Market regulator Securities and Exchange Board of India (SEBI) has moved the Supreme Court (SC) against the 28th June order passed by Securities Appellate Tribunal (SAT) which stayed its decision to bar Franklin Templeton Asset Management (India) from launching new debt schemes for two years and asking the fund house to refund a little over Rs512 crore.
The market regulator might well be in for yet another head-on clash with its own appellate tribunal, which has recently been seen quashing many of SEBI’s penal orders. Earlier this year, in a similar appeal by SEBI, SC had stayed an SAT order
that had replaced the regulator's directive of monetary penalty with a warning, in a fraudulent trading case.
It has also been submitted that similar orders have been passed by SAT in many other cases, leading to several appeals being filed before the apex court by SEBI.
Separately, the SC had on Wednesday held that the trustees are required to seek consent of majority unit-holders for closing MF schemes
after publishing a notice disclosing reasons for their decision to wind up debt schemes. The top court's judgement came on a plea by Franklin Templeton challenging Karnataka High Court order which restrained winding up of its six debt schemes without obtaining the consent of its investors by a simple majority.
In its fresh appeal filed in SC, SEBI has assailed the SAT’s decision
which had termed its order on refund amount as 'excessive'. SAT had asked Franklin Templeton to deposit Rs250 crore in an escrow account as against the penalty of Rs512 crore as directed by SEBI.
The appeal in SAT was filed against SEBI's 7th June order
which said Franklin Templeton violated certain provisions of mutual fund norms in relation to the management of the six debt schemes which are now closed.
Franklin Templeton was directed to refund investment management and advisory fees along with interest at the rate of 12% per annum amounting to Rs512.50 crore. The fund house was also prohibited from launching new debt schemes for two years and a penalty of Rs5 crore was levied on it.
The SAT noted that 21 debt schemes are still being managed by Franklin Templeton and there have been no complaints on these schemes.
"The mere fact that the appellant (Franklin Templeton) has chosen to wind up six schemes does not mean that they should be debarred from launching any new debt schemes," the order said.
The Tribunal had stayed SEBI's direction to restrain Franklin Templeton from launching any new debt schemes for a period of two years during the pendency of the appeal of the AMC.
The six debt schemes -- Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund, and Franklin India Income Opportunities Fund -- together had an estimated Rs 25,000 crore as assets under management.
After the fund house announced its decision to wind up the schemes, SEBI had ordered a forensic audit and appointed Chokshi and Chokshi LLP, chartered accountant to conduct a forensic audit of Franklin Templeton MF, Franklin Templeton AMC, and trustees, particularly in respect to the six debt schemes.
SEBI in its order had found that Franklin Templeton "committed serious lapses/violations with regard to a scheme categorization (by replicating high risk strategy across several schemes) and calculation of Macaulay duration (to push long term papers into short duration schemes)."
According to SEBI, serious lapses and violations appear to be a fallout of the Franklin Templeton’s obsession to run high-yield strategies without due regard to the associated risk dimensions.