Franklin Templeton’s investments were like loans, Sebi says; AMC moves SAT
Market regulator Securities and Exchange Board of India (Sebi), which investigated Franklin Templeton Asset Management Company (AMC) after announcing the abrupt closure of six debt programs with assets of around Rs 26,000 crore, said that the fund company had invested in illiquid securities without due diligence and its investments “were akin to a loan to issuers”.
âThese securities were tailor-made, opaque, high-risk corporate bonds that were rife with illiquidity. The covenants of these securities have been negotiated between the Issuer and the sole investor. Given these characteristics, these investments have characteristics closer to loans than negotiable bonds, âsaid Sebi in his decree. Pursuant to section 44 (3) of the Mutual Fund Regulations, a mutual fund should not make loans for any purpose.
On Monday, Sebi banned the fund company from launching a debt program for 2 years and asked it to repay Rs 512.5 crore for breach in connection with the closure of six debt programs last year. He imposed a penalty of Rs 5 crore on the AMC. “We strongly disagree with the findings of the Sebi Order and intend to appeal to the Securities Appellate Tribunal,” Franklin Templeton said in a statement.
According to Sebi, the fund company managed inspected debt programs similar to the credit risk fund program and in a similar fashion (in terms of investment strategy, credit rating, Macaulay duration, portfolio and fund manager) although the investment objectives of these programs are different. The debt programs inspected were projected as duration-based programs instead of credit risk fund programs, he said.
FT had not disclosed its strategy of investing in high yield securities with a credit rating of AA and A to investors of the respective debt regimes inspected.
He said that an incorrect date was taken as the assumed maturity date, the securities were valued incorrectly. In addition, Macaulay’s duration disclosed to investors was also incorrect. “By taking the interest rate reset date as the deemed maturity date, the fund company had housed many long-term securities in shorter-term portfolios and had managed to run several programs with a similar strategy.” , did he declare.
Sebi found that FT had entered into investment terms that were ambiguous and without equal rights for both the issuer and the investor. It failed to value the securities in accordance with fair valuation principles, thus failing to reflect the true realizable value of the underlying securities, Sebi said.
He did not immediately disclose the investment changes to rating agencies and credit rating agencies.