On a big day for Franklin's investors, SEBI has released orders pertaining to Franklin's compliance with SEBI's provisions before the AMC wound up six of its debt funds. The market watchdog has imposed a monetary penalty of Rs 5 crore on the AMC. The AMC has to pay the amount within 45 days of the order. Further, the AMC will have to refund the investment management and advisory fees of Rs 451 crore (as per the order) collected from June 4, 2018 to April 23, 2020 for its six debt schemes, along with an interest of 12 per cent per annum. This amount will be utilised to repay the unitholders.
SEBI has also prohibited the AMC from launching any new debt fund for the next two years. Further, the ban on the launch of new debt funds in the categories of the six shuttered funds will come into effect from the date on which, the AMC terminated those funds.
In April last year, Franklin Templeton Mutual Fund announced the voluntary wind-up of six schemes, including Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund. The fund house cited the dramatic fall in liquidity across the debt market owing to COVID-19 and the lockdown as the reasons for the decision. No sooner than that, SEBI ordered a special audit into the case and hired Chokshi and Chokshi to inspect the dealings of the six schemes.
According to the order, the findings from the audit have revealed there have been serious lapses/violations from the FT's end with regard to the scheme categorisation (by replicating a high-risk strategy across several schemes), the calculation of Macaulay duration to push long-term papers into short-duration schemes, non-exercise of exit options in the face of emerging liquidity crisis and securities valuation practices and risk management practices and investment-related due diligence.
In a separate order, SEBI has imposed a monetary penalty of Rs 4 crore on Vivek Kudva, Director of FT, AMC and of Rs 3 crore on Rupa Kudva, Vivek's wife, for undertaking redemptions just before announcing the closure of its six debt funds. The market regulator has directed them to transfer Rs 30.70 crore of the redeemed FT units to an escrow account within 45 days. Further, the regulator has barred them from accessing the securities market for one year.
Referring to these orders, a Franklin Templeton spokesperson said, "We strongly disagree with the findings in the SEBI order and intend to file an appeal with the Hon'ble Securities Appellate Tribunal. We place great emphasis on compliance and believe that we have always acted in the best interest of unitholders and in accordance with regulations. Our commitment to India remains steadfast."
The spokesperson added, "The six schemes under winding up have distributed INR 14,572 crores to unitholders as of April 30, 2021 and an amount of INR 3,205 crores is available for distribution as of June 4, 2021. After this distribution in the first week of June 2021, the total amount disbursed will range between 40% and 92% of AUM as of April 23, 2020 across the six schemes. Including the amounts available as of June 4, 2021 for distribution, 71% of the AUM as of April 23, 2020 will have been returned to unitholders in total across all the schemes. The current net asset value of each of the six schemes is higher than it was on April 23, 2020. We believe this supports the decision made by the Trustee in consultation with the AMC and its investment management team to wind up the six schemes. The schemes have followed a consistent strategy of investing in credits across the rating spectrum and have delivered meaningful outcomes to investors over long periods of time."
For a detailed account of how things have unfolded following the announcement of the windup, read this.