Franklin Templeton: Some officials redeemed investments before winding up, shows audit
The forensic audit also pointed to Franklin Templeton not exercising put options in papers despite ratings downgrade, said sourcesThe forensic audit is part of the Sebi investigation initiated into the investment decisions taken by Franklin Templeton for a period of 1 April 2018 to 23 April 2020
PremiumMumbai: The forensic audit by Choksi & Choksi ordered by Securities and Exchange Board of India (Sebi) has found that few key managerial personnel (KMP) of Franklin Templeton India withdrew their own investments before the fund house shut six of its debt schemes on 23 April. The forensic audit also pointed to Franklin Templeton not exercising put options in papers despite ratings downgrade, said two people with direct knowledge of the matter.
The put option was not exercised in the papers belonging to Essel group, Reliance group companies, among others, these people added.
“These findings of the forensic audit have been placed before a committee of division chiefs. The audit and Franklin’s response to the observations are being examined," said the first of the two people quoted above.
The forensic audit is part of the Sebi investigation initiated into the investment decisions taken by Franklin Templeton for a period of 1 April 2018 to 23 April 2020. Sebi had ordered the forensic audit in the month of May after investors complained to Sebi alleging malpractices.
On 23 April amid severe redemption pressure and illiquidity Franklin Templeton had decided to shut down 6 of its debt schemes. This impacted 300,000 investors and assets under management (AUM) of ₹26,000 crore.
The statements appearing in your email are not accurate nor has Sebi come to any such findings at this time, Franklin Templeton said in a statement.
“Our interactions with Sebi as our regulator are confidential. Inspections and third-party audits fall within the purview of Sebi’s oversight of mutual funds and we are cooperating fully with Sebi," said Franklin Templeton spokesperson in an emailed statement.
The audit pointed to unusually high and irregularities in redemptions.
Redemptions in March 2020 was an aggregate of ₹9,826 crores across the six schemes) and April 2020 (till 23 April) was ₹5,531. In comparison the redemption levels in the last financial year was ₹3,255 crores in March 2019 and ₹2,378 crores in April 2019.
“Some investors were allowed to redeem from some schemes and not from others," said the second of the two people quoted above.
One of the main issues pointed out by the auditor is that of Franklin employees withdrawing their investments from the schemes ahead of the decision to shut these schemes.
“Few KMPs of Franklin Templeton withdrew their personal investments before the winding up decision," said the first person quoted above.
“Employees who made investments in the FTMF (Franklin Templeton Mutual Fund) schemes continue to hold substantial investments in the affected schemes. We have already communicated the reasons for winding up and request our investors not to be swayed by unverified or speculative reports. We continue to follow due process, both in making investment decisions and with regard to the winding up of the funds," said Franklin Templeton in the emailed response.
“Under securities laws, trading by employees in the schemes of mutual funds where they work could be charged with front-running or insider trading, depending upon the nature of trade. If the trades are placed ahead of trades placed by the fund and in a pattern, it is front-running. However, if the trades are placed based on USPI (unpublished price sensitive information) then the insider trading charge arises. But in both cases, the provisions of code of conduct applicable to mutual fund employees gets triggered. While in India, enforcement in mutual fund arena is evolving, the US SEC has had a stellar success," said Sumit Agrawal, Managing Partner, Regstreet Law Advisors & former Sebi officer.
The audit report also says that Franklin was inconsistent in exercising put options in some of the papers belonging to Reliance Group companies, and Essel group despite ratings downgrade.
“This was despite the recommendation of risk management committee. Considering that the funds were invested in illiquid paper they should have been proactive in uniformly exercising the put option," said the second person.
A put option gives the right to the holder to sell a particular asset at a particular time and price.
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