The high court ruled that the Franklin Templeton's decision to wind down its suite of six debt schemes required a simple majority consent of unit holders
Mumbai: The Karnataka high court on Monday ruled that Franklin Templeton India’s decision to wind down its suite of six debt schemes required a simple majority consent of unit holders.
The court ordered that trustees should not take any action on the winding up of the six schemes till a simple majority consent of unit holders is obtained. This means that for any further winding up actions, they would need a consent of unit holders.
However, considering that the Supreme Court is on vacation, the operation of the orderhas been stayed for six weeks to give time to Franklin Templeton India to appeal the order. Till then status quo on refund, redemptions should be maintained, the Karnataka high court ruled.
It also restricted the asset management company and trustees from taking on any fresh borrowings in the six debt schemes, which were shut in April.
A division bench of chief justice Abhay Shreeniwas Oka and justice Ashok S. Kinagi said that it did not find merit in interfering with the decision of trustees as they have the power under Securities and Exchange Board of India (Sebi) regulations 39-40 of mutual regulations. But under the norms, they failed in their duties by acting on winding up of the six schemes without taking the consent of unit holders.
"We are studying the order issued by the Hon'ble Karnataka High Court and will take appropriate steps in consultation with legal experts in the best interest of unit holders," said Franklin Templeton in a statement.
On 23 April amid severe redemption pressure and illiquidity, Franklin Templeton had decided to shut down its suite of six debt schemes. This impacted 300,000 investors and assets under management (AUM) of ₹26,000 crore.
Aggrieved by this decision, some investors moved the courts in June.
No winding-up process could be concluded without the consent of the unit-holders, as has been laid down in sub-regulation 15(c) of regulation 18 of Sebi's mutual fund norms. The trustees had to obtain the prior consent of the unit holders through a simple majority, ruled the court.
Section 18-15(c) of Sebi mutual fund regulations says trustees need to take the consent of unitholders to wind up or prematurely redeem units.
The Karnataka high court was hearing at least four petitions filed by the investors of Franklin schemes which were earlier being heard in various high courts—in Gujarat, Delhi and Madras. The petitions and counter petitions were heard continuously in the high court over the past 45 days.
These investors had petitioned the courts that Franklin’s decision to wind down the six schemes was illegal and required investor consent. They also alleged that these schemes were mismanaged.
Under Sebi's norms, mutual funds need to get the consent of unit holders through an e-voting process. The voting would have authorized either the trustees of Franklin or Deloitte to monetize underlying assets for the winding-up process. On 3 June, the Gujarat high court stayed a scheduled e-voting and on 8 June, rejected a Franklin petition to vacate it. Sebi and Franklin Templeton then separately moved the Supreme Court to lift the stay.
On 19 June, the top court transferred all the cases to the Karnataka high court. In the process, the e-voting, which was scheduled to begin on 9 June, got deferred.
The Karnataka high court also concluded that the markets regulator should have acted more proactively and it failed in its duty towards taking prompt actions.
Sebi has also conducted a forensic audit on the six schemes for a period from 1 April 2018 to 23 April 2020. The forensic audit is a third-party document to which the fund house replied on 3 September. Sebi is placing these in front of a panel of division chiefs. They will recommend action under section 11/11B– directions and order, penalty proceedings.
The 106-page audit by Choksi and Choksi highlights that Franklin schemes faced unusually high redemption pressures; they did not take timely corrective action when illiquidity crept into the secondary market for lower-rated paper.
The high court said that the report need not be made public nor a copy is needed to be provided to unit holders.
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