India’s markets regulator will investigate whether Franklin Templeton’s local unit had violated rules or acted in the best interest of its investors, following the collapse of six of the asset manager’s debt funds, two people with direct knowledge of the developments said.
The Securities and Exchange Board of India (Sebi) will probe whether the asset manager had misrepresented the risk involved in investing in these funds by inaccurately classifying them as ‘income’ funds, committed a violation of the model code of conduct, and whether the fund’s investments met fiduciary requirements.
“It is to ascertain whether there was a failure of risk management,” said one of the two people mentioned above. “The queries from Sebi are on the portfolio of these six schemes, rationale for choosing these papers, extent of bank borrowing, and how liquid the underlying bonds are,” according to this person.
Typically, in such instances, Sebi audits the investment rationale and minutes of meetings of the investment committee for the past five years, the person said. The schemes allegedly did not follow Sebi’s scheme classification mandate. Credit risk funds must invest at least 65% of their holdings in securities rated below AA+, according to Sebi norms. Other types of debt schemes, including income funds, are meant to invest in higher-rated bonds.
Franklin Templeton India’s parent has also initiated an inquiry into the reasons leading to the drastic action, said the second person mentioned above. It is, however, not clear whether the inquiry has been entrusted to a third party.
{{/usCountry}}Franklin Templeton India’s parent has also initiated an inquiry into the reasons leading to the drastic action, said the second person mentioned above. It is, however, not clear whether the inquiry has been entrusted to a third party.
{{/usCountry}}The parent’s inquiries revolve around the impact of the decision on their brand, while Sebi’s probe seeks to understand the fund house’s commitment to adequate risk management, portfolio diversification, credit research and whether the funds violated Sebi’s fund categorisation norms, the person said.
“The Franklin inquiry involves questions to the Indian team about prudential steps taken by the asset manager while launching and running the schemes and whether the fund house had kept aside adequate surplus cash to meet redemption stress,” the person said.