Twenty-two days after Franklin Templeton India shut down its six debt schemes and left 300,000 investors in the lurch, the fund house said a negative outcome to e-voting would delay the refunds process.
The statement has thrown open a legal debate on the varied interpretation of a 24-year-old mutual fund winding up norms by Securities and Exchange Board of India (Sebi). The policy guideline, which were not tested or updated since 1996, adds to the uncertainty over refund of investor funds worth ₹25,658 crore stuck in these schemes. In an email to investors, Franklin Templeton said, as part of the winding-up process, trustees need authorization from investors to return the money at the earliest. A negative outcome in the voting could delay the process of liquidating the assets of the scheme and paying the proceeds to unit holders, said Franklin in its communication to investors.
“Therefore, I urge you not to base your choice on market speculations or rumours," said Sanjay Sapre, India-president, Franklin Templeton. The payment schedule can only be finalized and implemented after the successful completion of the voting process.
Franklin Templeton cited Section 41 of the Sebi regulations, which says: “The trustee shall call a meeting of unitholders to approve by simple majority of the unitholders present and voting at the meeting resolution for authorising the trustees or any other person to take steps for winding up the scheme."
It is not clear how Franklin had arrived at this interpretation. It told investors that a negative outcome would not result in the winding up process being reversed and restarting of redemption, subscription.
According to a senior corporate lawyer, this interpretation seems to be a stretch. “The regulation does not say anything on negative outcome. It almost seems that unit holders vote is redundant. Winding up is defined as paying-off investors, which is the whole purpose of the exercise. Under Sebi norms, the refund process should be completed in two years. But, Section 41 does not define a timeline," he said.
According to Rajeev Agarwal, a former whole-time Sebi member , the powers granted to trustees to rule on the winding up and the process to be followed for winding up have to be read separately. “Regulation 41 has nothing to do with the powers of either trustees or unit holders or Sebi while deciding if the scheme is to be wound up in certain circumstances. Regulation 41 will be applicable only to decide as to who will execute winding up after the decision is taken." Agarwal said in case of deadlock, the AMC should seek regulatory guidance.
However, Sumit Agrawal, founding partner, Regstreet Law Advisor, said the criteria for winding up need to be read along with the manner of winding up.
“Sebi regulations had not envisaged such a situation and, therefore, in law the rights of investors or obligations of an AMC are dependent on harmonious reading of provisions dealing with criterion for winding up and the procedure and manner of winding up. The moot question here is whether unitholders' right to vote is restricted to authorising the trustees or any other person to take steps for winding up of the scheme, or is it inclusive of rejecting the winding up itself and therefore overriding the decision of trustees," said Agrawal.
According to Amit Tandon, chief executive of Institutional Investor Advisory Services (IIAS), the fund house should talk about alternate scenarios. “The winding down of the schemes will happen irrespective of whether investors vote for or against. The fund house should have better used this opportunity to talk about alternate scenarios for returning money to investors. This is the question that investors want answered," said Tandon.
Under Sebi regulations, Franklin Templeton is first supposed to extinguish its liabilities, which includes loans from banks. The fund house had borrowed nearly ₹3,000 crore from banks to meet redemption pressure in March and April.
Sapre said the schemes are receiving inflows from bonds that are maturing . "We continue to see marked reduction in borrowing levels across some of our funds under winding-up, as we received these cash flows via coupons, scheduled maturities and prepayments."
Mint had earlier reported that the fund house has received payments to the tune of ₹2,000 crore so far.
Franklin Templeton on 1 May had told Mint that it is in the process of hiring an independent advisor for the e-voting process, which has still not taken place.