Why does Franklin Templetons Sanjay Sapre still advise SEBI on mutual fund regulations?
Now that the Securities and Exchange Board of India (SEBI) has penalised Franklin Templeton India and its key management personnel for mismanaging debt funds, the key question experts are asking is why the fund houses CEO Sanjay Sapre continues to be part of the regulators mutual fund advisory committee. Sapre was fined Rs 2 crore (the same as Santosh Kamath, the chief investment officer of Franklin Templetons fixed income management) for failing to ensure that the fund house followed regulatory provisions and not addressing the risk of underlying illiquid portfolio, according to the SEBI order. While Franklin Templeton has designated Sapre as President, SEBI refers to him as the CEO since he is the head of the asset management company. "It is high time that SEBI and AMFI ask Sapre to step away for the time being, said a senior industry person on the condition of anonymity. When ministers can be given temporary suspensions if they are under investigation, then why should not similar action be taken here?" Sapre, who has been with Franklin Templeton since 2001, is one of the four fund house CEOs who serve in SEBI's Mutual Fund Advisory Council. The panel also includes the Association of Mutual Funds in Indias (AMFI) chief NS Venkatesh apart from a host of mutual fund industry experts and observers. Sapre also chairs an AMFI committee on Operations, Compliance and Risk. These are the very issues on which Franklin Templeton and his own fiduciary responsibilities are being questioned. The regulator has ruled the Indian unit of Franklin Templeton, a global asset manager based in the US, guilty of wrongdoing and mismanagement of debt funds. It has asked the fund house to refund fund management charges levied on investors over the last three years on the six schemes it had shuttered in March 2020, besides separate fines on the company, its fund managers and trustees. The onus is not just on SEBI but on the chairman of the mutual fund advisory committee to ask Mr Sapre to step down, said Shriram Subramanian, Founder and MD of InGovern Research Services, a proxy advisory firm. His presence on the committee may create a conflict of interest in certain situations". SEBI, AMFI and Franklin Templeton AMC did not reply to emails seeking comment about Sapre. Franklin Templeton has denied wrongdoing. After SEBI imposed the fines on June14, it released a statement saying that the company and employees have acted in compliance with regulations and in the best interest of unitholders in discharging their responsibilities.  It also proposed to challenge the SEBI orders in the Securities Appellate Tribunal (SAT). To be sure, the CEO does not control fund management in Franklin Templeton. The investment management team  including the chief investment officer Santosh Kamath  reported not to Sapre but vertical heads in the US. However, according to Indian laws, the CEO is responsible for the fiduciary duty of the entire AMC, including the investment team. Moreover, at some time during the last two years, Franklin Templeton shifted the monitoring of portfolio risk from the Business Risk Management Committee (BRMC) to the CEO. While SEBI ruled that this in itself is not a breach of its mutual fund regulations, the shift underscores the fact that the excessive risk-taking strategy had the blessings of the top leadership. This pursuit of a high-yield, or excessive risky strategy, meant that Franklin Templeton did not take the many options it had to reduce its concentration risk and reduce exposure to illiquid, risky securities. The SEBI order said in FY19-20, the fund house called back money only three times by exercising put options while it had as many as 45 chances. This is despite the fund house itself noting "signs of stress" in late 2019. The regulators November 24, 2020 show cause notice and the latest one fining the personnel censures Franklin Templeton Indias board for not providing guidance or suggesting concrete steps to manage various risks relating to concentration, downgrades and liquidity issues. In one instance, the regulator observed that a presentation to the board by the risk management team was changed and certain concerns it raised deleted, as required by the fund manager and its team. This instance indicates that there is no independence in reporting to the board, the order noted. In Sapres case, it is also a matter of not practicing what he professed. In the aftermath of the IL&FS default, SEBIs mutual fund advisory committee had recommended that funds reduce exposure limits to single issuers. The regulator accepted these suggestions. It also said that funds should invest only in listed debt securities while progressively reducing their investments in unlisted debt paper. With Franklin Templeton planning to appeal the SEBI orders, the action shifts to the Securities Appellate Tribunal. Moreover, a few Franklin Templeton executives, including Santosh Kamat, are being investigated by the Enforcement Directorate.