The Chennai police has registered a first information report (FIR) against Franklin Templeton Asset Management India (FTAMIL) and Franklin Templeton Trustee Services and AMC's top management personnel, alleging criminal conspiracy to defraud three lakh investors by causing wrongful losses to them.

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Those named include Santosh Das Kamath, MD and chief investment officer, FTAMIL; Sanjay V Sapre, whole-time member, FTAMIL; their directors Jayaram Subramaniam Iyer, Vivek Kudva, RV Subramaniam and Pradip P Shah, among others.

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I want to argue that if concerned lawmakers from SEBI to the Ministry of Finance do not stop trigger-happy FIR lodgers immediately, the financial stability of the country is in grave danger. Here's why.

One, there is no prima facile evidence that the Templeton funds have embezzled money. Theirs was an aggressive investment style. The invested instruments were in the public domain. If the underlying companies failed to repay, it is a case of an investment gone bad. The very same investors of FTAMIL benefitted from the fund in the previous many years when it delivered above-market returns.

Two, the manner in which the six Templeton funds were folded up was also provided for in the law.

Three, if the fund managers were taking more risk than was allowed by the mandate of their funds, that is for SEBI to judge and penalise if needed. The market regulator is accordingly investigating the case. This is hardly within the bandwidth of the police to judge.

Four, in any case, why are independent directors like Vivek Kudva and even for that matter other directors and office bearers being named.

Also read: Franklin Templeton fund closure: 3 lessons investors can learn from the debacle

Cases like these are holding the financial sector to ransom. When there are sector regulators looking into issues, a criminal case should not even be entertained. The mind goes back to 2018 when the Pune police arrested the managing director of Bank fo Maharashtra Ravindra Marathe, simply because DSK builders, a company that had borrowed from Bank of Maharashtra defaulted on its public deposits.

The farce continued for a week until then Finance Minister Arun Jaitley addressed an Indian Banks Association (IBA) meeting and publicly denounced the police action.

Jaitley pointed out that Bank of Maharashtra is a PSU and its MD is a central government employee, over whom the state police have no jurisdiction. Legal eagle that he was, the late FM used a fine legal argument. But statesman that he was, he also condemned all investigative agencies for interfering in cases involving commercial judgment where the country’s laws provide for a sector regulator, to look into improprieties if any.

Also read: Franklin Templeton MF's shut schemes receive Rs 4,280-cr since closure

There's a reason why sector regulators are appointed: because commercial judgments can go wrong and hence a specialist is needed to distinguish between genuine failures and those caused by intentional wrongdoing. Every business failure is not criminal, neither is every wrong investment decision.

FIRs and arrests as the first resort in cases of failed investment can destroy the financial sector. One won’t be surprised if many a fund manager is considering resigning today and living on his savings rather than risk his name and future and his family to the unpredictable whims of the cops.

In the Franklin FIR, SEBI and finance ministry must step in, like Mr Jaitley did, speak to the state government and order the police to refrain from proceeding in the case till SEBI completes its investigation. The Bangalore High Court is hearing the case and legal experts say this court is best placed to quash the FIR.

Sources say AMFI - the Association of Mutual Funds in India - is considering representing to SEBI to stop the police from taking any action. It’s important that SEBI and North Block step in quickly.