CASE 1 – THE FRANKLIN TEMPLETON FIASCO
• Key Terms –
– Debt Mutual Funds
– Credit Risk Funds
– Duration Funds
– Credit Rating Scale
– Illiquid Securities
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CASE 1 – THE FRANKLIN TEMPLETON FIASCO
• Name of the Fund involved – Franklin Templeton Asset Management (India) Pvt. Ltd. (henceforth, FT India)
• How many Schemes affected – 6 Debt schemes
• Name of the Schemes involved –
– Franklin India Ultra Short Fund/Ultra Short Bond Fund
– Franklin India Low Duration Fund
– Franklin India Short Term Income Fund/Plan
– Franklin India Income Opportunities Fund
– Franklin India Dynamic Accrual Fund
– Franklin India Credit Risk Fund
• Date of the fiasco – 23 April, 2020
• What happened on 23 April, 2020 – FT India informed the unitholders that it had decided to wind up the above 6
schemes.
• Why Wind-Up – FT India unable to meet Investor’s redemption request post-Covid’s market correction in March,
2020.
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CASE 1 – THE FRANKLIN TEMPLETON FIASCO
• What was the “fiasco”?
– FT India was running a “Credit Risk Fund” while its investment objective was different. They were
projected as “Duration-based Schemes” instead of “Credit Risk Fund” schemes.
– Did not disclose its strategy of investing in high yield securities with credit rating of AA and A
– Did not disclose change in terms of investment immediately to valuation agencies and credit rating
agencies
– Investment in “Illiquid” securities without proper due diligence
– Making investments which were akin to giving loan to Issuers
– Board did not provide guidance or suggested any concrete steps to manage various risks (concentration,
downgrades, early warning signal and liquidity issues) of the securities in the portfolio even though it was
repeatedly reported to its Board
– Allowing a SEBI debarred entity to redeem units of mutual fund (Mr. B Hariharan, Group CFO, Avantha
Holdings, Promoter company of CG Power and Crompton – Redemption of INR 476.24 lacs) 3
CASE 1 – THE FRANKLIN TEMPLETON FIASCO
• % of holding in Corporate Bonds rated AA and below –
(Source – SEBI Filings)
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CASE 1 – THE FRANKLIN TEMPLETON FIASCO
• Common securities as a % of Total AUM –
(Source – SEBI Filings) 5
CASE 1 – THE FRANKLIN TEMPLETON FIASCO
• SEBI Order –
– Prohibition from launching any new debt scheme(s) for Two years
– Refund of investment management and advisory fees collected from June 4, 2018 till April 23, 2020 with respect to the
six debt schemes inspected along with simple interest at the rate of 12% per annum (Total Refundable – INR
512,50,92,534)
– Monetary Penalty of INR 5 Crores
• Outstanding liability towards investors –
– Total AUM of 6 schemes ~ 25,038 crores
– Investment management fees ~ 513 crores
– Total amount returned as on June’21 ~ 17,778 crores
– Balance yet Outstanding ~ 7,773 crores
• SAT Order –
– Granted relief to launch new debt schemes
– 6
Deposit INR 250 crores in an escrow
CASE 1 – THE FRANKLIN TEMPLETON FIASCO
• FT India’s Average AUM pre and post fiasco. The announcement resulted in ~40% fall in
the AUM. (Source – AMFI Data)
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CASE 1 – THE FRANKLIN TEMPLETON FIASCO
• Risk-o-meter disclosed now by FT India on these 6 schemes, which was earlier disclosed at
“Moderately High” –
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(Source – Company Website)
CASE 1 – THE FRANKLIN TEMPLETON FIASCO
• Discussion Questions –
– Why would you invest in a Debt Mutual Fund?
– Why invest in “Credit Risk Fund” at all?
– What due diligence process should be carried on as an investor / advisor before
investing in such funds / schemes?
– Can a similar saga happen with an “Equity” Mutual Fund as well?
– What would have been your (investor / advisor) first line of defense post 23 April’s
announcement?
– Do you think the SEBI’s order is justified in terms of transactional and monetary
penalty?
