After an investigation into the unexpected liquidation of six credit funds last year, the market authority restricted Franklin Templeton Mutual Fund from launching any new debt schemes for two years on Monday. The Securities and Exchange Board of India's (SEBI) judgment is a big setback for Franklin Templeton, one of India's most famous fixed-income fund firms, with assets under administration of about $825 billion ($11.33 billion) as of March 31.
SEBI ordered the fund firm to repay more than 500 crore in investment and advisory fees, plus interest, and fined the global company another 5 crore. Franklin Templeton stated that it strongly disagrees with the SEBI's decision and intends to appeal it.
The decision to wind up the schemes "was taken with the sole objective of preserving value for unitholders, a spokesperson said in an email to Reuters. In April 2020 the company unexpectedly wound up six credit funds in India with assets under management of close to $4 billion and large exposures to higher-yielding, lower-rated credit securities, citing a lack of liquidity amid the coronavirus pandemic. That sparked panic withdrawals from other Franklin Templeton schemes as well as credit funds of other asset managers, triggered a storm on social media, and led to court cases by distraught investors.
In a statement on Monday, SEBI said the fund house had high exposure to illiquid securities across several schemes, failed to conduct adequate due diligence, and did not ensure critical investment parameters were analysed for individual issuers. The regulator also said the fund house did not take any concrete steps to manage risks of concentration, downgrades and liquidity issues of the securities in its portfolio.
“The violations appear to be a fallout of Franklin Templeton's obsession with running high yield strategies without due regard from the concomitant risk dimensions", SEBI said. Franklin Templeton was long known for its focus on lower-rated papers such as AA or A, and in turn higher yields for its investors.
But a string of defaults since late 2018 led to liquidity in the corporate bond market drying up. As redemptions soared due to the coronavirus pandemic, Templeton, faced with no demand for its lower-rated papers in the bond market, shut down the funds.