April 23, 2020 is the date that shocked about 3 lakh investors in debt mutual funds. It was the day when Franklin Templeton Mutual Fund took a drastic step of winding up six debt mutual fund schemes overnight citing poor liquidity condition in debt markets due to COVID-19 crisis.

The chaos and confusion kicked in among investors who were unable to access their money invested in these schemes. Investors were concerned about what would happen to their hard-earned money. Would they ever get their money back? If yes, then when and how?

In May 2020, SEBI appointed Chokshi & Chokshi to conduct a forensic audit after the fund house wound-up these six debt mutual fund schemes, which had combined assets worth Rs 26,000 crores. The forensic audit report submitted to SEBI in August 2020 was an eye opener. The audit report revealed some top executives at the fund house, their family members, directors on the AMC’s board, trustees, and entities linked to the fund house had redeemed their holdings in the stressed schemes shortly before they were frozen for redemptions.

As per sources, SEBI has recently sent a show-cause notice to the asset management company, key personnel and trustees. The market regulator has started adjudication proceedings into the alleged breach of Fraudulent and Unfair Trade Practices (FUTP) regulations against the officials, who are supposed to appear before SEBI over the next few weeks. The notice alleges code of conduct violations, failure of risk management processes and the inability to discharge their fiduciary responsibility towards investors in the six debt mutual fund schemes.

This is a question on the integrity of some of the top executives at the fund house who had access to unpublished information about the upcoming liquidity challenge. In the month of March 2020 and before April 23, 2020, some of the key personnel, their family members, trustees and entities linked to the fund house had redeemed their holdings together worth Rs 56 crore, before announcing the shutdown of the schemes.

The key personnel include Mr Vivek Kudva – Head of Asia Pacific at Franklin Templeton, his wife Ms. Roopa Kudva who is the managing director at Omidyar Network India, and his mother. Even the president of the asset management company, Mr Sanjay Sapre, his wife, and some of the directors had withdrawn a small portion of their investment in these schemes during the period.

The associate company of Franklin Templeton, Mywish Marketplaces Pvt. Ltd., that has common directors, too had redeemed a significant portion of its investments in the stressed debt schemes. Notably, some of these schemes were running into negative cash balance and had resorted to bank borrowing to meet the redemption pressure.

The repayment status of investor’s money in stressed debt funds

Investors have been unable to access their money in the six debt mutual fund schemes of Franklin Templeton mutual fund that were wound up last year. Many investors even parked their retirement corpus in these schemes with an aim to generate decent returns, and were relying on them to meet their day to day needs. They have to wait to get back their money stuck in these schemes.

Now after waiting for more than 10 months, there is some respite for investors. Last month, Supreme Court dismissed all petitions challenging the validity of the e-vote for winding up of six debt mutual fund schemes, thus paving way for liquidation and eventually, the distribution of assets to the unitholders in the respective schemes.

The apex court has appointed SBI Funds Management to undertake the liquidation and distribution of assets. As per the court’s order, the fund house has disbursed the first tranche of money, i.e. Rs 9,122 crore (cash available for distribution as of January 15, 2021) to the aggrieved unitholders during the week of February 15, 2021. After the disbursement of the first tranche, the six debt schemes still have securities worth Rs 17,000 crores, of which the fund house has accrued around Rs 1,180 crore in cash as on February 26, 2021.

Investors in five out of six schemes that have turned cash positive have received a portion of their money. These are Franklin India Ultra Short Bond Fund (disbursed 49.66%), Franklin India Low Duration Fund (disbursed 62.63%), Franklin India Short Term Income Fund (disbursed 8.37%), Franklin India Credit Risk Fund (disbursed 25.25%), and Franklin India Dynamic Accrual Fund (disbursed 39.78%).

Distribution of funds from Franklin India Income Opportunities Fund, which had an AUM of Rs 1,742 crore as on January 29, 2021 and an outstanding borrowing at around 5% of the AUM, can only commence once it has repaid its borrowings.

Should investors trust Franklin Templeton Mutual Fund?

The debt debacle at the fund house was primarily a result of high conviction and over confidence of the CIO and the fund managers towards lower rated debt papers and actively taking higher credit risk to generate higher yield. The winding up decision of these six debt schemes in April 2020 due to illiquidity, had already raised questions on the risk management process followed at the fund house.

If that was not enough, the actions of key personnel at the fund house failing to keep the clients’ interest first and jumping the ship at the first hint of trouble raises question on the top managements integrity and commitment towards investors.

The question also arises on the role of the risk management at the fund house.

• Did it fail to raise the flag in time after realising the debt portfolios were highly illiquid?
• Or, did it lack independence and was operating under undue pressure of the key personnel?
• Why did the top management not take timely action to mitigate the risk?

The act of some key management personnel is unacceptable, if they are actually involved in front running based on unpublished information, while about 3 lac investors were left without access to their money. Certainly, many investors have already lost their trust and confidence and have serious doubts about the process the fund house follows while managing their money.

Investors looking at quality need to first evaluate how comfortable they are holding their money in a fund house where the risk management is questionable and the key management personnel have been named in following unethical practices.

As the management at the fund house seems to have failed in keeping their clients’ interest first, chances are that many investors may lose confidence in the fund house after this act, and may hesitate to invest their hard-earned money in funds belonging to Franklin Templeton.

Trust takes years to build, seconds to break, and forever to repair. ~ Anonymous

This article first appeared on PersonalFN here