Winding up debt schemes: Franklin Templeton currently reviewing SEBI forensic audit findings

The final outcome of the forensic inspection is supposed to shed light on whether FT’s investments were made in best interest of the investors and if there was any failure of risk management measures

Kumar Shankar Roy Aug 31, 2020

Santosh Kamath Franklin TempletonMarket regulator SEBI has communicated the findings of the forensic audit/inspection to Franklin Templeton Trustee and have sought their comments including the comments of Asset Management Company. The Trustee and AMC are currently in the process of reviewing the findings and will appropriately respond to SEBI, the trustee said in its latest report to investors dated August 28.

It was Franklin Templeton Trustee Services that in April 2020 had issued a winding up notice thereby deciding to wind up six fixed income schemes in accordance with Regulation 39 (2)(a) of SEBI (Mutual Funds) Regulations, 1996. The six schemes viz. 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, held investor assets worth Rs 26,000 crore. The winding up notice was unprecedented as no other AMC has ever shut down funds this way.

Few unitholders later filed writ petitions against SEBI, AMC, Trustee and others challenging the winding up decision and all such petitions are currently being heard in Karnataka High Court.

“SEBI initiated a forensic audit/inspection, with respect to these six schemes and other fund of funds schemes that invest in these six schemes. SEBI has communicated the findings of the said forensic audit/inspection to Trustee and have sought their comments including the comments of Asset Management Company (together with relevant supporting documents/records). The Trustee and AMC are currently in the process of reviewing the findings and will appropriately respond to SEBI. The final outcome of this forensic audit/inspection is pending as on the reporting date,” says the trustee report signed by Alok Sethi, Director, Franklin Templeton Trustee Services Private Limited.

In June, it was reported that SEBI had ordered an audit in the six debt schemes shut down by Franklin Templeton. The audit was being done by Choksi & Choksi to ascertain whether the investments were made in the best interest of the investors, investment rationale, whether the fund’s investments met fiduciary requirements, and if there was any failure of risk management measures.

Franklin Templeton Trustee Services Pvt. Ltd. (‘Trustee’/‘Trustee Company’) is the Trustee to Franklin Templeton MF. The Trustee is the exclusive owner of the trust fund and holds the same in trust for the benefit of the unitholders. During the year, Arvind Sonde, Sandra Martyres and Sanjaya Johri were appointed as directors on the Board of the company and due to completion of tenure, Anand J. Vashi, Percy J. Pardiwalla and Indu Shahani stepped down from the directorship.

Franklin Templeton Mutual Fund’s six debt schemes, which are under winding up process, have received total cash flow of nearly Rs 5,000 crore till August 14. Out of the six FT schemes, two funds (Franklin India Ultra Short and Franklin India Dynamic Accrual) are loan-free. Two funds (Franklin India Low Duration and Franklin India Credit Risk) have brought borrowings near cash-positive status (sub-5%).

“We understand that the delay due to various legal cases have added to the disappointment and inconvenience for investors in the schemes under winding up. However, we are doing our best to have the legal cases resolved at the earliest so that the schemes can start to efficiently monetise assets and return money to unitholders. In the meanwhile, the AMC investment team working with the independent advisor have developed a monetisation strategy for each of the securities in the portfolio, and the schemes continue to receive maturities, pre-payments and coupon payments,” the trustee report added.

In picture: Santosh Das Kamath, managing director and chief investment officer, Franklin Templeton Fixed Income in India. Kamath has been in the dock ever since the fund decided to wind up the six debt schemes. Here is an interview he gave on the issue.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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