Franklin Templeton debt schemes: SEBI bans Vivek Kudva, wife from accessing securities market for 2 years; imposes 7 crore fine

The Securities and Exchange Board of India (SEBI) has barred senior official of Franklin Templeton Vivek Kudva, his wife Roopa Kudva from accessing the securities market for two years after finding them guilty of unfair trade practices..The duo were proceeded against after redeeming units in certain schemes of the now wound up Franklin Templeton mutual funds debt schemes while allegedly being privy to material non-public information..This, in the eyes of the markets regulator, was in contravention of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations)..On April 23, 2020, the trustees of Franklin Templeton informed the unit holders of six schemes that it was winding up the schemes. After conducting a forensic audit, SEBI found that the husband-wife duo, along with Vasanthi Kudva (Vivek's mother) had redeemed units in the debt schemes between April 1, 2019 and April 23, 2020..SEBI observed that as per the Supreme Court's ruling in SEBI v Kanaiyalal Baldevbhai Patel & Ors, that front running by non-intermediaries would come within the ambit of ‘fraud’ under regulation 3 and 4(1) of the PFUTP Regulations. The Court had also observed that the scope of the term ‘unfair trade practise' is wider than that of the term ‘fraud’ and activities which do not satisfy the parameters of ‘fraud’ could independently be proceeded under Regulation 4(1) if it can be considered as an ‘unfair trade practice’..While stating that it could not be proved that the Kudvas committed fraud, SEBI found them guilty of unfair trade practices. The order states,"The timing of the trades is also a crucial circumstantial evidence in this case. It can be noted that the trades by Noticee No. 2, who is the wife of Noticee No. 1, was undertaken on March 23, 2020 and March 24, 2020- i.e. the trades were done in close proximity to the dates when Noticee No.1 started redeeming his investments as well as that of Noticee No. 3. It is further seen that on March 24, 2020, both Noticee No.1, on behalf of Noticee No. 3, and Noticee No. 2 were redeeming units. It needs to be borne in mind that Noticee No. 2 is also an experienced finance professional in her own right. Given her experience, she was expected to be aware of the sensitivity of the transactions undertaken by Noticee No. 1, being a key functionary of the AMC with access to material non-public information and its implications.".The order further states,"Having made a sizeable investment in the Impugned Debt Schemes, Noticee No. 1 should have upfront declared his investments to the AMC and should have sought to recuse himself from any decisions related to the Impugned Debt Schemes. Further, he should have refrained himself from accessing any non-public information relating to the schemes, material or non-material. Far from recusing himself, the Noticee went about seeking non-public information like liquidity profile, redemptions, concentration etc. which are critical indicators of the failing health of the debt schemes under winding up. Hence, I am constrained to note that conduct of Noticee No. 1 in redeeming units in the Impugned Debt Schemes while in possession of material non-public information is not in line with the high ethical standards expected of a person vested with such quasi-fiduciary responsibilities.".The following directions were thus issued:Noticees to transfer 75% (Rs. 8,60,18,952) and 73%(Rs. 14,04,06,821) of the amount received from the redemption of units in IOF and STIP, respectively, within 45 days in an interest bearing Escrow Account marking a lien in favour of SEBI Noticee No.1 (Vivek Kudva) and Noticee No. 2 (Roopa Kudva) shall be restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of one (1) year from the date of this order. Noticee No.1 shall be liable to pay a monetary penalty of Rs 4 crores for the redemptions undertaken on his own behalf and on behalf of Noticee No. 3 (Vasanthi Kudva), and Noticee No. 2 shall be liable to pay a monetary penalty of Rs 3 crores..[Franklin Templeton debt schemes] ₹9,122 crore to be distributed among unitholders through SBI Mutual Funds: Supreme Court.Vivek Kudva and his family were represented by Darius Khambata, Senior Advocate and Mustafa Doctor, Senior Advocate..[Read the order].Also read, SEBI order In the Matter of Inspection of Six Debt Schemes of Franklin Templeton Mutual Fund