Mutual funds. Franklin AMC to return ₹460-cr advisory fees

Franklin Templeton Asset Management Company (FTAMC), one of the country’s largest fund houses, was found guilty by market regulator SEBI of wrongful conduct and causing loss and hardship to the investors of its six debt schemes.

On Monday, SEBI asked FTAMC to return nearly ₹460 crore it had collected as management and advisory fees from the investors of the debt schemes since June 2018 with 12 per cent interest. Further, SEBI banned FTAMC from launching any new debt schemes for two years and imposed a fine of ₹5 crore on the fund house.

The SEBI order brings to the fore a culture of mismanagement, reckless investment decisions and even unfair trading by senior officials of FTAMC. Under SEBI laws, disgorgement (return of fees) can be ordered in case of gains made from illegal or unlawful activities. It was found that FTAMC had entered into terms of investment that were ambiguous and without offering equal rights to the issuer and the investor. Valuations were not done as per set methods and there were several incorrect disclosures.

“The noticee (FTAMC ) has been found seriously wanting insofar as its conduct as an AMC is concerned. There are findings of breaches of the Mutual Funds Regulations and various SEBI circulars. Income derived out of wrongful conduct, which ultimately resulted in loss and caused hardship to the investors, is liable to be disgorged. For the impropriety committed while functioning as an AMC, imposition of penalty is also justified,” the SEBI order said.

FTAMC abruptly shut six debt schemes on April 23, 2020 and suspended redemptions in them citing losses due to the Covid-19 situation. No consent was sought from investors. Later, it was found that the fund house had for long been struggling to keep afloat the six debt schemes, which had more than ₹50,000 crore (as per early 2019 Net Asset Value) and around ₹26,000 crore as per its last NAV before they were shut. SEBI ordered a forensic audit into the dealings of FTAMC after media hue and cry and investor complaints.

SEBI said that it had found several irregularities in the running of the debt schemes, contrary to the interest of the unit holders. SEBI found dubious investments into Future Group, ReNew Power, OPJ Trading, Northern Arc Capital, Reliance Big Private Ltd, and Essel Infra Projects by FTAMC.

“The irregularities also extend to failure to exercise adequate due diligence, carry out valuation of securities as per the Principles of Fair Valuations and ensure robust risk management framework. The employees of FTAMC may be liable for irregularities arising during the course of business. SEBI has initiated adjudication proceedings against certain employees of FTAMC including the Chief Executive Officer, the Chief Compliance Officer and the Directors,” SEBI said in its order.