Following up on its order issued last week, markets regulator Securities and Exchange Board of India (SEBI) on Monday evening imposed monetary penalties on Sanjay Sapre, Franklin Templeton AMC CEO, Jayaram S Iyer (Director of FT-AMC), its debt fund managers, AMC trustee and a top official handling compliance. For a fund house which has been in this industry in India for over two-and-a-half decades, its systems to monitor and manage critical risks have been found wanting.
While SEBI slapped a penalty of Rs 3 crore on Franklin Templeton Trustee Services, it imposed fines of Rs 2 crore each on Sapre and Santosh Kamath, the chief investment officer of its fixed income management. The regulator also fined other debt fund managers of Franklin Templeton, namely Kunal Agarwal, Sumit Gupta, Pallab Roy, Sachin Padwal Desai and Umesh Sharma a sum of Rs 1.50 crore each. Iyer was fined Rs 25 lakh.
Similar to the Vivek Kudva order last week, SEBI slapped a fine of Rs 45 lakh on Venkata Radhakrishnan (Director of FT-AMC) and a fine of Rs 5 lakh on his wife, Malathi Radhakrishnan for redeeming units of FT-MF prior to closure of the schemes, after being privy to the information of stress in the fixed income schemes, which is a non-public information. SEBI said Venkata misused his position.
All this relates to the sudden winding up and gating on investor redemptions in 6 FT schemes namely Franklin India Low Duration Fund, Franklin India Ultra Short Fund/Ultra Short Bond Fund, Franklin India Short Term Income Fund/Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund.
Based on certain media articles and complaints received by Securities and Exchange Board of India (SEBI), a Forensic Audit/Inspection was done by Chokshi and Chokshi LLP, Chartered Accountants. The scope of the audit was inâ€“house RTA activities, AMC and Board of Trustee/Trustee Company with respect to the debt schemes. The audit led to a scathing report.
As per SEBI, there were serious lapses and violations in FT case and they appear as a fall out of “FT-MFâ€™s obsession to run high yield strategies” without due regard from the concomitant risk dimensions.
“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,” SEBI said. Also, it added that the effectiveness of these systems stand compromised in the process of the noticeeâ€™s single-minded pursuit of reaping high yield.
“…similarly, 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 â€˜commercial understandingâ€™. While it is easy to shift the blame for such mishaps onto black swan events, regulatory changes, etc. the Noticees need 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,” the order said.
Reacting to the order, a Franklin Templeton spokesperson said: “We believe the company and employees have acted in compliance with regulations and in the best interest of unitholders in discharging their responsibilities. Based on our initial review of the order, we are considering all options with regard to next steps which may include filing an appeal before the Honourable Securities Appellate Tribunal (SAT).”
In addition, SEBI has also fined the trustee company a sum of Rs 3 crore. Saurabh Gangrade, the fund house’s chief compliance officer has been fined a sum of Rs 50 lakh. “Evidences available do not indicate actions / directions to establish that the Trustees had exercised high standards of service, exercised due diligence, ensure proper care and exercised independent professional judgment to address these risks,” the SEBI order pointed out.
FT on its part said that while it holds SEBI in the highest esteem but disagrees with the findings in the SEBI order and intends to file an appeal with the Securities Appellate Tribunal.
“We place great emphasis on compliance and believe we have always acted in the best interest of unitholders and in accordance with regulations. As stated previously, the decision to wind up the schemes was a result of the severe market dislocation and illiquidity caused by the COVID-19 pandemic,” FT spokesperson added.
The six schemes under winding up have already distributed Rs 17,778 crore to unitholders, comprising 71 percent of the AUM of Rs 25,214 crore on the date of the winding up decision. The process of monetisation and distribution is ongoing.
The Securities and Exchange Board of India (Sebi) also imposed a penalty of Rs 5 crore on Mywish Marketplaces, an associate company of Franklin Templeton AMC. The penalty has been levied on the company on charges that, as Vivek Kudva was director of the company, it had information that was not in the public domain and could redeem its investments before the decision to wind up the debt schemes was taken in April 2020. Vivek Kudva, head of Franklin Templeton Asia Pacific (APAC), was director in Mywish Marketplaces, as pointed out by the forensic audit of the wound-up schemes. Alok Sethi, director, FT-trustee, was also a director in Mywish Marketplaces.