The securities market regulator SEBI has fined Franklin Templeton Mutual Fund, Franklin Templeton Trustee Services Private Ltd and Franklin Templeton Asset Management (India) Private Ltd ₹10 lakh for forming an “informal investment committee” and for including the international CIO in the investment committee. SEBI found that the committee violated SEBI (Mutual Funds) Regulations 1996.

SEBI conducted an inspection on October 19, 2015 of Franklin Templeton Mutual Fund of its affairs during the period from July 1, 2015 to October 15, 2015.

The inspection report revealed that the Scheme of Additional Information (SAI) of the fund mentioned that the investment committee (IC) is an “informal group” comprising International Chief Investment Officer (CIO), Head – Risk Management and Portfolio Managers.

SEBI sees violation

In its order, SEBI said “an ‘informal group’ acting as an investment committee is in violation of the circular dated September 30, 2002 as having an informal group is tantamount to not having any investment committee. Also, the explanation of the AMC that the word ‘informal’ offers operational flexibility and ability was not acceptable to SEBI. It is also not clear how far an ‘informal’ IC would take responsibility for its decisions and how far the writ of such a committee would run in the mutual fund operations; especially in context of the important functions of the Investment Committee.”

SEBI also objected to the international CIO being part of the informal investment committee, since according to mutual fund regulations, “an asset management company shall not carry out its operations including trading desk, unit holder servicing and investment operations outside the territory of India.”

SEBI turned to call log and email details between the international CIO based in the US and the Indian CIO to conclude that the international CIO “was privy to information about investment operation of an Indian mutual fund.”

Also, the minutes of the committee’s meetings do not include the name of persons who attended/ participated in the meeting and signatures on the minutes are not identified with names.

In its defence, Franklin Templeton said that “the use of the term ‘informal’ to describe the Investment Committee... does not detract from the fact that the Investment Committee is a duly constituted investment committee” and “is an integral component of FT’s board-prescribed, debt investment process.”

Investment process

Also, it said that the international CIO’s role for India was focussed on ensuring that FT’s investment process is consistent with Franklin Templeton's global best practices and that evaluating the functioning of the India operations in the broader scheme of Franklin Templeton’s global strategy and outlook. “Neither of the above functions extends to making any investment decisions and does not intrude into the domain of the specific activities of portfolio managers.”

A spokesperson for the mutual fund said, “We are in receipt of the SEBI order and will decide on the future course of action after studying the order in detail.”