Franklin Templeton Debt MF Schemes: Investors Send Legal Notice to SEBI Seeking Action against Its Erring Officials, Trustees of FTML
Some investors of Franklin Templeton Mutual Fund (FTML) have sent a legal notice to market regulator Securities and Exchange Board of India (SEBI) seeking vigilance enquiry and action against officials who allowed the mutual fund to increase borrowing limits from 20% to 30% for two schemes, namely, Franklin India Low Duration Fund (FILDF) and Franklin India Short Term Income Plan (FISTIP) and to 40% from 20% in Franklin India Income Opportunities Fund (FIIOF) and in Franklin India Credit Risk Fund (FICRF).
In the notice sent through advocate Puneet Jain, the investors contend that the portfolio of the six schemes from FTML should have conformed to the scheme objectives and the harmonisation norms before the trustees seek permission for winding up under regulation 18(1s)(c).
The notice sent to SEBI chairman Ajay Tyagi, whole-time members (WTMs) G Mahalingam and Madhabi Puri Buch and SEBI's chief vigilance officer (CVO) Aarti C Srivastav, also alleges that the schemes are de-jure open; however; the trustees and FTML have kept the schemes closed de-facto. "… since the schemes can become closed only after consent under 18(15) (c), the trustees cannot be permitted to seek consent under 18(15) and SEBI needs to direct trustees of the scheme to de-facto open the schemes for all unitholders," the notice seen by Moneylife says.
Further, these investors want SEBI to direct either FTML to disgorge, or pay out by trustees of FTML, out of the property held by them in trust and redress or dispose of complaints from investors pending since long.
In relation to the closure of six debt schemes by FTML, the notice also alleges FTML's action of continued write-off of the value of securities held in the portfolio.
In the notice, Advocate Jain, who was one of the intervening lawyers before the Karnataka High Court in the FTML matter, requested SEBI to suspend and cancel registration of Franklin Templeton under regulation 68 and 75A. "Franklin Templeton has committed egregious wholesale violations of the regulations, which have been enumerated in the complaints and notices issued by my clients which are with SEBI. It is therefore imperative that SEBI takes immediate action under Regulation 68 read with Regulation 27 of the SEBI (intermediaries) Regulations, 2008 as well as Regulation 75A of the SEBI (Mutual Fund) Regulations, 1996. Continued inaction by SEBI, despite observations made by the Karnataka High Court, points to implicit complicity of SEBI and its officers with Franklin Templeton," Advocate Jain says in the notice.
These investors also requested SEBI to direct FTML to redeem their investments with an interest of 15% as provided in Section 53 of the mutual fund regulations on declared net asset value (NAV) as on 23 April 2020.
We sent emails to top officials or SEBI as well as FTML. However, till writing this story, we have not received any response from them. We will incorporate their response as and when we receive it.
Meanwhile, Franklin Templeton Mutual Fund has approached the Supreme Court against the Karnataka High Court's order which said that mutual fund schemes cannot be shut without the consent of the unit holders.
In a letter to the investors, Sanjay Sapre, president, Franklin Templeton Asset Management (India) Pvt Ltd, said that post the judgement of the high court, the company considered all possible options over the last few weeks to start returning money to the unit holders in the shortest possible time in an orderly manner. This included the option of seeking the unit holders' consent according to the judgment of the high court, he said.
"However, after detailed deliberations, we have determined that it will be necessary to seek judicial intervention from the Supreme Court to ensure appropriate implementation of the law in the best interest of the unit holders," Mr Sapre told the investors.
Last month, the Karnataka High Court had said the decision of Franklin Templeton to wind up the six schemes cannot be implemented unless the consent of the unit holders is obtained.
Earlier, on 23 April 2020, Franklin Templeton had announced shutting down six debt fund schemes due poor and illiquid investments amid the coronavirus crisis, leaving lakhs of investors in a lurch. The total assets under management (AUM) of the six schemes were over Rs25,000 crore, spread across Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund. (Read: Rs30,000 Crore Stuck in Franklin India Proves Why Debt MF Scheme Categories Are Not Worth the Risk)
Subsequently in May 2020, Franklin Templeton’s global CEO Jennifer M Johnson blamed markets regulator SEBI’s October 2019 decision to allow mutual funds to invest only 10% in unlisted instruments, as one of the reasons for closing down these six schemes.
A query filed under the Right to Information (RTI) also revealed that Franklin Templeton did not take any approval from the market regulator before winding up its six debt schemes. The information was sought by Ahmedabad-based Areez Khambatta, the owner of soft drink maker Rasna, and his wife, Persis Khambatta.