Franklin Templeton disagrees with SEBI order; to move SAT

Franklin Templeton Asset Management (India) on Tuesday said it strongly disagrees with the findings in SEBI ‘s order in the case of winding of six debt schemes in 2020 and has decided to challenge the direction in Securities Appellate Tribunal (SAT).

SEBI, on Monday, barred Franklin Templeton Asset Management (India) from launching any new debt scheme for two years and imposed a penalty of Rs 5 crore for violating regulatory norms in the case of winding up of six debt schemes in 2020.

Also, it has been asked to refund investment management and advisory fees of over Rs 512 crore (including interest) collected with respect to the six debt schemes.

This amount will be used to repay unitholders, as per SEBI order.

Reacting to SEBI ‘s order, a Franklin Templeton spokesperson said, “We strongly disagree with the findings in the Sebi order and intend to file an appeal with the Hon’ble Securities Appellate Tribunal”.

He, further, said Franklin Templeton places great emphasis on compliance and believes that it has always acted in the best interest of unitholders and in accordance with regulations.

SEBI found that Franklin Templeton AMC has committed serious lapses/violations with regard to a scheme categorisation (by replicating high-risk strategy across several schemes) and calculation of Macaulay duration (to push long-term papers into short duration schemes).

Also, it has committed violations in respect of non-exercise of exit options in the face of an emerging liquidity crisis, securities valuation practices, risk management practices, and investment-related due diligence, it added.

“As a result of the irregularities in the running of the debt schemes inspected, loss has been caused to the investors. The notice (Franklin Templeton AMC) was under a statutory obligation to abide by the provisions of the Mutual Regulations and Circulars issued thereunder, which it failed to do,” SEBI noted.

Franklin Templeton MF shut its six debt mutual fund schemes on April 23, 2020, citing redemption pressures and lack of liquidity in the bond market.

The schemes — Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund, and Franklin India Income Opportunities Fund — together had an estimated Rs 25,000 crore as assets under management.

According to the spokesperson, 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 six schemes under winding up have distributed Rs 14,572 crore to unitholders as of April 30, 2021, and an amount of Rs 3,205 crore is available for distribution as of June 4, 2021.

After this distribution in the first week of June 2021, the total amount disbursement will reach to Rs 17,778 crore, amounting to 71% of assets under management (AUM) as on April 23, 2020.

“We believe this supports the decision made by the trustee in consultation with the AMC and its investment management team to wind up the six schemes,” the spokesperson said.

According to him, the schemes have followed a consistent strategy of investing in credits across the rating spectrum and have delivered meaningful outcomes to investors over long periods of time.

These schemes provided an important source of funding to growing companies in India that to date have proven to be sound investments. Many of these holdings are now being liquidated by the schemes at fair value under normal market conditions, he added.

Franklin Templeton said its immediate priority and focus remains on supporting the court-appointed liquidator in liquidating the portfolio of the schemes under winding up and distributing monies to unitholders at the earliest while preserving value.