Sebi on Monday imposed a penalty totalling Rs 15 crore on senior officials of Franklin Templeton AMC and its trustee for violating regulatory norms in the case of winding up of six debt schemes in 2020.
However, a spokesperson of Franklin Templeton said they disagree with the findings in Sebi's order and intend to file an appeal with the Securities Appellate Tribunal (SAT).
A fine of Rs 3 crore has been levied on Franklin Templeton Trustee Services Pvt Ltd and Rs 2 crore each on Franklin Asset Management (India) Pvt Ltd President Sanjay Sapre and its chief investment officer Santosh Kamat, according to the Sebi order.
In addition, the regulator imposed a penalty of Rs 1.5 crore each on fund managers -- Kunal Agarwal, Pallab Roy, Sachin Padwal Desai and Umesh Sharma -- as well as former fund manager Sumit Gupta.
Besides, a Rs 50 lakh penalty has been levied on chief compliance officer Saurabh Gangrade.
They have been directed to pay the penalty within 45 days.
Sebi noted that the trustees of Franklin Templeton Mutual Fund (MF) and these officials failed to avert certain lapses in the functioning of the mutual fund.
"The acts and deeds committed by them while discharging their duties are not in the interest of the unitholders in specific and the investors in general," Sebi said in its 151-page order.
According to the regulator, the officials did not exercise proper due diligence while discharging their responsibilities at the relevant time and violated the regulatory requirements, which hampered the interest of the unitholders.
On the trustees, Sebi said "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."
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.
In its order, Sebi said the serious lapses and violations clearly appear to be a fallout of Franklin Templeton MF's obsession to run high-yield strategies without due regard for the concomitant risk dimensions.
"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 single minded pursuit of reaping high yield," Sebi said.
Franklin Templeton Trustee Services and the officials of the asset management company have been collectively referred to as noticees.
Sebi said the noticees have brought out the reasons of 'business judgment' to defend questionable decisions.
However, it is seen that these decisions which involve deployment of public funds are barely documented.
Similarly, the terms of investment covenants were apparently not in the interest of investors and the deficiencies in the agreements were sought to be corrected through a 'commercial understanding', Sebi noted.
"While it is easy to shift the blame for such mishaps onto black swan events, regulatory changes, etc, the noticees needs to seriously introspect and put in place robust risk control and due diligence mechanisms, given that the rest of the industry has been able to cope with the events and survive through the crisis period of the Covid-19 pandemic, without reaching the point of winding up," it added.
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 emerging liquidity crisis, securities valuation practices, risk management practices and investment-related due diligence.
In a statement, the spokesperson said that Franklin Templeton places great emphasis on compliance and has always acted in the best interest of unitholders and in accordance with regulations.
"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," he added.
He further said the trustees' immediate priority and focus remains on supporting the liquidation of the portfolios of the six schemes under winding up and distributing monies to unitholders at the earliest, while preserving value.
With regard to employees, the spokesperson said they have acted in compliance with regulations and in the best interest of unitholders in discharging their responsibilities.
In three separate orders, the regulator imposed a penalty of Rs 5 crore on Mywish Marketplaces, Rs 25 lakh on Jayaram S Iyer, Rs 45 lakh on Venkata Radhakrishnan and Rs 5 lakh on Malathi Radhakrishnan for redeeming their mutual fund units before the schemes were wound up.
Sebi noted that Vivek Kudva, head of Asia Pacific (APAC) for Franklin Templeton AMC, and Alok Sethi, director at Franklin Templeton Trustees, were directors on the board of Mywish Marketplaces.
They have been penalised for redeeming their units while in possession of non-public information with respect to stress in the debt schemes.
Through such activities, they violated the provisions of PFUTP (Prohibition of Fraudulent and Unfair Trade Practices) norms, Sebi noted.
Photograph: Kind courtesy BrokenSphere/Wikimedia Commons