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Sebi fines Santosh Kamath, Sanjay Sapre and other debt fund managers in Franklin case

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In another blow to Franklin Templeton AMC, Sebi has decided to fine the CEO, CIO, debt fund managers and other top officials in the case of shutting down of six debt mutual fund schemes in 2020. Sebi has decided to put a monetary fine of Rs 3 crore on CEO Sanjay Sapre and CIO- Santosh Kamath. Other debt fund managers of Templeton- Kunal Agarwal, Sumit Gupta, Pallab Roy, Sachin Padwal Desai and Umesh Sharma will be liable to pay a fine of Rs 1.50 crore each.

In addition to the above, SEBI also fined the trustee company a sum of Rs 3 crore and Saurabh Gangrade, Chief Compliance Officer, Franklin Templeton, a sum of Rs 50 lakh. Sebi in the order said that the forensic audit report found that Franklin Templeton violated several regulations in the management of the six shut debt schemes.

“There were similarities in investment strategy though the investment objectives were differing in the six wound up schemes. This was observed by way of common fund managers, high exposures in “AA and below” corporate bonds in all the six schemes even though investment objectives as per the SIDs of these schemes are different. Further, as per the portfolio holding data, most of the securities are rated AA or below at the time of investment. In addition, there was concentration of similar securities across schemes under audit where investments were made over 70% of the issue of such debt securities and most of the investments which were made in schemes were common at time of investment,” said Sebi in the order.

Sebi also said that the practices related to interest rate reset papers and incorrect calculation of maculay duration allegedly violated the Santosh Kamat, Kunal Agarwal, Sumit Gupta, Pallab Roy, Sachin Padwal Desai and Umesh Sharma. “In 42 instances (for FI-UBF) and 17 instances (for FI-LDF), exit options were in fact not exercised where available in FI-UBF and FI-LDF,” the order noted. Sebi also said that FT MF failed to ensure that the changes in terms of investments are made available immediately for disclosure to valuation agencies and credit rating agencies and also for correct disclosure of portfolio to the investors.

Sebi further noted that Franklin Templeton failed to carry out due diligence with respect to investments in illiquid securities and it was also observed that the pattern of investment transactions is akin to giving loan to issuers. “No concrete steps were taken or guidance was provided in managing various risks viz., concentration, downgrades, early warning signal and liquidity issues, of the securities in the portfolio. Removal of investment risk monitoring from Business Risk Management Committee (BRMC) and lack of independence of risk management function was observed,” Sebi order said.

The order also said that FT failed to ensure that Investment Process Note (IPN) contains detailed objective criteria for investment and also failed to ensure appropriate policy to have pro-rata allotment of partial buyback to all the schemes.

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