FT ruling creates larger ramifications for trustees2 min read . Updated: 26 Oct 2020, 07:05 AM IST
It has laid the groundwork for trustees’ conduct, opened them to scrutiny by courts
The Karnataka high court’s observation on Saturday that Franklin Templeton India’s trustees should have taken the consent of unit holders before winding up the six debt schemes of the fund manager has created a new reason for concern for trustees. The court also said that the trustees can be subjected to scrutiny by high courts.
The matter pertains to Franklin Templeton’s decision on 23 April to shut down six debt schemes amid severe redemption pressures and illiquidity, impacting 300,000 investors and assets under management (AUM) of ₹26,000 crore. Aggrieved by this decision, a clutch of high net-worth individuals moved the courts in June in Delhi, Gujarat and Chennai, arguing that the decision required the consent of unit holders.
“If the said decision is shown to be taken in violation of the express provisions of the Mutual Funds Regulations or by committing breach thereof a writ of mandamus can be always issued to the Trustees by this Court by exercising power under Article 226 of the Constitution of India," the high court said.
Writ of mandamus is a judicial remedy in the form of an order from a court to a body to do some specific act which it is obliged to do under the law.
“This has larger ramifications for trustees and opens them up for scrutiny of high courts. Trustees who are performing fiduciary duty towards unit holders may now face court cases," said a chief executive of a large fund house.
The judgement laid the groundwork for trustees’ conduct in future by ensuring that any decision that impacts unit holders must be first communicated to investors.
“The duty of the Trustees is to disseminate to all the unit holders an accurate, adequate, explicit and timely information about the various aspects, including the general affairs of the schemes of a mutual fund," the order said.
“If such an important decision is taken by the Trustees of winding up of a scheme which affects the interest of unit holders, they are entitled to know the reasons for the decision," it added.
Thereby, the court ensured that the minutes of the meeting of trustees, which led to the decision to wind up the schemes, had to be disclosed to unit holders. “If all other legal remedies fail, Franklin will have to disclose the minutes of the meeting to let investors know all the reasons that went behind the wind-up decision," said a person familiar with Franklin Templeton’s thinking.
The high court pointed out lapses on part of the market regulator, the Securities and Exchange Board of India (Sebi), saying it did not take timely action to protect the interest of unit holders of Franklin Templeton. “Sebi ought to have been cautious and ought to have played a very active role. Even for Sebi, such a winding up was an extraordinary event," it said.