SEBI imposes ₹15 cr fine on Franklin Templeton, 8 others over wound-up schemes

In its latest action, SEBI has issued a fine of ₹3 crore on Franklin Templeton Trustee Services Pvt Ltd, and ₹2 crore each on Franklin Asset Management (India) Pvt Ltd President Sanjay Sapre and its Chief Investment Officer Santosh Kamat.

The market watchdog has also imposed a penalty of ₹1.5 crore each on Kunal Agarwal, Sumit Gupta, Pallab Roy, Sachin Padwal Desai and Umesh Sharma, who acted as fund managers for various Franklin Templeton schemes at the time of violation. It has also fined chief compliance officer Saurabh Gangrade ₹50 lakh.

The monetary penalty has to be paid within 45 days from the receipt of the order, the market regulator noted in its order.

The serious lapses and violations clearly appear to be a fallout of the Franklin Templeton’s “obsession” to run high yield strategies without due regard from the concomitant risk dimensions, SEBI said.

“For a fund house which has been in this industry in India for over two and a half decades, it is surprising that its systems to monitor and manage critical risks like liquidity, credit and concentration are less than robust. The effectiveness of these systems stand compromised in the process of the noticee’s single minded pursuit of reaping high yield,” SEBI said.

SEBI noted that the noticees cited reasons of “business judgment” to defend “questionable decisions”, but these decisions which involve deployment of public funds are barely documented. The terms of investment covenants were apparently not in the interest of investors and the deficiencies in the agreements were sought to be corrected through a ‘commercial understanding’, the regulator further said.

“While it is easy to shift the blame for such mishaps onto black swan events, regulatory changes, etc, the noticees needs to seriously introspect and put in place robust risk control and due diligence mechanisms, given that the rest of the industry has been able to cope with the events and survive through the crisis period of the Covid-19 pandemic, without reaching the point of winding up,” SEBI said in its adjudication order.

Responding to the action, a Franklin Templeton spokesperson said that the fund house places great emphasis on compliance and has always acted in the best interest of unitholders and in accordance with regulations.

“The difficult decision to wind up these schemes was taken after due consideration of available options to avoid distressed sales of portfolio holdings to meet heightened redemptions and with the sole objective of preserving value for unitholders,” he added.

He further said the trustees’ immediate priority and focus remains on supporting the liquidation of the portfolios of the six schemes under winding up and distributing monies to unitholders at the earliest, while preserving value.

With regard to employees, the spokesperson said they have acted in compliance with regulations and in the best interest of unitholders in discharging their responsibilities.

In separate orders, SEBI imposed fines to the tune of ₹5 crore on Mywish Marketplaces, ₹25 lakh on Jayaram S Iyer, ₹45 lakh on Venkata Radhakrishnan and ₹5 lakh on Malathi Radhakrishnan. The regulator held them guilty of misusing non-public information with respect to stress in the debt schemes and redeeming their mutual fund units before they were wound up.

SEBI mentioned in one of its order that Vivek Kudva, head of Asia Pacific (APAC) for Franklin Templeton, and Alok Sethi, director at Franklin Templeton Trustees, were directors on the board of Mywish Marketplaces. They have been penalised for redeeming their units based on non-public information regarding stress in the six wound-up debt schemes.

Through such activities, they violated the provisions of Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) norms, SBEI said.

Franklin Templeton MF shut its six debt mutual fund schemes on April 23, 2020, citing redemption pressures and lack of liquidity in the bond market.

The schemes — Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund, and Franklin India Income Opportunities Fund — together had an estimated ₹25,000 crore as assets under management.