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Franklin Templeton investments were like loans, says Sebi; AMC moves SAT

On Monday, Sebi barred the fund house from launching any debt scheme for 2 years, and asked it to disgorge Rs 512.5 crore for violation in connection with the shutting down of six debt schemes last year. It has imposed a penalty of Rs 5 crore on the AMC.



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Market regulator Securities and Exchange Board of India (Sebi), which investigated Franklin Templeton Asset Management Company (AMC) after it announced the abrupt closure of six debt schemes with assets of around Rs 26,000 crore, said the fund house invested in illiquid securities without proper due diligence and its investments “were akin to giving loan to issuers”.

“These securities were bespoke, opaque and high-risk corporate bonds which were plagued by illiquidity. The covenants of these securities were negotiated between the Issuer and the single investor. Given these features, these investments have characteristics more in common with loans than tradable bonds,” Sebi said in its order. As per Regulation 44(3) of the Mutual Funds Regulations, a mutual fund should not advance any loans for any purpose.

On Monday, Sebi barred the fund house from launching any debt scheme for 2 years, and asked it to disgorge Rs 512.5 crore for violation in connection with the shutting down of six debt schemes last year. It has imposed a penalty of Rs 5 crore on the AMC. “We strongly disagree with the findings in the Sebi order and intend to file an appeal with the Securities Appellate Tribunal,” Franklin Templeton said in a statement.

As per Sebi, the fund house was running debt schemes inspected akin to Credit Risk Fund scheme and in a similar manner (in terms of investment strategy, credit rating, Macaulay duration, portfolio and Fund Manager) despite the investment objectives of these schemes being different. The debt schemes inspected were projected as duration–based schemes instead of Credit Risk Fund schemes, it said.

FT had not disclosed its strategy of investing in high yield securities with credit rating of AA and A to investors of the respective debt schemes inspected.

It said as an incorrect date was taken as deemed maturity date, the securities were valued incorrectly. Further, the Macaulay duration disclosed to investors was also incorrect. “By way of taking interest rate reset date as deemed maturity date, the fund house had accommodated many long duration securities in shorter duration portfolios and had managed to run multiple schemes with a similar strategy,” it said.

Sebi found that FT had entered into terms of investment which were ambiguous and without equal rights to both the issuer and investor. It did not value the securities as per the Principles of Fair Valuations, thereby not reflecting the true realisable value of the underlying securities, Sebi said.

It had not disclosed change in terms of investment immediately to valuation agencies and credit rating agencies.

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