Trouble not yet over for Franklin Templeton

Franklin Templeton has been in the news for some time now, mostly after its closure of six schemes due to redemption pressure and liquidity issues. Though the funds recovered around Rs 8,262 crore yet it’s in news all over again but this time for its overall misconduct at the management level.

The forensic audit by Chokshi & Chokshi conducted on Franklin Templeton Asset Management (India), indicated various misconduct including insider trading by the key management personnel of the asset management company (AMC). The report said that certain key personnel of the fund had redeemed their personal investments just before the formal announcement of the closure of six debt funds, making money at that time. Therefore, there are chances that Securities & Exchange Board of India (SEBI) might consider these redemptions from the perspective of insider trading regulations.

Further, the report indicated the existence of favouritism for certain companies it had invested in by not exercising the put option. This was despite the risk management committee suggesting its Chief Investment Officer (CIO) exercise the put option.

A put option gives the right but not the obligation to its holder to sell the number of equity shares at a pre-determined strike price before the option expires.

According to the report, fund managers were inconsistent in exercising the put option, where for some companies they did exercise it but for some, it did not. And this was despite a major downgrade from the credit rating of A to D in less than a year. According to the rules, fund managers can exercise the put option, when investments are downgraded by the credit rating agencies. Further, the fund managers invested in illiquid companies and did not utilise the put option, which raises questions on the conduct of the fund house that calls for SEBI investigation.