The Securities and Exchange Board of India (Sebi) on Monday slapped a penalty of Rs 5 crore on Franklin Templeton Mutual Fund for “several irregularities” in the running of its six debt schemes that were wound up in April 2020. The market regulator has also directed the fund house to disgorge Rs 451 crore (Rs 512 crore after interest) it has collected as investment management and advisory fees between June 2018 and April 2020.
Further, the US-headquartered asset manager has been prohibited from launching any new debt scheme for a period of two years.
“The findings in the instant proceedings have brought on record several irregularities in the running of the debt schemes inspected, contrary to the interests of the unitholders in such schemes. As brought out above, the irregularities also extend to failures to exercise adequate due diligence, carry out valuation of securities as per the principles of fair valuations and ensure a robust risk management framework,” Sebi said in an order.
In the order, the regulator said it has initiated adjudication proceedings against the chief executive officer, chief compliance officer and the directors of the fund house as they too are liable for the irregularities.
On April 23, 2020, Franklin Templeton MF announced that it had decided to wind its six debt schemes citing liquidity issues due to the covid-19 outbreak. The move had hit over 300,000 investors and locked up over Rs 25,000 crore of investments.
Based on certain complaints, Sebi initiated a forensic audit against the fund house to ensure that it was in compliance with all the securities regulations. After studying the compliance report, Sebi in November 2020 issued show cause notices to Franklin seeking explanation on slew of violations including allowing a Sebi-barred entity from redeeming units.
Sebi investigation found several irregularities in the way the six schemes were operated. For instance, the regulator has alleged that the fund house had not documented in credit notes the basis of scrip-wise investment decisions and also detailed credit analysis. It also had not collected end–use certificates from companies it had invested in. Sebi also found lapses in the security selection process.
Sebi observed that the Franklin MF’s debt schemes had subscribed to 70 per cent of an issue even if their securities were rated below ‘AA’.
In the order, Sebi has also alleged that the fund house took exposure to stressed sectors and groups such as Essel, Reliance ADAG and Edelweiss despite early warning signals. The regulator also alleged irregularities with respect to the valuation of Future Group securities. In the case of Reliance ADAG group it was alleged that Franklin failed to seek mandatory prepayment and invoke collateral in 2019. Also, it failed to produce any documents indicating that the decision to not invoke pledge was deliberated by the investment team. Similarly, it was alleged that the fund house had failed to exercise due diligence in deciding not to participate in the second round of stake sale offered by the Essel promoter group in November 2019 even though certain other lenders participated.
In its reply, Franklin had submitted that there was no breach of any regulation and the decisions were taken by relevant considerations and in the best interests of unitholders. It said the valuations were arrived at in good faith after taking into account relevant considerations.
In its submission to Sebi, Franklin MF said that all its investments were being monitored on an ongoing basis and decisions with respect to such investments have been taken in an informed manner and discussed with and recorded in minutes of the investment committee.
Franklin MF allowed one B Hariharan redeem MF units worth Rs 4 crore despite a Sebi ban. The fund house said the redemption was processed erroneously.
“This is a serious violation and no explanation of oversight can be accepted,” Sebi whole time member G Mahalingam has said in the order.
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