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    Sebi issues notices to Franklin Templeton

    Synopsis

    In the show-cause notices to Franklin Templeton AMC and its trustees, the regulator alleged code of conduct violations said people with knowledge of the matter.

    SebiET Online
    The forensic audit also pointed out that the six schemes used the Macaulay duration framework to justify the investment in long-dated papers into short-term funds, and there was a delayed reaction to downgrades.
    MUMBAI: The Securities and Exchange Board of India (Sebi) has issued show-cause notices to Franklin Templeton Asset Management Company (AMC), trustees and key managerial personnel based on findings of a forensic audit report, according to people with knowledge of the matter. Sebi had ordered the audit after the fund house wound up six debt mutual fund schemes in April last year.

    In the show-cause notices to Franklin Templeton AMC and its trustees, the regulator alleged code of conduct violations, said the people cited above. It asked why action should not be taken against them for not discharging their fiduciary responsibilities toward investors and for lapses in the risk-management process.

    The notices issued to key managerial personnel included Vivek Kudva, head of Asia Pacific (APAC) for Franklin Templeton; his wife Roopa Kudva, managing director at Omidyar Network India, and his mother. They allege violation of the Prohibition of Fraudulent and Unfair Trade Practices and mutual fund regulations.

    ‘Response Sent to Sebi’
    Franklin Templeton told ET that detailed responses to the show-cause notices had been sent to Sebi. “None of the key persons have redeemed any units post the trustees taking the in-principle decision to wind-up the schemes,” said a company spokesperson in an email. “Schemes under winding up continue to have significant investment from employees and management of Franklin Templeton. All redemption applications submitted by unit holders until April 23, 2020, were processed in the normal course of business. Our interests remain aligned with those of our investors.”

    The regulator didn’t respond to queries.

    Sebi Issues Notices to Franklin Templeton

    The forensic audit report said Kudva, his family members and some senior Franklin Templeton executives withdrew some of their investments between March and April 2020. The auditor also pointed out that some of the directors on the board of the AMC as well as the trustee company also withdrew a portion of their investments from the stressed schemes just before they were shut for redemptions on April 23, 2020.

    ET was the first to report in September last year that the regulator had sought the response of the fund house on the redemptions, running into crores of rupees, that had been made since January 2020 by some senior personnel at Franklin Templeton.

    The forensic audit also pointed out that the six schemes used the Macaulay duration framework to justify the investment in long-dated papers into short-term funds, and there was a delayed reaction to downgrades.

    Legal & Adjudication Proceedings
    The regulator has initiated legal proceedings under Section 11B of the Sebi Act, which empowers the regulator to bar an entity from the securities market and order disgorgement of profits. In parallel, it has initiated adjudication proceedings against the entities, under which it can impose monetary penalties for alleged violations.

    “The show-cause notices were issued a few weeks ago. If violations are established, action will be taken against the concerned entities and persons,” said a person familiar with the development.

    After a wait of more than 10 months, investors in five of the six shuttered debt schemes of Franklin Templeton Mutual Fund received a portion of their money, which was lying as cash in these schemes, in the middle of February. The fund house has disbursed a total Rs 9,122 crore in the five cash-positive schemes.

    “Our focus has been, and remains, on returning monies at the earliest by supporting SBI Funds Management in the monetisation process,” said the Franklin Templeton spokesperson. “The schemes have already distributed Rs 9,122 crore to investors and have accrued another Rs 1,180 crore in cash as on February 26, 2021… We believe it would be inappropriate to comment further on speculation, and request investors not to draw conclusions based on conjecture.”

    After disbursement of the money, the six schemes still have debt securities worth Rs 17,000 crore. The Supreme Court, which is overseeing the winding up of the schemes, has directed SBI Mutual Fund to liquidate them and distribute the proceeds.

    About 300,000 investors in these six debt mutual fund schemes, which have assets of Rs 26,000 crore, have been hit since April 23, 2020, when the fund house decided to wind them up on account of poor liquidity conditions in debt markets after the Covid-19 outbreak.

    Investors have been unable to access their money in these schemes as the winding up was challenged in courts, preventing the fund house from distributing or monetising any assets in the schemes.
    The Economic Times

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