6B.12 Case studies

6B.12.1Franklin Templeton India winds up six debt schemes, April 2020#

Context Franklin Templeton's Indian debt schemes held large positions in lower-rated, often unlisted, corporate paper with high yields. Such paper has no active secondary market: its liquidation cost $k$ in (6B.30) is high.

Timeline [S unless stated].

• 24 Jan 2020: the schemes moved their Vodafone Idea debt into segregated portfolios after a downgrade, and marked it to zero¹.
• March–April 2020: the COVID-19 shock dried up the corporate bond market while redemptions rose.
• 23 Apr 2020: the trustees decided to wind up six schemes (Franklin India Ultra Short Bond, Short Term Income Plan, Credit Risk, Low Duration, Dynamic Accrual and Income Opportunities) under Regulation 39(2)(a) of the 1996 Regulations, citing redemption pressure and illiquidity². AUM at closure was about ₹25,215 cr³.
• 24 Oct 2020: the Karnataka High Court held that the winding up could not take effect without unitholders' consent.
• 26–29 Dec 2020: in an e-vote under a SEBI-appointed observer, more than 90% of the votes cast in each scheme approved the winding up.
• 2 Feb 2021: the Supreme Court ordered distribution of ₹9,122 cr of cash in hand, through SBI Funds Management as liquidator; 12 Feb 2021: it upheld the vote, reading "consent" as a majority of unitholders participating; 14 Jul 2021: its judgment on the appeals confirmed the majority-of-voters reading⁴.
• 7 Jun 2021: SEBI ordered the AMC to refund ₹451.63 cr of fees collected from 4 Jun 2018 to 23 Apr 2020 with 12% interest (₹512.50 cr in all), barred it from launching new debt schemes for two years and imposed a ₹5 cr penalty; on 28 Jun 2021 the Securities Appellate Tribunal stayed the refund and the ban against a ₹250 cr deposit⁵. A final SAT ruling could not be confirmed.
• 22 Aug 2023: the liquidator completed the sale of 217 securities; about ₹27,508 cr, roughly 109% of the AUM at closure, had been distributed⁶.

Mechanism In the language of 6B.10, the schemes had a high $k$ and no swing pricing for the stress, so (6B.30) made every redemption costly for the stayers and every stayer a candidate to redeem. Winding up stopped redemptions and with them the first-mover advantage: everyone was paid pro rata as assets were sold over three years. The 109% recovery shows that the problem was liquidity, not solvency: the assets were worth more than the April 2020 NAV, but they could not be sold quickly without the discount $k$.

6B.12.2IL&FS (2018) and its effect on debt funds#

Timeline [S].

• Late August to early September 2018: IL&FS group companies delayed and then missed payments on commercial paper and inter-corporate deposits.
• 8 Sep 2018: IL&FS's long-term rating was cut from AA+ to BB; 17 Sep 2018: to D (default). At 31 Aug 2018, 12 AMCs held about ₹2,283 cr of IL&FS-group paper across 32 schemes, including liquid funds⁷.
• 29 Oct 2018: a money-market fund's NAV fell 5.94% in one day when it wrote off the remaining half of its IL&FS paper⁸.
• 21 Sep 2018: a fund's sale of DHFL paper at a high yield triggered a collapse in DHFL's share price; DHFL defaulted in June 2019, and funds exposed to it took further markdowns (M06 · 6.12).
• SEBI's response: the segregated-portfolio framework (28 Dec 2018); valuation reforms that ended amortisation (22 Mar and 24 Sep 2019); the liquid-fund rules on liquid assets and exit loads (20 Sep 2019) [S].

Mechanism Before the markdowns, NAVs were stale relative to public information: $\varepsilon < 0$ was predictable. Proposition 6B.2.1(c) and Worked example 6B.2 give the transfer: investors who redeemed before the markdown were paid at the stale NAV, and those who stayed bore a larger markdown. Every reform that followed attacks a term in that formula: side pockets ring-fence the impaired asset, mark-to-market valuation shortens the staleness, and liquid-asset buffers and exit loads reduce the cost $k$ of meeting redemptions.

6B.12.3Axis Mutual Fund front-running, 2022, and SEBI's response#

Timeline [S unless stated].

• February 2022: Axis AMC began an internal investigation; 4–6 May 2022: it announced the suspension of its chief dealer and a fund manager, and the chief dealer was dismissed later that month⁹.
• 28 Feb 2023: SEBI's interim order barred 21 entities and impounded about ₹30.55 cr of alleged unlawful gains from trades between September 2021 and March 2022¹⁰.
• 1 Aug 2024: the SEBI (Mutual Funds) (Second Amendment) Regulations, 2024 required AMCs to set up an institutional mechanism to deter and detect market abuse, including front-running, with the chief executive and chief compliance officer accountable; SEBI's implementing circular followed on 5 Aug 2024¹¹. The 2026 Regulations carry this over: an AMC must "establish, implement and maintain an institutional mechanism ... for identifying and deterring potential market abuse, including front-running"¹².
• 24 Jul 2026: SEBI's final order in the matter barred the former chief dealer for seven years with a ₹3 cr penalty, barred others for three to seven years, and retained the impounded amount as disgorgement¹³.

Mechanism Front-running is trading ahead of a known large order. A fund's dealer knows that the fund will buy a large block; an associate buys first and sells to the fund at the higher price that the fund's own buying causes. The fund pays the impact twice: the normal impact of its order (M05) and the associate's profit. The cost appears nowhere in the TER, only as a lower gross return, like the hidden costs of 6B.3.3.

6B.12.4The US mutual fund scandal of 2003: stale prices, market timing and late trading#

Timeline [V where SEC releases are cited; S otherwise].

• 3 Sep 2003: the New York Attorney General filed a complaint against the hedge fund Canary Capital Partners, alleging late trading in one fund family's funds and market-timing arrangements with several others; Canary settled for $40 million ($30 million restitution and a $10 million penalty) without admitting or denying the allegations¹⁴.
• 11 Dec 2003: the SEC proposed a "hard 4 p.m. close" for orders (Release IC-26288); it was not adopted [V for the proposal].
• 15 Mar 2004: Bank of America agreed to pay $375 million (SEC press release 2004-33) [V]; other fund families settled in 2004–05 (for example Janus $100 million, SEC 2004-111) [V].
• 11 Mar 2005: the SEC adopted Rule 22c-2, which lets funds impose a redemption fee of up to 2% on shares redeemed within seven or more days of purchase and requires agreements with intermediaries to identify the underlying shareholders (Release IC-26782) [V].

Mechanism International funds struck NAV at 4 pm New York time from Asian closing prices that were many hours old. After a US rally, the expected next-day move of Asian prices was positive and predictable: $\varepsilon > 0$ in Proposition 6B.2.1(b). Market timers bought at the stale NAV and redeemed the next day; late traders placed the order after 4 pm at the 4 pm price. Zitzewitz (2003) estimated the dilution of long-term holders of international funds at 114 bp a year in 2001. Fair-value pricing (adjusting stale foreign prices for news after their close) shrinks $\varepsilon$; redemption fees act like a swing price on round trips.

6B.12.5The international and silver ETF premiums, 2022–2026#

The numbers are in 6B.9.3. Three lessons. (1) The premium measures the cost of the arbitrage that is unavailable: with creations stopped, the upper edge of (6B.26) is infinite, and the price is set by the most eager buyer. (2) Exchange price bands do not cap a premium; the 2026 price-band framework anchors bands on the ETF's own previous close, not on iNAV. (3) The investor who buys at a premium holds two positions: the index, and a short position in the premium, which collapses when the constraint is lifted (or, as in silver, when physical supply returns).