The Securities and Exchange Board of India (Sebi) has hired the services of a chartered accountant and forensic audit firm to probe into the dealings of six mutual fund schemes that were shut down by Franklin Templeton, one of India’s leading asset managers.
“We are in receipt of the audit notice from the Regulator and continue to provide information as required,” said a Franklin Templeton Spokesperson.
The Mumbai-based Chokshi & Chokshi LLP, which advises on tax, accounting, risk, and due diligence among other things, has been given the assignment, sources told ET.
The firm is likely to investigate if there were collusion between the found house and bond-issuing corporates, instances of conflicts of interest of directors or senior officials, and transactions that were prejudicial to the interest of investors in the schemes.
Sebi has asked Chokshi & Chokshi to submit its report in 30 working days.
“The scope is unlimited. They have to look at all aspects and examine if there have been any regulatory violations… whether the fund house followed the rules in spirit, whether there has been circumvention of rules on fund management,” said a person.
The wound-up schemes which are no longer available for redemption after 23 April, 2020, include: Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Fund, Franklin India Credit Risk Fund, Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund.
Amid hue and cry raised by investors for the decision, Franklin Templeton was criticised for running all the six schemes as ‘credit risk funds’, which have majority of investments in papers with lower credit rating. Though not a violation of regulations, it brought to the fore the sharp practice of the fund managers. This was because in laying down the rules to categorise debt mutual funds, Sebi specified the duration of the securities but not the credit ratings for debt scheme papers.
It was further reported that large portions of investments in the funds in question comprised bonds and securities issued by companies belonging to certain business groups. Besides, the schemes had sizeable exposure to unlisted papers.
It was a widely shared perception in the industry that even if the Franklin star fund manager had taken care of the credit risk, he disregarded the hazards of waning liquidity. This came to haunt the schemes when it was unable to sell the papers in a market that froze in the wake of Covid-19.
“The regulator’s decision to order a probe may be significant. Till now, it has not indicated any foul play,” said an industry person. In a press release issued on May 7, Sebi said it has advised Franklin Templeton to focus on returning money to investors in the six debt schemes which were shut down. According to the process required under law, Franklin is reaching out to investors of these schemes to seek their consent to wind up. If majority of the investors approve the decision, the fund house will sell the securities as and when it feels the market is right and return money to investors.
News Source: Economic Times