Franklin Templeton: Did Forensic Audit Report Find Wrongdoings by the Management Team?

Oct 09, 2020

It has been close to six months since Franklin Templeton wound up six of debt schemes leaving its investors in a lurch. Investors in the scheme are still waiting to see the light at the end of the tunnel as Franklin Templeton has been embroiled in various legal proceedings.

To ensure speedy resolution for investors in the scheme, the Supreme Court in June transferred all legal cases relating to winding up of the six schemes to Karnataka High Court. The Supreme Court further directed that the matter must be completed within 3 months.

However, while the high court has completed hearing the arguments it has deferred the judgement. This means that FT cannot initiate the voting process yet without which FT will not be able to start repayments to investors.

It is crucial that these schemes turn cash positive so that FT can begin the process to monetize assets. Till now four out of six schemes have turned cash positive. These are Franklin India Ultra Short Bond Fund (FIUBF), Franklin India Dynamic Accrual Fund (FIDA), Franklin India Low Duration Fund (FILDF), and Franklin India Credit Risk Fund (FICRF). Franklin India Short Term Income Plan (FISTIP) and Franklin India Income Opportunities Fund (FIIOF) still have outstanding borrowings.

FT has received Rs 8,262 crore as of September 30 from the six schemes in the form of maturities, prepayments and coupons. Of this Rs 5,084 crore is available for distribution to unitholders in the four cash positive schemes.

Table: Expected timeline of payout from wound-up schemes of FTMF

(Source: Franklin Templeton Mutual Fund)

The high court's verdict is not the only worry FT is facing. If you recall, SEBI had ordered a forensic audit to find out if there had been any regulatory violation by the fund management team. The investigation may include finding out whether the fund took decisions in the best interest of the investors, whether the investments were in the spirit of rules, the rationale behind classification of funds, failure of risk management measures, any possible collusion between the found house and bond-issuing corporate among others.

[Read: Who Is to Blame for the Franklin Templeton Fiasco?]

As per media reports, the forensic audit by Choksi & Choksi has found that few key management personnel of FT withdrew their own investments before the fund house wound up the six schemes. The report has also pointed out that FT did not exercise the 'put' option in some of the papers belonging to Reliance ADAG group companies, Essel group companies, despite rating downgrade.

According to the statement given by the audit firm to the media, this was despite the recommendation of risk management committee. It further stated that since the funds were invested in illiquid paper they should have been proactive in uniformly exercising the put option.

A put option gives the holder the right to sell a particular asset at a particular time and price.

FT however has refuted these claims saying that the findings of the forensic audit are not final and might change based on clarifications provided by the fund house to auditors. According to Sanjay Sapre, president of Franklin Templeton India, "The reports regarding the findings of the forensic audit/inspection are misleading, and we believe that it is improper to make any publication regarding the forensic audit/inspection report as the matter is under the consideration of the Karnataka High Court".

(Image source: photo created by pressfoto -

​Sapre clarified that employees who had invested in the six schemes continue to have substantial holdings in them. On reports regarding put option, he said that exercising the option was not the only option the investment management team had and that they had initiated legal recovery proceedings in the case of some of these issuers to maximize recovery of proceeds.

To add to the troubles, the Economic Offences Wing of Chennai Police has registered an FIR against Franklin Templeton Asset Management India and Franklin Templeton Trustee Services for an alleged criminal conspiracy to defraud 300,000 investors by causing wrongful loss to them and unlawful gain to themselves.

FT in a press release has asked investors to not believe in unsubstantiated rumours and baseless accusations. FT said, "The books of the six impacted schemes are regularly audited by internal auditors, statutory auditors, auditors appointed by the regulators and none of them have ever made any observation regarding misutilisation of funds by the schemes".

FT has stated that the business has been carried out in compliance with the applicable laws and all decisions were taken in the best interest of our unit holders, and they are confident about the outcome of any true and fair investigation conducted in this regard.

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Warm Regards,
Divya Grover
Research Analyst

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