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Photo: Mint
Photo: Mint

FT  moves  apex  court against HC verdict

The asset manager has challenged the order halting funds closure

Franklin Templeton Mutual Fund (FT) moved the Supreme Court on Monday, challenging a Karnataka high court order that said its decision to wind down six debt schemes in April required a simple majority consent from unitholders.

In October, the high court had ordered that trustees should not take any action on the winding-up of the schemes till such consent was obtained. It also restricted the asset management company and its trustees from taking any fresh borrowings in the six debt schemes.

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The trustees of Franklin Templeton decided to wind up six debt schemes on 23 April, citing illiquidity due to the coronavirus outbreak, a decision which impacted 300,000 investors and assets under management of 26,000 crore. Aggrieved by the decision, some investors moved various courts in June.

No winding-up process could be concluded without the consent of unitholders, under sub-regulation 15(c) of regulation 18 of Sebi’s mutual fund norms, the court had ruled. The specific rule says trustees need to take the consent of unitholders to wind up or prematurely redeem units.

The investors 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 norms, mutual funds need to get the consent of unit holders through an e-voting process. The voting would have authorized the trustees of Franklin to monetize the underlying assets for the winding-up process.

Cases pending before various high courts were clubbed and sent to the Karnataka high court by the apex court. The high court concluded that the market regulator should have acted more proactively and it failed in its duty in taking prompt action.

A Franklin statement on Monday stated that in May 2020, the trustees had sought a vote by unitholders to permit the trustee to undertake an orderly sale of the debt securities held in the funds and return money to unitholders. However, the process could not be completed. “Though the schemes could not actively monetize the portfolio, approximately 5,900 crores are available for distribution in four out of these six schemes. This shows that the securities held in the funds can be liquidated at a fair value if the schemes are allowed to undertake an orderly process of liquidation. This is definitely preferable to a distress sale of securities (at steep discounts) that would occur if a rush of redemptions forces an emergency liquidation of the securities at prices far below their realizable value under normal market conditions."

The asset manager said it considered all possible options over the last few weeks to start returning money to unitholders in the shortest possible time in an orderly manner.

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