Sebi quizzes Franklin over shutting of funds

The Securities and Exchange Board of India (Sebi) sent two sets of queries to the fund manager based on a forensic audit of its investments, the people cited above said seeking anonymity.

The regulator wants to know why the fund manager did not take corrective steps when underlying bonds started turning illiquid, why its short-term funds held long-term securities, reasons for excessive redemptions in months before the shutdown, and the rationale for being the sole lender to 26 issuers, the people said.

“Sebi had sent queries to Franklin on 5 August and 24 August based on the observations and findings of the forensic audit. The 106-page audit by Choksi and Choksi highlights that Franklin schemes faced unusually high redemption pressures; they did not take timely corrective action when illiquidity crept into the secondary market for lower-rated paper," one of the two people said.

Squeezed by severe illiquidity and redemption stress, the asset manager decided to wind up the six schemes on 23 April, impacting 300,000 investors and assets under management (AUM) of ₹26,000 crore.

Aggrieved investors complained to Sebi that Franklin had violated its norms, following which the regulator commissioned a forensic audit into the AMC’s conduct and investment decisions.

“The forensic audit was for a period of 1 April 2018 to 23 April 2020. The forensic audit is a third-party document to which the fund house needs to reply for explanation and perspective. Franklin has replied to the findings of the audit on 3 September. Sebi is placing these in front of a panel of division chiefs. They will recommend action under section 11/11B– directions and order, penalty proceedings," the second person said.

The action could include barring the AMC from launching new fund offers and starting penalty proceedings, he added.

“Our interactions with Sebi are confidential and the issue of winding-up is sub judice. Inspections and third-party audits fall within the purview of Sebi’s oversight of MFs and we are cooperating fully with Sebi. We continue to follow due process, both in making investment decisions and with regard to the winding-up of the funds," a Franklin Templeton spokesperson said in an emailed response.