Explained: Why Franklin Templeton plans to challenge SEBI order, Rs 5-crore penalty

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Franklin Templeton 'strongly disagrees' with SEBI's order and penalty on its move to shut down 6 debt fund schemes. It says it will challenge the order at SAT.

Explained: Why Franklin Templeton plans to challenge SEBI order, Rs 5-crore penalty
Franklin Templeton Asset Management (India), once a market leader in the mutual funds industry, has been barred by the Securities and Exchange Board of India (SEBI) from launching new debt schemes for two years and fined Rs 5 crore penalty, to be paid within 45 days. The market regulator has also ordered the fund house, which reigned for 25 years, to return Rs 512.50 crore to their investors.
Franklin Templeton (FT) in turn has said it would challenge the order before the Securities Appellate Tribunal (SAT).
The 6 Schemes Wound up Were:
  • Franklin India Ultra Short Fund/Ultra Short Bond Fund
  • Franklin India Low Duration Fund
  • Franklin India Short Term Income Fund/Plan
  • Franklin India Income Opportunities Fund
  • Franklin India Dynamic Accrual Fund
  • Franklin India Credit Risk Fund.
  • Why is FT Barred and Penalised?
    FT last April had abruptly wound up six debt fund schemes, blaming it on severe market dislocation and illiquidity that was caused by COVID-19. Also, the objective of preserving value for unit holders had to be considered.
    SEBI, which took up investigations against FT, found that there were lapses in the manner these six funds were wound up. The market watchdog ordered it to return fund management fees worth Rs 451.63 crore to the investors towards investment management and advisory fees that was collected from June 2018 to April 2020. The regulator also levied a 12 percent interest fee on this amount totalling Rs 512.50 crore.
    What Did SEBI Find?
    After the funds were wound up, SEBI swung into action and found that FT did not follow the scheme categorisation in the right spirit. SEBI in 2018 had laid down 36 mutual fund categories. Each category had limitations or boundaries that cannot be breached. So, every scheme under a category launched by a mutual fund house has to operate within those set limits only.
    As per a report by Live Mint, “FT is being held responsible by SEBI for replicating high-risk strategy across several schemes, miscalculating Macaulay duration to push long-term papers into short-duration schemes, non-exercise of exit options in the face of emerging liquidity crisis, lapses in securities valuation practices, as well as risk management practices and investment related due diligence.”
    Why 12% Interest?
    SEBI calculated that a 12 percent per annum interest should be charged over and above the funds to be returned to the investors of these six schemes that were wound up.
    Why Extra Rs 5-Crore Penalty?
    SEBI has said FT has violated many rules and circulars of theirs such as investment and borrowing norms, code of conduct, and principles of fair valuation, among others.
    SEBI is also proceeding with adjudication proceedings against the chief executive officer, chief compliance officer and the directors. As per a report by Money Control, the charges being levied are, "several irregularities in the running of the debt schemes inspected, contrary to the interests of the unit holders."
    Furthermore, SEBI has barred the mutual fund house from launching any new debt scheme for a period of two years.
    FT’s Reaction
    FT disagrees with the findings in the SEBI order and intends to challenge the order in the Securities Appellate Tribunal (SAT), according to FT’s statement.
     

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