The Securities and Exchange Board of India (SEBI) has imposed a monetary penalty on Franklin Templeton Asset Management Company Limited and ban on six new debt schemes launched by them.
Whole-time member of SEBI, G Mahalingam held the company liable to pay a monetary penalty of Rs five crore within a period of 45 days and refund the investment management and advisory fees collected with respect to the six debt schemes inspected along with simple interest at the rate of 12 percent per annum within a period of 21 days from the date of this order.
The company shall also be prohibited from launching any new debt scheme for two years.
Franklin Templeton Trustee Services Pvt Ltd had decided to wind up the following schemes of Franklin Templeton Mutual Funds pursuant to the provisions of Regulation 39(2)(a) of SEBI (Mutual Funds) Regulations, 1996:
i. Franklin India Ultra Short Fund/Ultra Short Bond Fund;
ii. Franklin India Low Duration Fund;
iii. Franklin India Short Term Income Fund/Plan;
iv. Franklin India Income Opportunities Fund;
v. Franklin India Dynamic Accrual Fund and
vi. Franklin India Credit Risk Fund.
SEBI had found serious lapses in the way Franklin Templeton India Mutual Fund managed the six debt funds that it wound up suddenly in April, 2020. Upon a consideration of the Forensic Audit/Inspection Report, SEBI issued a showcause under the provisions of Sections 11(1), 11(4), 11(4A) and 11B of the SEBI Act, containing the following allegations-
a) The company running debt schemes inspected akin to Credit Risk Fund scheme and in a similar manner, despite the investment objectives of these schemes, being different. The debt schemes inspected were projected as duration–based schemes, instead of Credit Risk Fund schemes.
b) Not disclosed its strategy of investing in high yield securities with credit rating
c) Incorrectly calculated Macaulay duration, taking interest rate reset dates as deemed maturity date, even though there was no explicit exit to both the parties-Issuer and Investor, on the interest rate reset date
d) Entered into terms of investment, which were ambiguous and without equal rights to both the Issuer and the Investor
e) Did not value the securities as per the Principles of Fair Valuations, thereby not reflecting the true realisable value of the underlying securities.
f) Not disclosed change in terms of investment immediately to valuation agencies and credit rating agencies
g) Incorrect disclosures of the monthly portfolio of securities.
h) Invested in illiquid securities without proper due diligence.
i) Had made investments, which were akin to giving loan to Issuers.
j) Had not ensured independence of risk management function and also reduced the role of Business Risk Management Committee, without approval from its Board.
k) Not provided guidance or suggested any concrete steps to manage various risks of the securities in the portfolio.
l) Not have any policy on detail objective criteria to be recorded in the Investment Process Note (“IPN”).
m) Did not exercise due diligence to ensure that investment parameters were analysed for individual Issuers
n) Had failed to ensure appropriate policy to have pro–rata allotment of partial buy– back to all the schemes
o) Had allowed a SEBI debarred entity to redeem units of mutual fund.
p) Failed to maintain high standards of integrity, exercise due diligence, ensure proper care and exercise independent professional judgement as per the Code of Conduct.
Sebi has also imposed a penalty of Rs five crore on Franklin Templeton India 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 among others.
It has instructed the refund of investment to return fund management fees worth Rs 451.63 crore to the investors of the six debt funds. Plus, it has also levied a 12 percent interest fee on this amount, which sums up the total disgorged fee to Rs 512.50 crore.