Franklin Templeton (FT) had announced winding up 6 of its debt schemes in April 2020 citing redemption pressures and lack of liquidity due to COVID 19. The Securities and Exchange Board of India (SEBI) during its investigation has found serious lapses in the management of the 6 schemes which were abruptly wound up.
Due to these lapses, SEBI has instructed FT to return back management fees worth INR 451.63 crores and has also levied a 12% interest fees per annum on this amount making it a grand total of INR 512.5 crores. The primary reason for this is that SEBI found that FT did not follow the scheme categorization, as set out by the regulator in 2018, properly. It observed that FT had replicated high-risk strategies across several of its schemes and that the fund management did not exercise the exit options in illiquid securities, despite an emerging liquidity crisis.
SEBI has also imposed a penalty of Rs. 5 crore on Franklin Templeton Asset Management Company for violations of various SEBI rules and circulars, such as investment and borrowing norms, code of conduct, and principles of fair valuation.
Furthermore, apart from the monetary penalty and instruction to return back management fees, SEBI has also banned the fund house from launching any new debt schemes for 2 years. The capital market regulator has also restrained the head of Franklin Templeton Asia Pacific (APAC), Vivek Kudva and his wife, Roopa Kudva, MD of Omidyar Network India from accessing the securities market for 1 year. SEBI has directed them to transfer Rs. 30.7 crore of redeemed FT units to an escrow account within 45 days. A monetary penalty has been imposed on Vivek Kudva of Rs. 4 crore whereas a fine of Rs. 3 crore has been issued to Roopa Kudva.
The SEBI ruling is expected to be contested by Franklin Templeton in Securities Appellate Tribunal (SAT).
The ruling will be a wake-up call for the mutual fund houses to set their internal processes in order and enhance compliance.