SAT Stays SEBI Order on Franklin Templeton Mutual Fund - Outside View by PersonalFN

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SAT Stays SEBI Order on Franklin Templeton Mutual Fund
Jul 1, 2021

Recently, market regulator SEBI barred Franklin Templeton Mutual Fund (FTMF) from launching any new debt mutual fund schemes for a period of two years. It had also imposed a penalty of Rs 5 crore on the fund house and directed it to refund the unitholders an amount of Rs 512 crore collected as investment management and advisory fees for the six wound up debt schemes between June 2018 and April 2020.

According to SEBI, there had been serious lapses and violations in the way the six wound up debt schemes were being run. It alleged that FTMF utilised high yield strategies without any robust system to monitor and manage critical risks such as liquidity, credit, and concentration.

FTMF, however, denied any breach of SEBI regulation relating to Macaulay Duration valuation, due diligence and care. It reiterated that the decision was taken because the markets had become illiquid due to the severe impact of COVID-19 with the sole objective to safeguard value for investors. Subsequently, it moved the Securities Appellate Tribunal (SAT) against the SEBI order.

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SAT has now provided interim relief to FTMF and has stayed the order passed by SEBI. This means that FTMF can launch new debt schemes. Further, SAT has found SEBI's order of directing FTMF to refund Rs 512 crore to be excessive at this stage.

Why did SAT stay the order?

FTMF has been in the fund management business for more than two decades and some of the schemes have been in existence for more than 10 years. SAT observed that no complaint has been registered to indicate the poor management of the scheme by the fund house. It further stated that FTMF is still running 21 debt schemes and no issue has come to fore about the management of these schemes. Therefore, SAT is of the opinion that FTMF should not be barred from launching new debt schemes. Consequently, the order will remain stayed till the time the appeal is pending.

On the issue of refund of investment management and advisory fees, SAT has stated that SEBI has taken the gross amount as unlawful gains, which appears to be incorrect. According to SAT only profits should be directed to be refunded after deducting the necessary expenses actually incurred by FTMF in managing the schemes. Since SEBI did not take this into consideration, SAT has reduced the amount that FTMF has to deposit in an escrow account to Rs 250 crore; the fund house has to deposit it within three weeks. Notably, SEBI had directed FTMF to refund Rs 512 crore collected as investment management and advisory fees and had imposed a penalty of Rs 5 crore on the fund house.

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The next and final hearing on the matter will take place on August 30, 2021.

FTMF has distributed Rs 17,778 crore till now in three tranches to unitholders in the six wound up debt schemes. Unitholders will continue to receive further sum as and when SBI mutual fund (the official liquidator) collects cash from the liquidation of securities.

Meanwhile, SEBI is continuing with its efforts to make debt mutual funds scheme more transparent and compel mutual fund houses to become more accountable for their actions.

PS: If you are looking for quality mutual fund schemes to add to your investment portfolio, I suggest you subscribe to PersonalFN's premium research service, FundSelect. PersonalFN's FundSelect service provides insightful and practical guidance on which mutual fund schemes to Buy, Hold, and Sell.

Currently, with the subscription to FundSelect, you could also get Free Bonus access to PersonalFN's Debt Fund recommendation service DebtSelect.

Under DebtSelect, we give high weightage to schemes displaying worthy portfolio characteristics. We avoid debt mutual fund schemes that aim for higher yields by taking undue higher credit risk with substantial exposure in instruments issued by private issuers.

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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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