Investors plan to drag SEBI to SAT

PALAK SHAH Mumbai | Updated on August 09, 2021

Legal notices have been served on SEBI as a precursor to filing a suit in SAT   -  REUTERS

Allege violations by the fund were impossible without the knowledge of SEBI officials

Investors of Franklin Templeton Mutual Fund (FTMF) will drag the Securities and Exchange Board of India (SEBI) to the Securities and Appellate Tribunal for the alleged regulatory lapses that they say helped the fund cover up its wrongdoings and mismanagement of the six debt schemes.

Investors, who are among the original petitioners against FTMF in the Supreme Court (SC), told BusinessLine that legal notices have been served on SEBI as a precursor to filing a suit in SAT to highlight how several alleged violations by the fund would not have been possible without the active knowledge and connivance of SEBI officials.

Increase in borrowing limit

Anil Jain, partner, Kaj Associates and one of the original petitioners, said, “SEBI allowed FTMF to make changes to the net asset value (NAV) of the debt schemes several months after the schemes were shut. SEBI order stated that there was grave mismanagement of the schemes, and hence, it shows that Covid situation had no role in its shutdown. Yet, by citing Covid situation, SEBI allowed FTMF to enhance the borrowing limit of the schemes to 40 per cent against MF norms that cap it at 20 per cent. SEBI’s permission to enhance the borrowings came after FTMF had already breached the limits. The schemes were shut in April 2020 but FTMF camouflaged the existing borrowings by replacing it with a loan from another lender in August 2020. It extended the 90 days borrowing window.”

Nearly 15 months ago, FTMF announced a controversial shutdown of its six debt schemes that held assets worth more than ₹26,000 crore as on April 23, 2020. Jain says that SEBI has failed to respond to any of their complaints, legal notices and pleas in the past 15 months. Complaints were also made on SEBI’s online grievance platform SCOREs but they got no response.

The latest legal notice by investors, seen by BusinessLine, alleges that three junior SEBI officials had issued the letters enhancing the borrowing limits of FTMF in March and April.

One letter was also issued just a day ahead of the fund house shutting down the debt schemes, which has raised suspicion if SEBI had done enough due diligence before easing the norms. SEBI has to conduct regular MF inspections and investors say it failed miserably in permitting more borrowings when there was mismanagement of the schemes.

Open-ended schemes

The legal notice further states that while SEBI’s coffers could be filled with the penalty it has imposed on FTMF, no directions were issued by the regulator to ensure that the full value of the portfolio is paid back to investors with interest, as the schemes were found to be investing contrary to their stated objectives. No action has been initiated against directors of FTMF Trusteeship who permitted the winding-up. SC, in its order, said that prior investor consent was required to wind up the schemes. E-voting for investor consent was conducted nearly eight months after FTMF announced the shutdown of the open-ended schemes.

Investors can withdraw money anytime in open-ended schemes and an immediate shutdown curtails this right, experts said.

Published on August 08, 2021

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