Franklin Templeton Under Scrutiny: ED Conducts Searches in Mumbai and Chennai.

Franklin Templeton Under Scrutiny: ED Conducts Searches in Mumbai and Chennai.

The Directorate of Enforcement (ED), responsible for investigating foreign exchange and money laundering offences, conducted searches against Franklin Templeton Asset Management (India) Pvt Ltd on March 16.

The agency searched the residences of individuals linked to Franklin Templeton, including Vivek Kudva, former head of Asia-Pacific (APAC) distribution, and his wife Roopa Kudva, who heads Omidyar Network, India. Additionally, the team was present at the residence of Santosh Kamath, Chief Investing Officer-Fixed Income at Franklin Templeton Mutual Fund.

Sources claim that the searches are related to executives taking out personal funds from a few of the six debt programmes that Franklin Templeton India abruptly ended in April 2020. According to the Franklin Templeton Asset Management spokeswoman, the company continues to work with all legislative and regulatory authorities and provides them with all the data and information they need.

The spokesman further emphasized that the business places a high priority on following rules and that it has policies in place that are compliant with Indian law and international best practices.

The ED’s searches against Franklin Templeton have caught the attention of the Indian financial industry and sparked discussions about the regulatory framework and transparency in the mutual fund industry. The searches have also raised questions about the consequences for individuals and companies that violate regulations and indulge in illegal activities.

The Debt Schemes’ Winding Up

In April 2020, Franklin Templeton India announced the winding up of six debt schemes, which were facing severe liquidity issues amid the COVID-19 pandemic. The schemes had a combined asset under management (AUM) of around Rs 25,000 crore ($3.4 billion). The winding-up led to a massive outcry from investors who were left with no access to their investments, and they have since then been awaiting their funds’ return.

The winding up of the debt schemes also led to a legal battle between Franklin Templeton India and the Securities and Exchange Board of India (SEBI). SEBI, a regulatory body in India that keeps an eye on the securities market, barred Franklin Templeton India from launching any new debt schemes for two years in December 2020. The regulator had also imposed penalties of Rs 15 crore ($2 million) each on Franklin Templeton India and its CEO Sanjay Sapre, among others.

In August 2021, the capital market watchdog Securities and Exchange Board of India (SEBI) ruled the fund house and the officials—among them Kudva, Kamath, and others—guilty of mismanaging debt funds, which resulted in the abrupt and unceremonious winding up and locking away of investors’ money.

It has been reported that the ED is executing these raids because high-ranking officials withdrew their own money from these schemes before the public announcement of their closure. On July 28, 2022, Kudva left the company after 16 years.

According to the sources, the agency is also attempting to collect evidence as part of its investigation against the company and its promoters in accordance with the Prevention of Money Laundering Act (PMLA).

SEBI crackdown

Franklin Templeton startled both investors and the MF sector by closing six of its debt schemes in April 2020. It halted redemptions and announced that it would sell the underlying securities and give investors their money back.

During a probe, the SEBI discovered that Vivek Kudva, who at the time oversaw EMEA, and his wife Roopa withdrew Rs 30.70 crore from the six debt funds just before they were closed.

In a series of specific orders issued in August 2021, SEBI also found the fund house, its trustee business, and eight other top fund house executives accountable for the improper administration of debt money. The behaviour of Kudva and his wife was under investigation by SEBI.

The regulator fined Franklin Templeton Rs 5 crore for “many irregularities” in administrating its six debt programmes. The fund house was required to return the investment management and advisory fees it received between June 2018 and April 2020, totalling Rs 451 crore (Rs 512 crore after interest).

Along with these restrictions, SEBI barred Vivek and Roopa Kudva from engaging in any type of association with the securities market for a year, including accessing the market, buying, selling, or otherwise transacting in securities.

The SEBI ruling barring Kudvas from accessing the capital markets was delayed by the Securities Appellate Tribunal (SAT). The orders were disputed by Franklin Templeton MF as well as the SAT, which is hearing the matter.

Response from Templeton

According to Franklin Templeton India, the six schemes that are being wound up have already dispersed Rs 26,931.27 crore to unitholders as of March 16, 2023, corresponding to 106.81 per cent of the aggregate declared AUM value as of April 23, 2020.

According to the six funds’ respective declared AUM values as of April 23, 2020, the amount that has been distributed thus far ranges from 99.32 per cent to 112.46 per cent.

“Each scheme’s Net Asset Value was higher at the time of distribution than it was on April 23, 2020. When the winding-up decision was made on April 23, 2020, five of the six funds had returned more than 100% of the AUM.

Only one issuer has three performance securities left to be liquidated in the remaining two schemes, while all performing securities have been liquidated in 4 of the six schemes, “explained the spokeswoman for the fund institution.

What Does This Mean for Franklin Templeton?

Franklin Templeton India wound up six debt schemes suddenly in April 2020, which led to a lot of uncertainty and anxiety among investors. The ED’s raids are a continuation of the investigation into the winding up of these schemes. The officials being searched are accused of withdrawing their personal money from the schemes before the winding up.

Franklin Templeton has been facing much scrutiny over the winding up of these schemes, and the ED’s searches are just the latest in a series of investigations into the matter. The Securities and Exchange Board of India is also looking into the situation and has penalized the business.

The Need for Transparency and Accountability

The ED’s searches against Franklin Templeton highlight the need for transparency and accountability in the mutual fund industry. Mutual funds combine the capital of retail and institutional investors to purchase stocks, bonds, and other financial instruments. Throughout the past ten years, India’s mutual fund market has experienced significant expansion as AUMs crossed Rs 33 lakh crore ($450 billion) in February 2022, up from Rs 7 lakh crore ($95 billion) in March 2010.

Thoughts concerning the industry’s lack of accountability and transparency have also been expressed due to its expansion. Mutual funds charge fees from investors for managing their money, and investors rely on the fund managers’ expertise and diligence to generate returns on their investments. Investors expect mutual funds to adhere to ethical and legal standards and provide them with accurate and timely information about their investments.

The SEBI, which establishes rules and regulations for the industry participants, regulates the mutual fund sector in India. The regulator has proactively ensured that mutual funds adhere to the regulatory framework and penalize them for non-compliance. However, the Franklin Templeton case highlights the need for more stringent regulations and oversight to protect investors’ interests.

The ED’s searches at the residences of officials linked to Franklin Templeton Asset Management (India) Pvt Ltd are a continuation of the investigation into the winding up of six debt schemes in April 2020. The officials being searched are accused of withdrawing their personal money from the schemes before the winding up.

Franklin Templeton has been facing much scrutiny over the winding up of these schemes, and the ED’s searches are just the latest in a series of investigations into the matter. It is yet uncertain how these investigations will turn out, but it is clear that Franklin Templeton’s reputation has taken a hit due to these developments.

Edited by Prakriti Arora