It is welcome that Sebi has taken stiff action against Franklin Templeton Asset Management (India) and its former Asia-Pacific head, Vivek Kudva, and his wife, for irregular, high-risk investment practices that eventually resulted in premature closure of six debt schemes and, in the case of the individuals, for benefiting from non-public information, specifically, getting out of the schemes before they were closed down by the asset management company (AMC). Sebi has also initiated action against senior members of the AMC for sharp practices. All this set an example for other AMCs. Welcome as these steps are, there are some additional systemic issues to be taken into account.
Franklin Templeton (FT) did more than most others to create a market for corporate bonds that were less than the best-rated. In this, they did a service to the Indian economy. The problem was in diffusing this risk appetite across schemes, regardless of their formal risk profile. Investors in mutual funds tend to go by the reputation of the sponsor and not at the nature of the schemes on offer, and mutual fund managers tend to take advantage of such presumed licence to take on risk. It also needs to be asked, if instruments such as credit default swaps were available, and mutual fund schemes also bought insurance against default when investing in high-risk instruments, the problem that precipitated in scheme closures would not have occurred. The responsibility for creating a functional market for credit default swaps lies with RBI, Sebi and the government, not with mutual funds.
Yet another systemic issue points a finger at the government. In a climate of low inflation and low interest rates, not just on bank deposits but also on small savings schemes, alongside a volatile and overpriced stock market, where exactly are people supposed to deploy their savings? If the government came out with inflation-indexed bonds that protected capital and interest, savers would not opt for high-risk schemes. FT was no victim of a flawed system, but let us acknowledge those flaws.