Sebi’s Franklin-Templeton ruling a defining moment

By: |
June 10, 2021 6:20 AM

It sends the right message to AMCs on need for due dilligence and respecting investors’s money

As such, the action taken by the Securities and Exchange Board (SEBI) against the FT AMC and its senior executives should come as a lesson for all players, a reminder that investors’ savings need to be respected.

The capital market regulator’s tough stance against Franklin Templeton Asset Management India (FT AMC) sends the right signals to the mutual funds sector. For too long have mutual funds had it their way, taking unnecessary risks—especially in the fixed income segment—and asking for relief at the slightest sign of trouble. Despite turning out less than ordinary returns, fund managers’ salaries have only gotten bigger. As such, the action taken by the Securities and Exchange Board (SEBI) against the FT AMC and its senior executives should come as a lesson for all players, a reminder that investors’ savings need to be respected.

FT AMC has now been barred from launching new debt schemes for two years. Monday’s order from SEBI also imposed a `5 crore penalty and asked the fund house to refund the investment management and advisory fees collected between June 4, 2018, and April 23, 2020—`512 crore—for the six wound-up debt schemes, including interest at 12 % annum. FT AMC may claim that the market conditions were unfriendly, but that can’t be an excuse; mutual funds can’t seek to be let off for destroying hard-earned savings because the markets are illiquid. That the bond market in India is relatively shallow, especially for paper rated below AA-, is well-known—with inadequate tools to hedge the risks—and the portfolio needs to be created accordingly; holding debt paper of companies that are not well-rated and could default is asking for trouble. There is little point blaming illiquidity in the market. It isn’t as though FT is a new entrant to India; as SEBI has pointed out, the fund house has been here for close to two-and-half decades.

The regulator has found FT guilty of adopting a high-risk strategy across schemes, putting long-term paper in short-duration schemes, and even not exercising exit options when a liquidity crisis emerged. Going by the order, the AMC’s valuation practices were not exactly kosher and neither was the due diligence up to the mark. From the looks of it, the risk management effort at the AMC left much to be desired. As SEBI observed in its order, simply because high-risk strategies have paid off in the past, this can’t be held to mean that they won’t fall apart in the future. In general, it would appear that AMCs in India seem to be abandoning caution as they take on high-risk strategies to grow their businesses. A couple of years ago, several mutual funds were seen to have large exposures to NBFCs, unwarranted and risky since it is well-known NBFCs have long-term assets on their books. Investors in India tend to rely on the name and reputation of a fund house, they are not really looking at every scheme closely to gauge the risk levels. One could argue they should. But it is equally important that the risk management systems are strong and also that fund managers don’t take undue risks in their quest for high returns. Requests for “side-pocketing” an exposure when a company defaults on repayments are unjustified. The FT episode is a defining moment in India’s mutual fund history, but one does not expect AMCs to mend their ways overnight. The greed for bigger AUMs must give way to better fund management practices. It is time the investor got a break.

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