A couple of days ago, The Economic Times reported that Franklin Templeton Mutual Fund (FTMF), caught in serious mismanagement of six debt schemes, is using diplomatic channels to pressure the Indian government to go soft on it. It has also threatened to pull out of India if it fails to get a ‘just and fair hearing’ or is slapped with hefty penalties or disgorgement.
A quick recap would put things in perspective. FTMF suddenly announced the winding up of six debt schemes with assets ofRs25,000 to Rs30,000 crore, putting the investment of over 300,000 people in jeopardy. A year later, investors have fought a bruising battle for justice, during which the Karnataka High Court as well as the Supreme Court have chided the Securities and Exchange Board of India (SEBI) for its failure to act swiftly and proactively to protect investors. While activists battled for justice for investors, we have the strange spectacle of an orchestrated social media campaign to question their motives and tarnish their efforts.
Meanwhile, SEBI continues to hide the report of a forensic audit of FTMF and has not initiated any action in the past year, even though leaks of the audit findings, published by the morningcontext.com and moneycontrol.com, indicate serious breach of fiduciary duty by FTMF, suppression of concerns raised internally and possible front-running in the form of hefty redemptions by senior management just before it shut the six schemes.
To put FTMF’s actions in perspective, this is not the first time US companies have used diplomatic channels to arm-twist the government to go soft on them, but it happened a lot more in the 1990s, when India was economically weak, had just been bailed out by the World Bank and was under pressure to open up and liberalise the economy. Today, India is one of the big markets for global companies; but, more importantly, the US is no longer the lone superpower. Worse, the accounting scandals of 2001 and the global financial crisis of 2008, which bankrupted nations, has considerably weakened its moral authority to question or lecture sovereign nations, as it seems to have done on behalf of FTMF.
FTMF’s foolish and misguided attempt to play victim must be seen in the context of how often US companies have been allowed to get away lightly. The most egregious example is Union Carbide, which benefited from political pusillanimity and collusion to get away with a paltry penalty after the Bhopal gas tragedy, which killed 15,000 people and left thousands of others with lifelong health issues.
Securities Scam and US Banks
In 1992, Citibank and other US banks were neck deep in illegalities but got away with minor penalties (along with all several other foreign banks) because India desperately needed their support to deal with its foreign exchange crisis. Many foreign banks openly violated Reserve Bank of India (RBI) rules and one senior Citibank executive had said, “RBI guidelines are just that, guidelines. Not the law of the land.” Then too, the banks lobbied the US government and the media, so much so that the Financial Times had reported how foreign banks are easy prey in ‘nationalist-minded’ India. In the end, they paid paltry penalties and moved out senior officials, often with a golden handshake.
Enron Inc in the 1990s
As the Indian economy was beginning to open up, Enron Inc, through a blitzkrieg of media management and political lobbying, signed a sweetheart deal to produce power in Maharashtra through the Dabhol Power Company. The contract gave it a high internal rate of return backed by a sovereign guarantee. The Enron deal became the basis of our power policy that guaranteed super-returns to all independent power producers. Thirty years later, we Indians continue to pay the price for those follies in the form of extremely high power tariffs.
But dirty politics in Maharashtra did not end with a change in the state political regime. So the BJP-Shiv Sena government first cancelled the Dabhol contract, causing global embarrassment and then re-negotiated a project that was three times bigger. But before Enron’s crooked ethics and sleazy dealings were exposed globally and it finally went bust, it hadn’t hesitated to use its enormous political clout to lecture and threaten the Indian government.
Enron was a big contributor to President George Bush’s campaign and US ambassadors Frank Wisner and Robert Blackwill openly lobbied for the company and had no hesitation in hectoring India about the deal. An abrasive Blackwill warned that the Enron disputes "feeds a chronic perception among the overseas investing community that India may not be ready yet for big-time international investment.”
The US Energy secretary also warned India that failure to honour the Enron deal would jeopardise not only other private power projects. History shows that Enron ended up embarrassing the US government and paved the way to the many accounting scandals that followed. As an aside, Frank Wisner had later joined the Enron board of directors.
Morgan Stanley Mutual Fund
Since FTMF, in its lobbying effort through diplomatic channels, has claimed that it is one of the few asset managers not to have ceased operations in India, we need a little reminder about Morgan Stanley Mutual Fund, which was one of the first to set up shop and also exit from India after it lost peoples’ trust.
Morgan Stanley Mutual Fund first came to India as a 50:50 joint venture with SBI Mutual Fund, for an offshore scheme. The venture came apart when SBI officials discovered that it slipped in a clause into the deal giving it veto powers over investment decisions, effectively making it the dominant partner in the deal. In 1994, it debuted as the first foreign fund in India. Its managers played on the ignorance of Indian investors to whip up a fake frenzy about the scheme. Its Rs10 units were selling at a premium in the grey market and investors stood in serpentine queues in pouring rain to put Rs1,000 crore in its hands, because allotment was to be on a first-come-first-served basis and people were expecting a spectacular performance from the storied fund house. Far from opening at a premium, the net asset value (NAV) of the close-ended scheme did not touch the issue price for over a decade! Investor anger was so high that the fund house could not launch a second scheme for a very long time.
Here’s what Debashis Basu wrote in his book Face Value in 2003: “Over the next few years, Morgan changed several fund managers amid whispers of their arrogance, wrongdoing and nexus with brokers. One Morgan fund manager was rumoured to have got the broker-research reports piled up on his desk, called in his secretary and with a wide swipe of a wooden stick flung the reports on to the ground. That was the way he wanted his secretary to treat research reports from brokers.” Unfortunately, “many of the stocks in Morgan’s portfolio were part of the garbage that comes to surface in a frothy market” and, between 1997 and 2000, despite desperately revamping its portfolio, Morgan Stanley had delivered a 3% return on its 20-year scheme. The fund house never regained investors’ trust that was lost by its arrogant hyped up entry and poor performance. In 2014, it finally sold out to HDFC Mutual Fund. Even today, Morgan Stanley remains a cautionary tale for the industry on how not to fool investors. A lesson that FTMF has clearly failed to learn.
Who Walked Out and Why?
As for FTMF’s claims about foreign asset managers having walked out of India, this too needs some perspective. In 2015, Reliance Capital Asset Management acquired Goldman Sach’s mutual fund business in India for Rs243 crore. At that time, Fidelity (acquired by L&T Finance), Daiwa, ING, PineBridge, Morgan Stanley (acquired by HDFC Mutual Fund) and Deutsche Mutual Fund had quit India and Nomura was making plans to sell to Life Insurance Corporation of India. But many Indian asset management companies also sold out; these included IDFC, Sahara, Cholamandalam and, more recently, Reliance (acquired by Nippon).
Meanwhile, thanks to falling interest rates on bank deposits, real estate prices having spiralled out of reach (before COVID-19) and a raging bull market in stocks, investor interest shifted to mutual fund schemes. The total assets under management of the Indian mutual funds is up 2.5 times—from Rs13 lakh crore in 2015 to Rs32 lakh crore (as of February 2021)—in just over five years. Maybe it is time for FTMF and other US fund houses to think again before attempting to evade the consequences of questionable practices in India by arm-twisting the government.