What brought Franklin Templeton in SEBI’s crosshairs? Here’s why the fund house apologised

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Updated: May 09, 2020 3:40 PM

From wounding up six debt mutual fund schemes with an AUM of over Rs 30,000 crore, to dealing with the ire of investors, the fund house has been busy fire-fighting ever since the nationwide lockdown was announced.

On April 23, Franklin Templeton announced that it has decided to wound up six debt mutual fund schemes owing to a liquidity crisis.

It has been a tough couple of weeks for Franklin Templeton. From wounding up six debt mutual fund schemes with an asset under management (AUM) of over Rs 30,000 crore to dealing with the ire of investors, the fund house has been busy fire-fighting ever since the nationwide lockdown was announced. However, it did not end there. Franklin Templeton is now trying to soothe the market regulator SEBI, which is visibly furious over comments made by Jennifer Johnson, CEO of Franklin Templeton. Franklin Templeton’s India President has now offered an ‘unconditional’ apology to SEBI in an effort to calm the regulator down. Here’s how things have unfolded. 

Franklin Templeton closes six debt mutual fund schemes
On April 23, Franklin Templeton announced that it has decided to wound up six debt mutual fund schemes owing to the liquidity crisis emerging in the wake of the novel coronavirus pandemic. The closed down funds included — Franklin India Low Duration Fund; Franklin India Ultra Short Bond Fund; Franklin India Short Term Income Plan; Franklin India Credit Risk Fund; Franklin India Dynamic Accrual Fund; Franklin India Income Opportunities Fund. The move sent shockwaves across the industry as the unprecedented move riled investors, not just of Franklin but other fund houses as well.

The wounding up meant that the schemes would not entertain any redemption or subscription requests and not that investors had lost all their investments. Franklin Templeton, in an effort to calm down investors, repeatedly stressed on how they were committed to sell the underlying instruments in the closed schemes so that investors could get their money back.

Global CEO and President says SEBI rule ‘orphaned’ fund
It was all going as planned for Franklin Templeton, the fund house was trying to assure investors that they will get their money back. It was stressing on how the underlying securities papers were not bad and it was just a liquidity issue, not a solvency one. This is until Franklin Templeton’s President Jennifer Johnson, in an earnings conference call, answered a question detailing what went wrong at its Indias arm. 

“… the high-yield market is still very immature there. So we’ve had a large fund – it’s actually six funds that were invested with a lot of this kind of private debt. And in October of 2019, unfortunately, SEBI came out with new guidelines saying that any investments in unlisted instruments you can’t have more than 10% in a fund, and you can’t trade them. So that orphaned about one-third of our fund there,” Jhonson said.

SEBI’s strongly worded rebuke

In a matter of days, the market regulator took note of the comments made by Johnson and advised the fund house to focus on returning investor’s money. SEBI did not just stop there, it detailed the rationale behind the 2019 decision that was mentioned by Johnson. The analysis and recommendations of various working groups on risk management framework with respect to liquid schemes were placed in a meeting of Mutual Fund Advisory Committee (MFAC) in 2019, SEBI said. 

Interestingly SEBI attached the names of the members of the MFAC, that included Franklin Templeton’s India President, Sanjay Sapre. The MFAC, that had made several recommendations for prudential norms for Investment in Debt and Money Market instruments by Mutual Funds including investments only in listed NCDs and Commercial Papers (CPs) in the interest of greater transparency and accountability, according to SEBI.

‘Unconditional’ apology offered to SEBI

With over 25 years of experience in the Indian market, Franklin Templeton knew the SEBI was not impressed, and tending to that the fund house offered an unconditional apology on Friday. “It is clarified that some media outlets in India have quoted Ms. Johnson out of context, which diluted the essence of her responses. The headlines and articles erroneously suggested that Ms. Johnson stated that SEBI’s guidelines on unlisted securities was the main reason for the decision to wind up the schemes. This is neither factually correct, nor substantiated by the comments made during the conference call,” Franklin Templeton said. 

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