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As per Sebi rules, only persons or entities registered as 'Investment Advisors' under Sebi rules can use terms like IFA or wealth advisor to describe themselves (Reuters)
As per Sebi rules, only persons or entities registered as 'Investment Advisors' under Sebi rules can use terms like IFA or wealth advisor to describe themselves (Reuters)

Sebi intervention unlikely in Franklin Templeton’s FIR

  • AMFI requested Sebi on 28 Sep to intervene in the matter to quash criminal proceedings against Franklin

The Securities and Exchange Board of India (Sebi) is not likely to intervene in the criminal complaint registered against Franklin Templeton India and its management despite requests from the mutual fund industry, two people familiar with the matter said.

The Chennai Economic Offences Wing registered a case on 23 September against senior officials of Franklin Templeton, the company and the sellers of the bonds in which it had invested for allegedly defrauding investors when it shut six of its debt schemes. The complaint was filed in May and Mint has reviewed a copy of the FIR.

The Association of Mutual Funds in India (AMFI) requested Sebi on 28 September to intervene in the matter to quash the criminal proceedings against Franklin Templeton and its top executives. The industry body fears that criminal prosecution of bona fide investment decisions will lead to extreme risk aversion among fund managers, hurting investors, and asset management companies.

The industry body said that considering that Sebi is already investigating the case, it has exclusive jurisdiction for criminal prosecution of offences under the Sebi Act.

“Sebi can petition a high court to quash the FIR, but doing it for one AMC poses vigilance issues. The fear of a systemic concern on the industry is valid but not necessarily correct as one needs to consider the facts of the FIR. The AMC itself can approach the courts to quash the FIR if it believes that the facts are frivolous," said one of the two people cited above.

The investigation by Chennai EOW is under IPC and Protection of Interest of Depositors (PID)Act, but mutual funds are exempt from the provisions of the PID Act.

“Legally speaking parallel proceedings with penal consequences of the same nature cannot go on but it would depend on whether Sebi is investigating the matter with the possibility of prosecution or is it limited to a regulatory review. This would be entirely contingent on the facts of the FIR which could potentially be different from the aspects Sebi is investigating. Ideally if the Mutual Fund believes that the FIR is without merit it can on its own move the courts to quash it and does not require a regulator to intervene on its behalf," said Sherbir Panag, founding partner, Panag and Babu, a law firm.

In its letter on 28 September, AMFI had told Sebi that an FIR will have a detrimental effect, particularly on fund managers, who could feel threatened of being sued for their bona-fide decisions if things go wrong due to factors beyond their control.

"The fear factor and panic amongst fund managers could lead to undesirable contagion effect on the entire MF industry, such as mass resignations, over-cautious and over defensive approach towards investment decisions resulting in lack lustre performance etc. and must be avoided at any cost," it said.

The original complainant and investor body, Chennai Financial Markets and Accountability on its part had refuted AMFI's assertion.

"AMFI is turning a blind eye to the fact that the FIR was registered in full fairness and transparency—the matter was discussed in the Hon. Karnataka High Court and EOW, Chennai, was given enough time to investigate the matter following which it found merit in registering the FIR," CFMA said.

Sebi has been making efforts to ensure that bona-fide decisions by market entities do not become a subject of criminal complaints.

"Sebi had in the past made representations to various state governments that cases against brokers, market entities should be dealt by Sebi, exchanges and through the arbitration system. Sebi can make similar representations for mutual fund industry to avoid bona-fide financial decisions from becoming a subject matter of criminal complaints by states," said the other person cited above.

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