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The Karnataka High Court pronounced its verdict in the case involving the closure of six Franklin Templeton Mutual Fund debt schemes in slightly over four months. (Photo: Bloomberg)
The Karnataka High Court pronounced its verdict in the case involving the closure of six Franklin Templeton Mutual Fund debt schemes in slightly over four months. (Photo: Bloomberg)

What the Karnataka HC judgment on Franklin Templeton case means for MF investors

  • After taking the decision to wind up, Franklin Templeton AMC in May 2020 had given investors a choice on the administering agency for the winding up process - Deloitte or the trustees of the mutual fund, assisted by Kotak Mahindra Bank

The Karnataka High Court on Saturday pronounced its judgment in the case involving the closure of six Franklin Templeton Mutual Fund debt schemes. The schemes had been frozen on 23 April, an action which was stayed by the Gujarat High Court on 3 June. The Supreme Court transferred the Gujarat case along with others filed in Delhi and Chennai to the Karnataka High Court on 19 June and asked it to hear the matter expeditiously. The Karnataka High Court pronounced its verdict on the matter in slightly over fourmonths. We explain what the judgment means for mutual fund investors.

Was the winding up of the 6 Franklin Templeton debt mutual funds legal?

After taking the decision to wind up, Franklin Templeton AMC in May 2020 had given investors a choice on the administering agency for the winding up process - Deloitte or the trustees of the mutual fund, assisted by Kotak Mahindra Bank. However the AMC did not provide unit holders an option to reject winding up altogether. This decision has been effectively invalidated by the decision of the Karnataka High Court on 24th October. The Court ruled that the consent of a simple majority of unit holders is required for winding up of mutual fund schemes and hence stayed the winding up till such a vote is taken. However the court stayed its own decision for a period of 6 weeks to give parties an opportunity to file an appeal with the Supreme Court.

When will Franklin Templeton debt investors get their money back?

4 out of the 6 Franklin Templeton debt schemes have turned cash positive, as Mint reported. The Karnataka High Court did not direct the AMC to start returning the money collected by the schemes. The court ruled that the disbursal of funds will depend on whether or not the decision of the mutual fund trustees to wind up the scheme is held to be valid. If it is held to be valid, money will be returned to all investors after repaying borrowings and the expenses of liquidation. If the decision is held invalid, money will be paid to those who give redemption requests. In addition, the High Court stayed its own decision for a period of 6 weeks allowing parties to file appeals with the Supreme Court. If the Supreme Court grants a further stay, it is unlikely that any money will be returned until the top court decides the matter.

Will Franklin Templeton AMC be penalised?

The Karnataka High Court did not dive deep into the correctness of the investments made by the AMC. The Court said that these were commercial decisions and would not be subjected to judicial scrutiny. The Court also refused to ask the Serious Fraud Investigation Office (SFIO) to investigate the matter, taking note of the forensic audit and First Information Report (FIR) in Chennai filed against Franklin Templeton AMC. However the Court asked the Sebi to take appropriate action once the final forensic report by Chokshi and Chokshi has been submitted to it.

What happens if unit holders do not give consent to the winding up?

Since the High Court has stayed its own decision and the Supreme Court may grant a further stay on the matter, a unit holders’ vote may not be held any time soon. If a vote is held and the outcome is negative, the schemes would have to be reopened and redemptions would have to be processed. This can force the AMC to sell its holdings at huge discounts in order to raise money. However the AMC may undertake steps such as restricting withdrawals of more than 2 lakh per unit holder for a period of 10 working days in order to deal with large redemption requests.

Does the decision set any precedents for investors in other mutual funds?

The Court's decision clarifies the procedure for winding up of mutual fund schemes. The procedure previously existed only on paper, without any mutual fund actually resorting to it. It hence had some level of ambiguity. The ruling establishes clearly the rights of mutual fund unit holders to give or withhold consent for winding up of mutual fund schemes. It also establishes a precedent for investors to challenge before courts the decisions of a mutual fund if they violate the SEBI Act, 1992 or mutual fund rules framed by the regulator.

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