Before I pose some very disturbing questions about the so-called trustees of Franklin Templeton Mutual Fund company, let us first understand how it was set up. So, Franklin Templeton Trustee Services Private Limited (FTTSPL) is a limited liability company set up on December 19,1995 as a subsidiary of Franklin Templeton Holding Limited, Mauritius. As per a trust deed dated January 4, 1996, revised on August 28, 2005, FTTSPL is meant to act as trustee for mutual funds, perform the functions and duties of a trustee, agency or fiduciary business.

I have gone through the AUDITOR’S REPORT for FTTSPL for Balance Sheet ending September 30, 2018 (excerpts reproduced at the end), and even they mention that the Management’s Responsibility includes provisions for safeguarding assets of the Company and for preventing and detecting frauds and other irregularities; and presentation of financial statements that give a true and fair view and free from material misstatement, whether due to fraud or error.

Despite that, it is shocking that FTMF closed 6 schemes amounting to Rs 26,500 crore based on final decision of FTTSPL. Interestingly, FTTSPL was advised on closure by FT AMC itself which was appointed by FTTSPL and which also had the power to replace FT AMC! Now the Trustees are trying to seek higher indemnity for protecting their personal liability when the Trustees actually failed to protect the unit holders despite their fiduciary responsibility to the extent of Rs 26,500 crore.

In the Mutual Fund industry, all support system rallies around the Fiduciary agent which are Trustees and this includes AMC, Custodians, Brokers, Banks, marketing agents of Mutual Funds, etc. But the real business is controlled by the AMC which in reality controls the Trustees though actually it is the Trustees that are supposed to be controlling all stakeholders being the Mutual Fund Fiduciary agent.

Now, here are the 9 disturbing questions that I could immediately think of:

1. Weak Trustee means freedom to FTAMC in marketing units, sale practices, deployment of investments, choice of investing companies, size of investments, timing of market sale, purchase, etc. There can be malpractices in each of these actions provided someone independent oversees these activities. What role did FTTSPL perform here?
2. If we see the Management’s Responsibility for the Financial Statements as specified by the Auditor of FTTSPL, we may see what is the magnitude of FTTSPL responsibility as a Trustee and still 6 schemes have closed. Why is SEBI not willing to question such blatant lapses by the Trustees?
3. When FTAMC advised winding up of 6 schemes what assessment was done by FTTSPL which does not have any employees?
4. What periodical assessment was being done by FTTSPL on FT AMC in the absence of its own employees to fulfil the responsibility of an agent of Unit Holders in fiduciary capacity. Strangely there was no early warning of distress ever given to the unit holders before the scheme closed.
5. In such a scenario what is the original assessment and independent work that FTTSPL does in fulfilling its fiduciary capacity as agent of 3 lakh unit holders?
6. What periodic assessment was being done by SEBI in their inspections that they could not assess such a rot in six schemes?
7. How did SEBI not see such low capitalized and nil staff organization called FTTSPL at the top of the pyramid acting in fiduciary capacity for protecting the asset of Rs 26,500 crore and 3 lakh unit holders who have suffered? The same trustees still continues to oversee the other schemes of FT AMC which have over Rs 70,000 crore of AUM.
8. Why is SEBI against sharing of forensic audit report since it would have revealed non-compliance in the absence of any fulltime employee, no expense for supervision and legal compliance’s and mere pass-through operation of FTAMC and FTTSPL?
9. How come nobody has ever questioned FTTSPL’s expenses that are only on account of its highly paid directors which includes profit sharing while unit holders are expected to absorb losses?

Excerpts from the audited report:

• Employee benefits expense – Nil
• Depreciation Rs. 178,230
• Profit related commission to Directors – Rs. 2,550,000
• Other expenses Rs 4,601,345
• No immovable properties, included in property, plant and equipment/fixed assets
• The Company has not granted any loans, secured or unsecured to Companies, firms, LLPs or other parties.
• The Company has not accepted any deposits from the public.
• Financials as on as on September,
  • 2018: Share capital - Rs 1,500,000
  • Reserves and surplus - Rs 60,130,055
  • Fixed assets - Property, plant and equipment - Rs 337,566
  • Total revenue  - Rs 22,875,145