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Franklin Templeton India said that investor count has no correlation with credit quality and investments were always made after conducting extensive qualitative and quantitative research and issuer diligence. (Bloomberg)
Franklin Templeton India said that investor count has no correlation with credit quality and investments were always made after conducting extensive qualitative and quantitative research and issuer diligence. (Bloomberg)

Franklin says no violations, followed industry practices

  • Asset manager says its actions regarding six shuttered debt funds were above board
  • Basic issues against FT’s funds are the maturities of the underlying paper in two of its funds

MUMBAI : Franklin Templeton India has told the Karnataka high court its actions regarding its six shuttered debt funds were above board, and the allegations levelled against the asset manager were in fact industry practices.

In four separate lawsuits, investors have alleged the schemes were wound down abruptly and did not follow due process; and that the schemes were mismanaged and the covid-19 outbreak was just an excuse to close them. The high court will start hearing the case on 7 August.

On 23 April, Franklin shut the six schemes citing severe illiquidity and redemption pressures due to covid-19.

Investors allege the maturities of the underlying paper in its ultra short term and short term bond funds were longer than that of the funds; that it lent to issuers which had very few subscribers; and the product did not reflect the correct risk factor.

Franklin’s affidavit said the Securities and Exchange Board of India (Sebi) norms prescribe duration at the portfolio level, and that other mutual funds too follow the same practice. On risk factor, it said it tagged some funds as moderate risk when similar funds were labelled low-risk by other fund houses.

The affidavit named short-duration funds run by Axis Mutual Fund and Aditya Birla Sun Life mutual fund which have late maturities.

“In Axis Short Term Fund as of 31.03.2020, about 60 securities in the portfolio have a maturity period running beyond 3 years from 31.03.2020, with the longest maturity in 2045... For Aditya Birla Sun Life Savings Fund as of 31 March 2020, about 85 securities in the portfolio have a maturity period running beyond six months from 31 March 2020, with the longest maturity in 2025," Franklin added.

About lending to issuers with few subscribers, Franklin said the investor count has no correlation with credit quality. Investments were always made after conducting extensive qualitative and quantitative research and issuer diligence, it said.

Franklin has also been accused of lending to investors which either defaulted or suffered ratings downgrade. The fund house said these issuers suffered credit events prior to which they were stable with good credit history. “Issuers of the DHFL, Vodafone-Idea, Yes Bank, ADAG and Essel groups had a good credit history and stable credit ratings at the time of investment (DHFL (CARE AAA), Reliance Broadcast Network Pt. Ltd (CARE AAA), Vodafone-Idea Ltd (CARE AA), Yes Bank Ltd (CARE AA). There were subsequent downgrades in these securities on account of credit events," said Franklin.

“Various schemes of other mutual funds such as Aditya Birla, Axis, BOI AXA, DSP, Edelweiss, HSBC, Indiabulls, IDBI, Kotak, L&T, LIC, Mirae, Nippon India, Tata Sundaram UTI etc. also had investments in the aforesaid securities/groups," it added.

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