The Supreme Court (SC) has ruled that the Securities Appellate Tribunal's (SAT) order, directing Franklin Templeton Asset Management (India) to deposit Rs 250 crore was ‘fair’. The apex court further refused to interfere with the SAT’s stay on an order passed by Securities and Exchange Board of India's (SEBI) restricting Franklin Templeton AMC from launching any new debt schemes for two years and refund a little over Rs512 crore.
The SC bench of justice Abdul Nazeer and justice Krishna Murari also recorded an undertaking by Franklin Templeton, which agreed not to launch a new debt scheme till the SAT case is closed.
However, while disposing the petition, the SC asserted that Franklin Templeton will also have to deposit Rs250 crore in an escrow account, as per the SAT order
Solicitor general (SG) Tushar Mehta, who was appearing for SEBI, contended that "The very foundation of fundamental error is wrong. We want them to deposit the amount in an escrow account. The interim order is wrong since only profits can be directed to be returned."
Mr Mehta contended that SAT failed to calculate the actual expenses, taking the amount as gross amount without calculating the asset management firm's expenses. Further, he said that based on the statutory rules, Rs 512 crore was calculated, and setting aside of this amount by SAT is 'erroneous'.
Mr Mehta also argued “It is not a stay of money decree, but also a stay on what they are not permitted...when there are facts and statistics on how Rs512 crore figure is arrived at, then if a part of the adjudicated amount is asked to be paid, then it becomes a precedent."
During the hearing, senior counsel Harish Salve, representing Franklin Templeton, stated that this is the first appeal on facts and law. "We are not saying they have wrongly identified the branch of fees. The whole thing cannot be the income. At worse, you can ask for profit," he said.
Justice Nazeer then asked how Rs250 crore was calculated?
Mr Salve responded, "Only 50%. Please read para 12. This is the first appeal on facts and law. The appreciation of facts on which SAT order has been given is wrong." He also alleged that SEBI had misled the apex court by saying 'similar matters are pending'.
Turning down SEBI’s appeal against the SAT order
, the apex court eventually ordered "Mr Salve and Mr Singhvi submits that Franklin Templeton AMC will not launch any new debt schemes till the disposal of appeal pending before SAT, Mumbai. The submission is taken on record. We are not inclined to interfere with the order regarding the payment of Rs512 crore.
"Appeals are accordingly disposed off. Four weeks' further time is given to SEBI before SAT, Mumbai. We direct SAT to dispose off matter expeditiously as possible."
The SAT had also stayed the SEBI's order
, restricting the fund house from launching any new debt scheme for two years.
SEBI had earlier also asked Franklin Templeton to refund investment management and advisory fees of Rs512 crore, including interest, collected towards its six debt schemes, which were shut down last year.
In its order, SEBI stated that Franklin Templeton "committed serious lapses/violations with regard to a scheme categorisation (by replicating high-risk strategy across several schemes) and calculation of Macaulay duration."
Serious lapses and violations appeared to be a fallout of the Franklin Templeton AMC's obsession to run "high yield strategies without due regard from the concomitant risk dimensions," the SEBI order said.
Last week, Franklin Templeton had indicated that it has complied with the conditions prescribed by the SAT order pertaining to the restrictions imposed by SEBI on the fund house.
In a letter to investors, Sanjay Sapre, president of Franklin Templeton AMC said, "The restriction on launching any new debt schemes for a period of two years shall remain stayed during the pendency of the appeal. We have complied with the conditions prescribed in the SAT order and the matter is listed on 30 August 2021, for further hearing."
The six debt schemes — 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 — together had an estimated Rs25,000 crore as assets under management.
According to SEBI, serious lapses and violations appear to be a fallout of the Franklin Templeton AMC’s obsession to run high-yield strategies without due regard of the risks involved.
After the decision to wind up the schemes, SEBI ordered a forensic audit and appointed chartered accountants (Cas) Chokshi and Chokshi LLP to conduct a forensic audit of the company and its trustees, particularly with respect to the six debt schemes.