Over 60% haircut in FTMF shut funds is ‘Black Swan’ event: CFMA

Describing the over 60 per cent haircut in six shut debt funds of Franklin Templeton as a ‘Black Swan’ event for three crore unit-holders of the entire domestic mutual fund industry, the Chennai Financial Markets and Accountability (CFMA), an organisation fighting for the cause of investors, on Thursday said three lakh unit-holders of Franklin Templeton Mutual Fund (FTMF) are set to lose Rs 16,000 crore out of Rs 28,000 crore invested.

“The FTMF unit-holders are not only set to lose over 60 per cent of their investments, but this will set a bad precedent for other mutual funds to go for such shenanigans which can erode the assets under management of the mutual fund industry by Rs 15 lakh crore out of the total asset under management of Rs 30 lakh crore,” the CFMA said, adding that this ‘Black Swan’ event may culminate into an Indian subprime crisis, akin to the US subprime crisis of 2008, if it is not controlled.

It reiterated that the recovery would not fetch more than Rs 12,000 crore as against the total receivable of Rs 28,000 crore and that too over a period of five to seven years. “At that time, there will be no FTMF, its President Sanjay Sapre and MD and CIO, India Fixed Income, Santosh Kamath.”

Notably, FTMF has said a majority of the unit-holders in its six frozen fixed-income schemes have voted in favour of an orderly winding-down. “Out of the total number of unit-holders who cast their votes, over 96 per cent of them have voted in favour of the winding up of the six schemes,” Sapre said in a communication to the investors.

The CFMA pointed out that FTMF has been claiming that it has realised more than Rs 13,000 crore in its six shut schemes, while its lawyers made statements before the Supreme Court that around Rs 9,000 crore are available for distribution without explaining how and where the remaining Rs 4,000 crore has vanished.

FTMF, which has front-ended the lie of COVID-19 as an excuse to abruptly shut down the six schemes, failed to explain how the pandemic reason has not been the case with its other schemes or any other mutual fund.

“The real reason for the winding up and ultimate loss to unit-holders is dubious investment decisions made by FTMF and its fund managers in connivance with trustees, AMC, KMP of the company along with the soft glove facilitation by the market regulator SEBI. This could be the main reason for FTMF to not make public the forensic audit report, despite the Gujarat High Court order. What is more surprising is the fact that even the SEBI, which has its fiduciary duty to protect the investors’ interests, has also objected to providing forensic audit reports to the unit-holders before the e-voting of six debt schemes,” the CFMA stated.

“It is of serious concern that none of the authorities, including the SEBI, has questioned the lies spread by FTMF and its fraudulent activities for winding up of six debt schemes,” CFMA said, adding that on the contrary, the SEBI was putting a stamp of approval on these lies.

By the time, according to the investor group, the unit-holders of FTMF will realise the fraud played on them, there would be no legal recourse left for them. “The regulator will escape by blaming the trustees and the trustees will escape by blaming the unit holders citing their consent to vote for the winding up.”

As a torchbearer, the CFMA believed that this issue will find its place in history, when ‘Black Swan’ event may culminate into an Indian subprime crisis, similar to the US subprime crisis of 2008. “However, there will be no recovery, as the regulator and legal processes would have already put a stamp of approval and it will set a precedent for three crore unit-holders across the mutual fund industry in India.”

The CFMA alleged that the entire e-voting process for the six shut schemes was conducted in a non-transparent and unfair manner and without the full knowledge of the findings in the forensic audit report. “Hence, the decision of unit-holders is not an informed one.”

“The SEBI’s announcement of appointing an observer was made after the voting commenced. Further, information on how many out of the three lakh unit-holders voted in the e-voting process was not provided,” the CFMA observed.

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