SAT stays Sebi order on Franklin Templeton
SAT stays Sebi order on Franklin Templeton

The Securities Appellate Tribunal (SAT) on Monday stayed a Sebi's order that had barred Franklin Templeton Asset Management (India) from launching new debt schemes for two years and had asked the fund house to refund a little over Rs 512 crore.

Terming the refund amount "excessive", SAT asked the asset management company to deposit a sum of Rs 250 crore in an escrow account within three weeks.

The appeal was filed against an order passed by Sebi on June 7, which said Franklin Templeton violated certain provisions of mutual funds norms in relation to the management of the six debt schemes, which are now shut.

Through the order, Franklin Templeton was directed to refund investment management and advisory fees along with interest at the rate of 12 per cent per annum amounting to Rs 512.50 crore. Further, the firm was prohibited from launching new debt schemes for a period of two years and penalty of Rs 5 crore was levied on it.

In its order on Monday, SAT noted that 21 debt schemes are still being managed by Franklin Templeton and no complaint of these schemes have come to the fore.

"The mere fact that the appellant (Franklin Templeton) have chosen to wind up six schemes does not mean that they should be debarred from launching any new debt schemes," it added.

Consequently, Sebi's direction to restrain Franklin Templeton from launching any new debt schemes for a period of two years will remain stayed during the pendency of the appeal.

As far as the refund of investment management and advisory fees is concerned, SAT is of the view that Sebi has taken the gross amount as unlawful gains.

"In our view, prima facie, this appears to be incorrect, in as much as, at best, only profits could be directed to be refunded after deducting the necessary expenses actually incurred by the appellant in managing the schemes. This factor has not been taken into consideration," it added.

According to the tribunal, the direction to deposit Rs 512.50 crore appears to be "excessive" at this stage.

"Considering the direction to refund Rs 512,50,92,534 and pay a penalty of Rs 5 crore, we direct that the appellant shall deposit a sum of Rs 250 crore in an escrow account within three weeks from today which shall be subject to the result of the appeal," the tribunal said.

If the said amount is deposited within the period the balance amount will not be recovered during the pendency of the appeal, it added.

The tribunal has direced Sebi to file a reply within four weeks and rejoinder may be filed within three weeks thereafter. The matter would be listed for admission and for final disposal on August 30, 2021.

In a separate statement, a Franklin Templeton spokesperson said with reference to the order issued by Whole Time Member(WTM) of Sebi on June 7, 2021, Franklin Templeton filed an appeal and an application for stay before SAT.

After hearing the parties, SAT has stayed the operation of the order passed by the WTM, he added.

Franklin Templeton AMC announced shutting its six debt mutual fund schemes on April 23, 2020 citing redemption pressures and lack of liquidity in the bond market.

The schemes -- Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund, and Franklin India Income Opportunities Fund -- together had an estimated Rs 25,000 crore as assets under management.

Subsequent to the decision to wind up the schemes, Securities and Exchange Board of India (Sebi) ordered a forensic audit and appointed Chokshi and Chokshi LLP, Chartered Accountants to conduct a forensic audit of Franklin Templeton MF, Franklin Templeton AMC, and trustees, particularly in respect to the six debt schemes.

Sebi in its order found that Franklin Templeton "committed serious lapses/violations with regard to a scheme categorization (by replicating high risk strategy across several schemes) and calculation of Macaulay duration (to push long term papers into short duration schemes)." Also, it committed violations in respect of non exercise of exit options in the face of emerging liquidity crisis, securities valuation practices, risk management practices and investment related due diligence, the regulator had noted.

"As a result of the irregularities in the running of the debt schemes inspected, loss has been caused to the investors. The noticee (Franklin Templeton AMC) was under a statutory obligation to abide by the provisions of the Mutual Regulations and Circulars issued thereunder, which it failed to do," Sebi had said.

According to Sebi, serious lapses and violations appear to be a fallout of the Franklin Templeton AMC's obsession to run high yield strategies without due regard from the concomitant risk dimensions, it added.

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