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Sebi on Monday barred Franklin Templeton AMC from launching any new debt scheme for two years and fined it 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 to the tune of Rs 512 crore, including interest, collected with respect to the six debt schemes, Sebi said in its 100-page order.
In a separate order, the regulator has barred Vivek Kudva, former head of Asia Pacific (APAC) for Franklin Templeton, and his wife Roopa from the securities market for one year for redeeming units of Franklin Templeton MF schemes while in possession of non-public information.
The regulator has also imposed a total penalty of Rs 7 crore on the couple.
Besides, they have been asked to jointly and severally transfer Rs 22.64 crore redeemed of Franklin Templeton MF schemes to an escrow account within 45 days.
Sebi found that the couple had cumulatively redeemed units amounting to Rs 30.70 crore while in possession of material non-public information.
In addition, Sebi has initiated adjudication proceedings against certain employees of Franklin Templeton AMC, including the chief executive officer, chief compliance officer and the directors.
Sebi found that Franklin Templeton Asset Management (India) Pvt Ltd has "committed serious lapses/violations with regard to a scheme categorization (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 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 noticee (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.
The serious lapses and violations appear to be a fallout of Franklin Templeton AMC's obsession to run high-yield strategies without due regard from the concomitant risk dimensions, it added.
The regulator said Franklin Templeton AMC will have to refund the investment management and advisory fees collected from June 4, 2018 till April 23, 2020 with respect to the six debt schemes, along with simple interest at the rate of 12 per cent per annum.
This has to be done within a period of 21 days from the date of the order for utilisation towards repayment of the concerned unitholders.
In the event of failure to comply with the direction, it shall pay simple interest 12 per cent per annum, which shall commence from the date the amount becomes payable.
In respect of Kudvas, Sebi noted that Vivek had redeemed units worth Rs 11.62 crore on his own behalf and units amounting to Rs 85.15 lakh on behalf of his mother Vasanthi, whereas Roopa redeemed units on her own account amounting to Rs 18.22 crore.
"The noticees (couple) by redeeming their units ahead of the other investors have enjoyed an unfair advantage by having access to their investments; whereas the unit holders who remained invested were left in the lurch as their investments were locked up for a considerable amount of time," Sebi noted.
In such a scenario, Sebi said it is appropriate to place the couple (with respect to their investments in the two schemes) in a similar position to that of the unitholders who had remained invested.
The amount of Rs 22.64 crore to be transferred to the escrow account will be released in tranches to the couple in the same proportion as the cash distributed to the unitholders (pursuant to the winding up process), taken as percentage of the AUM of the two schemes as on date of the decision to wind up the schemes -- April 23, 2020.
Such proportionate releases from the escrow account will continue till the balance in the escrow account gets depleted to zero.
If, on the other hand, on completion of the winding up process, any additional amounts remain in the escrow account, the same will be transferred to the Sebi Investor Protection and Education Fund, it added.
Sebi said redemption of units by the Roopa and Vivek on his own behalf and on behalf of his mother while being privy to material non-public information constitutes 'unfair trade practices' and is in contravention of PFUTP (Prohibition of Unfair Trade Practices) norms.
Franklin Templeton MF shut 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.
Subsequent to the decision to wind up the schemes, the Securities and Exchange Board of India (Sebi) ordered a forensic audit and appointed chartered accountants Chokshi and Chokshi LLP to conduct a forensic audit of Franklin Templeton MF, Franklin Templeton AMC and trustees, particularly in respect to the six debt schemes.