Franklin settlement application in debt fund closure case rejected

The Securities and Exchange Board of India (Sebi) has rejected the settlement application of Franklin Templeton Asset Management India (FT) for allegedly violating securities law in closing six debt funds last year, said people with knowledge of the matter.

The regulator is expected to pass an order in the FT case under Sections 11 and 11B of the Sebi Act soon, they said. Sebi has wide-ranging powers under these sections, including the ability to issue directions to any intermediary or person associated with the securities market to protect the interests of investors.

‘Grave Violations’

"The forensic auditor’s report pointed out serious lapses in Franklin Templeton’s risk-management systems," said a person familiar with the matter. "Its settlement application has been turned down on grounds of grave violations."

Sebi had commissioned audit firm Chokshi & Chokshi to conduct the forensic investigation in the FT debt fund closure case.

Another person confirmed that Sebi dismissed FT’s application under Rule 5(2) of the settlement regulations of 2018. This rule states that Sebi may not settle any specified proceeding if it is of the opinion that the alleged default has market-wide impact, caused losses to a large number of investors or affected the integrity of the market.

A Franklin Templeton spokesperson told ET that the fund’s interactions with regulatory and statutory authorities are confidential.

“The adjudication process initiated by Sebi is in the final stages and we retain full confidence in the due process of law,” the spokesperson said. “We continue to cooperate with, and provide all requisite data and information as required by them. We place great emphasis on compliance with regulations, and we have appropriate policies in place, consistent with Indian regulations and global best practices.”

Sebi didn’t respond to queries.

A settlement application involves an out-of-court resolution of securities law violations. It is negotiated between the regulator and the entity concerned, without admission of guilt and without denial of liabilities, and involves the payment of a fee. The settlement mechanism is a discretionary exercise on the part of the regulator.

The Supreme Court had directed Sebi to pass its order by July based on its own investigations into the allegations of wrongdoing against FT and certain officials.

In April 2020, FT, one of India's most prominent mutual fund houses in fixed income, shut half a dozen debt funds. This resulted in ₹26,000 crore of investor money getting locked up for the next 10 months. FT closed the debt schemes due to lack of liquidity in the wake of the coronavirus pandemic.

Investors challenged FT’s move in multiple Indian courts, preventing the local arm of the US firm from distributing or monetising any assets in the six schemes.

Sebi then issued show-cause notices to FT and to its executives, initiating legal proceedings against them in connection with their decision to wind up these schemes.

Following SC’s direction, FT has been liquidating the six schemes and has distributed ₹14,572 crore to investors so far.

"Franklin Templeton’s immediate priority and focus at this time remains on supporting the court-appointed liquidator in liquidating the portfolio of the schemes under winding up and returning monies at the earliest, while preserving value," the Franklin spokesperson said.