Penalizing the decision makers

In a toughly worded order, SEBI has come down heavily on certain decisions made by CEO Vivek Kudva and his wife Roopa Kudva. Vivek Kudva, ostensibly, was aware of the mess in the 6 debt funds and had made huge redemptions just ahead of the shuttering. That has raised serious questions of fairness and trading on privileged information. SEBI has imposed a 1-year ban and monetary penalty, apart from disgorgement of any monetary gains made in the process by Vivek Kudva, with the privileged data. 

Coming down on the AMC too

The penalty on individuals was one side of the story. In addition, there was also a penalty on the Templeton AMC as well as a ban on the AMC launching any debt funds for a period of 2 years. While the penalty and the ban were routine, the big shift was the disgorgement order. In fact, SEBI has ordered disgorgement of Rs.520 crore of AMC fees that the fund earned since 2018 and has ordered that such amounts be refunded to the unit holders who have lost money in the six shuttered scheme. Of course, this will go through its own legal rigmarole, but it is to SEBI’s credit, that it acted tough. 

A solid deterrent measure

One can argue that Templeton isn’t the first fund to lose money for investors and will not be the last. That is right. But one cannot underestimate the huge deterrent value of this order. It is likely to impel all mutual funds to take a long hard look at how they select assets in the portfolio, how they treat their fund investors and how they communicate the story of the fund to the investors. In the case of Franklin Templeton MF, it was not just the glaring gaps in the decision-making process, but also the cavalier manner in which the officials approached the problem and dismissed it as just a normal market level risk. 

Investors must take lessons too

One thing is clear. The Templeton order by SEBI is likely to substantially improve the decision-making process at most funds and also bring about greater level of transparency in the entire process. But there is a strong lesson in it for the investors too. They must start relying on hard data and analysis and less on very peripheral issues like global reach, AMC size etc. These things do not assure that the operation and management of the fund will be entirely aligned to the interests of the investors. Mutual funds are becoming more complex  by the day and at $415 billion AUM, Indian mutual funds are coming of age. SEBI made a good start and investors now need to evaluate their MF investments better!