Arbitrary Actions of Franklin Templeton Mutual Fund

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The mutual fund industry in India started in 1963 with the formation of Unit Trust of India (UTI) at the initiative of the Reserve Bank of India (RBI) and the Government of India. The objective then was to introduce small investors to security market investments. Since then and until 2020, there has been a stupendous rise in number of Mutual Funds in India and also the number of schemes handled by the Mutual Funds. 

Securities and Exchange Board of India (SEBI) is the regulator of the Mutual Funds. Recently, a massive campaign has been launched by Association of Mutual Fund Industry’ (AMFI) stating “Mutual Fund Sahi Hai”. This gives an impression to the investing public that their investments are safe.

Since individuals have limited resources and understanding of securities market, Mutual Funds are considered suitable for them since in Mutual Funds, the monies of several individuals is pooled together and the Professional Fund Manager decides to invest the funds in the schemes like equity, debt, tax etc.

Influenced by the above, a large chunk of savings of common man is invested in Mutual Fund as can be seen that the total Assets Under Management (AUM) of Indian Mutual Fund Industry as on March 31, 2020 stood at ₹22,26,203 crore. 

The AUM of the Indian Mutual Fund Industry has grown from ₹ 6.14 trillion as on 31st March, 2010 to ₹22.26 trillion as on 31st March, 2020 more than 3½ fold increase in a span of 10 years. 

The total number of accounts as on March 31, 2020 stood at 8.97 crore (89.7 million), while the number of folios under Equity, Hybrid and Solution Oriented Schemes, wherein the maximum investment is from retail segment stood at 7.94 crore (79.4 million). 

This phenomenal rise in the AUM and the number of accounts increases the responsibility of the SEBI to ensure that the investments of public is safe.

The present petition is filed in the interest of all Unit Holders and more specifically the Unit Holders of Franklin Templeton Mutual Fund (FTMF) who has recently announced winding up of 6 of their schemes with about Rs. 28,000 crores of AUM under it. The list of six schemes that FTMF has announced winding up is as under:

  1. Franklin India Low Duration Fund
  2. Franklin India Dynamic Accrual Fund
  3. Franklin India Credit Risk Fund
  4. Franklin India Short Term Income Plan
  5. Franklin India Ultra Short Bond Fund
  6. Franklin India Income Opportunities Fund

These six (6) debt schemes which were abruptly wound-up by Franklin Templeton handled assets of approx. Rs. 28,000 crores invested by lakhs of unit-holders. In contrast to the Equity schemes, Debt schemes are considered more secure where the principal amount of the unit-holder is almost assured like deposits in the banks.

FTMC in their own admission have stated that the recovery of monies across the 6 schemes shall be in the range of 5% to 81% over a period of over 5 years. Given the fact that the six schemes had Rs. 28,000 crores worth assets under management, average loss to the unit-holders taking 20% as average realisation, would be around Rs. 22,400 crores. This is the size of hole in the pocket of common man where the principal amount is wiped off as against the fee of around Rs. 4,400 crores charged by Franklin Templeton Mutual Fund for managing funds.

By suspending the right of the unit-holders to redeem their investments, the decision of winding up has left the unit holders at the mercy of the Trustees of Mutual Funds for liquidating the investments and paying back to the unit-holders.

The grounds cited for winding down of the schemes i.e. market dislocation and illiquidity caused by the COVID-19 pandemic are untenable as even as of 31st March 2020, the Net Asset Value of many schemes was in negative. Further, not all schemes of FTMF are under winding up.

FTMF has used COVID-19 as an excuse to suppress the real reasons for the ill-performance of their Mutual Funds caused purely as a result of complete mismanagement and the throwing of caution to the wind by the Fund Managers of FTMF. In fact, the investments made by these Fund Managers were beyond the statutory limit prescribed. It is also not unknown that all of these six funds had written down their respective exposure to troubled bonds of Vodafone Idea Ltd and a few of these also wrote down their exposures to Yes Bank Ltd.

Initially, both SEBI and AMFI sought to justify the action of FTMF. Thanks to active media and some public-spirited institutions who made representations, SEBI was forced to initiate investigation. It was the duty of the regulator i.e. the SEBI to ensure that the concentration and exposure norms were strictly adhered to and the fund managers do not take undue risk by exceeding the limit set even for credit risk funds by huge margin. 

By abruptly deciding on closing down of the schemes, FTMF has only shattered the confidence of the public at large. This will have a cascading effect on other mutual funds as there would be redemption pressure across all Mutual Funds. Recently, the Reserve Bank of India (RBI) was forced to come out with special liquidity scheme of Rs. 50,000 crores to prevent industry-wide defaults under the redemption pressure.

Since these schemes had to be wound down despite SEBI Regulation, complex structure of monitoring, audit, supervision, governance – involving SEBI registered Asset Managers, Investment Committee, Risk Management Committee, Board of Trustees, Sponsors, it is difficult now to trust FTMF to walk the talk when it says that it wants to protect value for investors.

The Mutual Fund and the Fund Managers should be made to answer questions on their choice of investment, and compliance of regulatory and prudential norms etc. A foreign brand coming and operating in India can’t be allowed to destroy wealth of Indian investors and go scot free with impunity; it will set a bad precedent.

FTMF has stated that the decision was taken “in order to protect value for investors via a managed sale of the portfolio”. The fact of the matter is, money of the unit holders is stuck at least till maturity of each scheme. Even on maturity, there is no certainty that at least the capital of the unit holders would be returned. In all probability, the unit-holders may have to face huge hair-cut. There is also no certainty that the persons associated with the FT who are responsible for the present state of the six schemes would be around to be held accountable. With lapse of time even the investors may lose zeal to pursue the matter.

It is therefore necessary that the Fund Managers and Key Managerial Personnel of FTMF be made personally accountable for the decisions.

Being a Society formed for the protection of interest of investors, a Public Interest Litigation (PIL) is been filed in Hon’ble Madras High Court seeking for the following interim reliefs:

  • constituting a Special Investigation Team, comprising of a retired Judge of the Hon’ble Court and other independent members, which may include one domain expert, one senior ex-official of regulator, one C.A. and one technology expert to supervise investigations by SEBI in respect of the affairs of FTMF and submit report before the Hon’ble Court
  • directing the principal executive personnel, managing the schemes of FTMF to disclosure on oath, the assets and properties owned by them and their immediate families
  • restraining them from selling, transferring, alienating or in any manner dealing/encumbering or creating third party interests with their assets and properties
  • restraining them from resigning from/ leaving the employment of and / or engagement of FTMF
  • restraining them from taking up any other role or assignment with any other person
  • restraining them from leaving the country, without prior approval of the Hon’ble Court
  • directing them to rigorously pursue recoveries against entities, with whom they have invested moneys from the six debt schemes, that have been announced to have been wound up

With the abrupt suspension of the six schemes, the unit-holders who would otherwise have right to liquidate their holdings are today hand-tied and have to wait for over period of 5 years and by then the FTMC would have left Indian shores. Presently, the unit-holders are left in lurch and will not even be able to foot emergency medical bills, leave alone fulfilling their dreams for themselves and their family.

The Hon’ble Madras High Court on 26th May 2020 has entertained, taken cognizance and issued notices in a Public Interest Litigation (PIL) filed by Chennai Financial Markets Accountability (CFMA), a society in Chennai to protect the interest of investors, against the SEBI, Franklin Templeton Asset Management India Pvt. Ltd. (FTAMC), the Trustees of the Mutual Fund, Mr. Santosh Kamath, Mr. Sanjay Sapre and other KMPs and have issued notices and has also sought Status Report from SEBI on the actions taken.

This being a neutral platform, we seek the support from the unit-holders of Franklin Mutual Fund so as to showcase our unity and solidarity and also the voice of the common man reaches the right audience as the list of supporters shall then be forwarded to Franklin Templeton Investments Headquarter in USA, US Securities & Exchange Commission (SEC), Federal Reserve Board USA, PMO Office (India) & Chief Minister of Tamil Nadu.

The entire mutual fund industry has investments of approximately 25 lakhs crores from public of which Rs. 12 lakh crore is in debt. If other debt funds also follow footsteps of FTMF and the unit holders do not raise their voice, they would lose a minimum of Rs. 7.2 lakh crores out of 12 lakh crore. Loss in equity funds would be separate. So today it is only the unit-holders of these six debt schemes of FTAMC, but tomorrow it could be unit-holders in other schemes and Mutual Funds as well who may face this fate.

For long the Mutual Fund industry has been running a campaign “Mutual Fund Sahi Hai” in association with AMFI to hypnotize, mesmerize and orient the mind of the common people, who are largely middle class, that the amount invested in Mutual Funds is safe like that of Bank FD.  The small disclaimer at the end of offer document, “Investments in Mutual Funds are subject to Market Risk” does not absolve the mutual funds, its trustees, fund managers and KMPs from cheating, fraud, arbitrariness and imprudent investment decisions.

Today, though you may not be affected by Franklin Templeton but it is not too far that some other Mutual Fund would announce its winding up. Let us all wake up and rise to the occasion wherein everyone who is taking public money for granted is made to pay the price of their decisions, as SEBI though born to protect the interest of investors has not done anything to achieve it.

Stop Franklin Templeton MF from using cash flow to repay bank loans: CFMA to SEBI
The Hindu Business Line, 06 July 2020

Investor Protection Society CFMA Raises Questions On Franklin Templeton's ‘Special’ Audit, Deadline Extension
Legal Era (online) 04 July 2020

Franklin Templeton Mutual Fund cannot be allowed to make priority repayment to bank borrowings from cash flow received after closure of 6 debt schemes

Reasons why the appointment of Chokshi and Chokshi chartered accountants as special auditor for the 6 debt schemes of Franklin Templeton is an eyewash

Franklin Templeton Group caught in a quagmire of repeated regulatory violations

US SEC Report on Franklin Templeton Groups’ Regulatory Violations

Copy of PIL filed in Madras High Court