It is back. The Franklin Templeton (FT) saga is making news once again. And this time the senior members of the cast are in action. Vivek Kudva and members of his family, along with other senior managers in the company, withdrew their monies from the company’s schemes before they were shut in April last year. The people at the top. The ones at the helm of affairs. The key management personnel. Whatever you’d like to call them, they are the captains who jumped as the ship was about to sink. Before we start, we should briefly recap what happened in April last year (apart from the pandemic). How it all startedLast year, FT India announced that it will shut six of its debt schemes, without the investors’ consent. The schemes had combined assets under management (AUM) of around INR26,000 crore. The schemes were shut from April 23, 2020. Mark the date. This was happening for the first time in the history of fund houses when as many as six schemes were being closed so abruptly, in a day. The reason? First, the condition of the market, where the company saw no signs of improvement and, second, large redemption requests from investors leading to illiquidity at their end. The management said at that time that it wanted to protect value for the investors. Largely, the fund house blamed the prevailing financial distress due to the pandemic for the fall in its asset value. Mind you, today, the unitholders are questioning its competency given its improved financial health and cash payments that are adding to its reserves. On April 24, 2020, FT made a public statement notifying investors about the closure of its six schemes. Post the revelation that the credit schemes had invested extensively in extremely risky assets, the net asset value (NAV) of the schemes tumbled in a day. The fund of funds (FOFs) that were supposed to be quasi-solution products turned out to be riskier because they held on to these schemes in their portfolio. They fell steeper than their underlying schemes that day. The big namesInvestors, well, many of them were left high and dry, a few of them managed to withdraw a chunk of their funds from some of the six debt schemes that were wound up in April 2020, days before such closure was announced. This is where the big names come in. Most notably Vivek Kudva, head of Asia-Pacific (APAC) distribution at FT; his wife Roopa Kudva, who is the managing director at Omidyar Network India; and his mother Vasanthi Kudva withdrew INR11.60 crore, INR17.43 crore, and INR64.5 lakh, respectively, of their investments from FT AMC’s stressed schemes between March 20, 2020 and April 3, 2020, according to media reports. Vivek’s current LinkedIn profile says he was appointed head of APAC distribution from August 2020. Prior to that, he held the position of managing director, EMEA (Europe, the Middle East, and Africa) and India from April 2016 to July 2020. Interestingly, Omidyar Network India, which Roopa heads, is an impact-investment firm. But the muck goes deeper. Kudvas were not the only ones who took out money before the schemes were shut. Reports also say Sanjay Sapre and his wife also withdrew INR1 lakh and INR4.8 lakh of their investments, while trustee Arvind Sonde redeemed INR2.45 crore, and directors Jayaram Iyer and Venkata Radhakrishnan, along with his wife, withdrew INR4.56 lakh, INR71.5 lakh, and INR6.58 lakh from these very schemes. The reports also state that Mywish Marketplaces Pvt Ltd, an associate company of FT, with common directors Vivek Kudva and Alok Sethi, redeemed about INR22 crore from two of the shut schemes — Low Duration Fund and the Ultra Short Bond Fund. A report by The Morning Context states, citing auditor’s report, that Vivek had sought the details of the six fixed-income schemes vide his e-mail on March 21, 2020, including the schemes’ latest borrowings, percentage borrowing at end of day among other things, being in the nature of unpublished price-sensitive information (UPSI), which were received on March 23, 2020. Such forensic audit was commissioned by the Securities and Exchange Board of India (Sebi). What Franklin Templeton saysIn an e-mailed response, FT said that the schemes under winding up continue to have significant investment from employees and management, and all redemption applications submitted by unitholders until April 23, 2020 were processed in the normal course of business. “Our interests remain aligned with those of our investors. None of the key persons have redeemed any units post the trustees taking the in-principle decision to wind up the schemes. We have submitted detailed responses to the show-cause notice issued by Sebi. We believe it would be inappropriate to comment further on speculation and request investors not to draw conclusions based on conjecture,” an FT spokesperson says in the e-mail. “Our focus has been, and remains, on returning monies at the earliest, by supporting SBI Funds Management in the monetisation process,” the spokesperson says, adding that the schemes have already distributed INR9,122 crore to investors and have accrued another INR1,180 crore in cash as on February 26, 2021. Text messages sent to Vivek and Roopa seeking comment were not replied to at the time of publishing. A separate e-mail sent to FT seeking comment from other employees and trustees named above also went unanswered. Has it happened before?Such debt and related fund crises are not new and there have been some cases of preferred exits. In 2015, Amtek Auto defaulted on INR800 crore of bonds to scores of lenders, including JPMorgan Mutual Fund, IDBI Bank, and Axis Bank. It repaid some movie stars such as Aishwarya Rai Bachhan, moviemaker David Dhawan, and more than a score of influential rich people, treating them as first among equals. In 2010, Aditya Birla Money had lost INR103 crore on its Options Maxima strategy, and the then chief executive officer of a large private bank had also lost money in the scheme. Then there are many other examples of debt schemes facing trouble. Such as JP Morgan AMC’s limited redemptions in two of its debt funds as it had an exposure of nearly INR200 crore to Amtek Auto debt paper through two of its schemes. Bank of India’s AXA’s Credit Risk Fund also witnessed a more than 50% slump overnight in April 2020.Why do these issues pop up only in debt products?Unlike equity investments, debt schemes are marketed as fixed-income products, and are distributed as carrying guaranteed returns with capital protection to investors, who largely are non-institutional investors. Of these, high net worth individual investors are key investors. The people who invest in these instruments expect their capital to stay intact at the very least. A one-day delay in repayments can be jittery for investors. Also, in an era of falling interest rates, the convincing power of fund houses to their investors dwindles as yields come down. To grab better returns, fund houses lap up riskier assets, which is why credit-risk funds came into vogue. This has pushed up the probabilities of such a crisis globally, and not just in India. What are the regulators doing?Sebi has issued show-cause notices to FT India’s trustees and key managerial personnel based on findings of the forensic-audit report. Separately, the Enforcement Directorate has registered a case of money laundering against the company and its senior officials. What happened at the court?The Supreme Court (SC) ordered the fund house to seek unitholders’ approval before closing down the scheme. The apex court was not approached first. Cases were first filed at Gujarat and Delhi high courts. These were then directed to the Karnataka High Court, which voted in favour of the unitholders. Unhappy with the decision, FT took the matter to the SC. The apex court ruled that after seeking consent from the trustees, the fund house must seek consent from the unitholders, too. That is when all hell broke loose for FT. Until then it was the unitholder who was busted. Now FT had to flush itself out in the open and inform people the importance of the closure. It did not give the specifics, instead kept repeating the consequences of a Yes/No vote. Without any other viable option left, the unitholders chose to vote in favor of winding down the schemes. We did data crunching ourselves to get an idea about the health of the schemes. A detailed story on this can be found by following this link. From the fall in April until November, these schemes were appreciating in terms of NAV. Not only that, the NAVs of FOFs were also improving. So, we dived in deeper to understand the reasons for the rise in NAVs. First, FOFs were thoroughly rebalanced. From the risky credit schemes they shifted to corporate debt funds. And in some cases, the schemes in the FOFs were re-proportioned to adjust for the risk associated with the credit schemes. Second, in order to curb speculative trading in these FOFs, the fund house put a limit on the inflows that were effective from August 2020. Third, many of the instruments in the schemes were either marked to zero or were downgraded. Some of these instruments even defaulted in their interest payments. Accordingly, the FOFs were also rebalanced. How much money is recovered?About 300,000 investors in these six debt mutual-fund schemes, which have assets of INR26,000 crore, have been hit since April 23, 2020, when the fund house decided to wind them up. On February 12, the SC directed SBI Mutual Fund to liquidate the remaining assets in the six debt mutual-fund schemes of FT and distribute the proceeds to unitholders. After a wait of more than 10 months, investors in five of the six shuttered debt schemes of FT received a portion of their money, which was lying as cash in these schemes, in the middle of February. The fund house has disbursed a total INR9,122 crore in the five cash-positive schemes. Last week, the SC heard arguments from all sides in the matter, but while reserving its order, decided to hold the next hearing in July when the market regulator will complete its investigation into the allegations.Beginning of the end of FT in India?Well, experts are divided. However, they agree that if the allegations are true and if the employees, trustees, and relatives withdrew monies with UPSI, there was clear wrongdoing, and it was unfair to the investors who were stuck. “My simple take is I would say it doesn’t pass the smell test on the face of it. We do not know if they had the information or not,” says JN Gupta, co-founder and managing director of Stakeholders Empowerment Services. Gupta, who is also a former executive director at Sebi, says this seems to be the only known case of allegations of insider trading of this magnitude in the mutual fund-space to his memory. Can this incident sink the ship for FT in India? Gupta doesn’t think so. “I don’t think there is a problem with the core. It only requires surgical changes in its working,” he says. Not all agree. “If they have redeemed the money on the basis of sensitive information, that is a bad thing. It is like pilots jumping out of the plane, to look at their own safety. Today, we have enough examples that pilots have held onto the navigational system, and steered the plane to safety or gone down with the passengers,” says Anil Singhvi, founder of Institutional Investor Advisory Services (IIAS), a shareholder advisory firm, “The same analogy holds good when you assume the role of leadership anywhere. If the allegations are proven, they have the potential to bring down the shutters for FT in India,” Singhvi adds. Will FT pay a huge price for its captains jumping the ship? Does this have the potential to bring down shutters for FT? And we wait.
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