Franklin Templeton India froze six debt funds in 2020; SEBI fined it ₹512 crore

On April 23, 2020, Franklin Templeton India announced it was voluntarily winding up six yield-oriented credit funds holding nearly ₹30,000 crore, citing heavy redemption pressure and dried-up liquidity in India's bond markets during the COVID-19 collapse. The six schemes — Low Duration, Dynamic Accrual, Credit Risk, Short Term Income, Ultra Short Bond and Income Opportunities — had already written down exposures to Vodafone Idea and Yes Bank bonds, and most ranked at the bottom of their categories with negative one-year returns.

Investors in the six funds were locked in with no redemptions; money would come back only as the portfolios' bonds matured or were sold. A Supreme Court ruling required unit-holder approval for the wind-up, and in January 2021 more than 90% of investors voted for closure. By January 15, 2021, the schemes had received ₹13,789 crore from maturities, pre-payments and coupons, and distributions finally began.

SEBI's June 2021 order found serious lapses: the fund house replicated a high-risk strategy across six schemes, pushed long-term papers into short-duration funds, failed to exercise exit options as liquidity drained, and fell short on valuation and risk-management norms. SEBI fined Franklin Templeton ₹5 crore, barred new debt schemes for two years, and ordered it to refund management and advisory fees collected since June 2018 at 12% interest — about ₹512 crore — to unitholders.

In a separate order, SEBI found that Franklin's India director Vivek Kudva, his wife and his mother redeemed ₹30.70 crore from the schemes while in possession of material non-public information; it fined them ₹7 crore, ordered ₹22.64 crore deposited in an escrow account, and banned them from the market for one year.

≈₹30,000 crore locked in six schemes; SEBI fined ₹5 crore, ordered ₹512 crore of fees returned, barred new debt schemes for 2 years; fund-house AUM fell 36% in a quarter

The same high-risk credit strategy ran across six schemes, so one liquidity shock hit them all at once

Portfolios were heavy in low-liquidity AA/A-rated bonds, including troubled Vodafone Idea and Yes Bank paper, which could not be sold in a panic

SEBI found Franklin did not exercise exit options or keep valuation and risk controls up to the strains building since 2018

Redemptions from the whole credit category had already reached about ₹5,500 crore in March 2020, making the run foreseeable

A credit fund holding illiquid lower-rated paper is a liquidity mismatch: when redemptions spike, nothing can be sold fast. Yield, size and reputation do not save a fund when markets stop trading.

Franklin said it would appeal the order to the Securities Appellate Tribunal, which later stayed parts of it. By June 2021 the six schemes had returned 71% of their April 2020 AUM to unitholders, with between 40% and 92% returned across individual schemes, and distributions continued as portfolios were liquidated. The episode chilled the entire credit-risk category: investors pulled money from other funds, and Franklin Templeton's India AUM fell 36% in the December 2020 quarter.