment to investors.
It’s been pointed out that by locking the schemes, Franklin Templeton may have prevented a selling deluge by other debt funds across the industry, sparing investors some losses. Maybe, but we will never know.
What we do know is that the AUM for the credit risk fund category across asset managers collectively has nearly halved since April 2020; from around Rs 58,000 crore to Rs 28,000 crore. Investors spiralled out of credit risk debt funds.
Yet, no one from the AMC has come forward to take responsibility for what has transpired and how it has jolted investor confidence across the industry. Unfortunately, arrogance of fund managers, even if it costs investors dearly, is not a criminal offence.
Now, a recent article alleges insider trading by showing details of large-sized redemptions by senior Franklin Templeton officials just before the schemes were wound up. If proven, it is a punishable offence; but the lines are blurred and proving wrongdoing for can take time.
Franklin Templeton India’s AUM of around $11 billion (April 2020) is not a patch on Franklin Templeton’s global AUM of around $1.4 trillion (FY20). If it’s not about profitability, then could the reaction by Franklin Templeton’s global leadership to use diplomatic channels be a desperate bid to preserve the reputation in the fast-growing asset management industry of the world’s sixth largest economy? In the meantime, Franklin Templeton’s share in the Indian mutual fund industry has shrunk from 7 percent 15 years ago, to around 3 percent now.
Despite all the upheaval, we continue to wait for concrete action from SEBI. It needs to set deadlines to conclude the audit and investigation with unequivocal penalties if wrongdoing is found. Along with polishing its own record in pronouncing deserving penalties within the deserving time frame, the move can firmly deter shirking of fiduciary responsibility by asset managers in future.