Franklin Templeton Fiasco: SEBI to Probe for Investment Violations in Wound-up Schemes - Outside View by PersonalFN

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Franklin Templeton Fiasco: SEBI to Probe for Investment Violations in Wound-up Schemes
Jun 4, 2020

Market regulator SEBI has issued audit notice to Franklin Templeton to provide information regarding the dealings of the six wound-up schemes. SEBI has hired the services of chartered accountancy and forensic audit firm Chokshi & Chokshi for the assignment. The investigation report is expected to be submitted within 30 days.

You may recall that a few weeks ago Franklin's global chief, Jennifer Johnson, during a conference call with analysts partly blamed the winding up of six of its debt scheme on SEBI's October 2019 rule which asked mutual funds to cap their exposure to unlisted non-convertible debentures (NCDs) at 10% of the schemes' corpus.

In its defense, SEBI stated that the rule was expected to bring in more transparency, liquidity, and accountability and asked FT to focus on returning money to the investors.

Notably, FT followed a high-risk high-return strategy for the wound-up schemes. Heightened redemptions amid virus outbreak brought in liquidity challenges for schemes because it had higher exposure to low rated instruments. FT reportedly was the sole lender to 26 out of the 88 entities in its debt schemes' portfolio, some of which were lesser-known companies.

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The practices followed by the AMC raised concerns that the fund manager chased higher yield without considering the negative implications it could have had.

[Read: Who Is to Blame for the Franklin Templeton Fiasco?]

Now SEBI wants to probe all aspects to find out whether there have been any regulatory violations. The investigation may include finding out whether the fund took decisions in the best interest of the investors, whether the investments were in the spirit of rules, the rationale behind classification of funds, failure of risk management measures, among others.

The firm is also likely to probe if there were collusion between the found house and bond-issuing corporate.

Though it is very surprising that the probe comes in when the damage has already been done and investors are left in a lurch, it is important that investors get clarity about whether there had been foul play involved in the management of their hard-earned money.

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If indeed collusion is established between the found house and bond-issuing corporates and if any violation of rule is discovered during the probe, then the fund house may face penal actions for not following ethical practices. It would also raise concerns about the management of the other schemes of the fund house and the reputation of the AMC would be at stake.

Alongside, an investor group in Chennai has moved to court seeking safeguard of nearly Rs 28,000 crore of investors' money stuck in wound-up schemes. The Madras High Court has issued notice to SEBI asking it to file a status report on the action taken so far.

The investor group, Chennai Financial Market Accountability (CFMA), has alleged that there is no commitment either from SEBI or FT that at least the principal amount of investors will be repaid in full. The group is planning to file an online petition to showcase unity among the investors of the wound-up schemes. The petition is likely to be forwarded to Franklin Templeton Investments in the US, the market regulator in the US and, the Prime Minister's Office.

[Read: Franklin Templeton Fiasco: Here Is When You Can Expect to Get the Money Back]

Meanwhile, FT is readying itself for the e-voting process to be held between June 09 and June 11 and the unitholder meet on June 12. It has brought onboard partners to assist them with an orderly and equitable liquidation of the portfolio so that they can start to return money soon.

Here are the options investors will have:

Firstly, unitholders will choose between 'Yes' and 'No' to proceed with the liquidation of the funds as proposed. For unitholders who vote 'Yes', they can then select between two options -

Option 1 will authorize the Trustee to monetize the assets with the assistance of the AMC and Kotak Mahindra Bank as an independent advisor

Option 2 will authorize Deloitte Touche Tohmatsu India LLP to monetize the assets with the assistance of the AMC and Kotak Mahindra Bank as an independent advisor. In this case, Trustee's role will be restricted to distribution of proceeds to unitholders after payment of liabilities and expenses in accordance with Regulation and the Trustee will not be responsible for disposal or realisation of Scheme assets.

[Read: Winding-up of Franklin Schemes: Fund House to Soon Start Voting Process]

FT has stated that in the case of a majority of unitholders choosing 'No' in any scheme, the Trustees will be required to seek another unitholder authorization by way of a subsequent voting exercise, which may delay the monetization and distribution of assets. It has clarified that choosing 'No' will not change the status of the schemes and the schemes will remain under winding up.

The AMC has advised investors to use their discretion to vote after understanding the pros and cons of each option.

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Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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