Franklin Templeton cannot wind up six mutual fund schemes without securing unit holders’ consent: HC

Franklin Templeton cannot wind up six mutual fund schemes without securing unit holders’ consent: HC

However, it stays operation of the verdict to enable company to approach apex court

The High Court of Karnataka on Saturday said that the Franklin Templeton Trustees Services (FT Trustees) Pvt. Ltd. cannot implement its decision to prematurely wind up six open-ended debt-oriented Mutual Fund (MF) schemes without obtaining the consent of the unit holders in the form of a simple majority.

The consent is mandatory as per 18(15)(a) of the Security Exchange Board of India (Mutual Funds) Regulations, 1996, when the majority of the trustees decide to wind up or prematurely redeem the units, the court said while declining to interfere with the FT Trustees’ April 20, 2020 decision to prematurely wind up the schemes.

A Division Bench comprising Chief Justice Abhay Shreeniwas Oka and Justice Ashok S .Kinagi delivered the verdict while disposing of the petitions filed by unit holders, who had challenged the decision to close the schemes without following the MF regulations.

However, the Bench stayed the operation of its verdict for six weeks to enable the trustees and the Franklin Templeton Asset Management (FT-AMC) India Pvt. Ltd. to approach the Supreme Court.

No redemption

Meanwhile, the Bench also clarified that there cannot be any redemption by the unit holders during this period of six weeks of stay while also directing the trustees and the FT AMC not to indulge in any borrowing or claim liabilities in relation to these schemes.

The petitions, filed by Amruta Garg in the Delhi High Court and 83-year-old investor Areez Phirozsha Khambatta and his wife in the High Court of Gujarat, were transferred to the High Court of Karnataka in June following a direction from the Supreme Court. A public interest litigation petition filed by M/s Chennai Financial Markets and Accountability in Madras High Court was also heard along with these petitions.

With today’s verdict the process, initiated by the FT Trustees and FT AMC by issuing a notice on May 28 to call a meeting of unit holders to authorise through e-voting the trustees or Deloitte Touche Tohmastsu India LLP to take further steps for winding up of the schemes, cannot be implemented.

61 hours of videoconference hearing

The Bench, while appreciating the cooperation of advocates, who argued from London, New Delhi, Mumbai, Chennai and Bengaluru through videoconference hearing owing to COVID-19 norms, said that this case has show that any complicated legal matter can be effectively conducted through videoconferencing.

Pointing out that the proceedings in these petitions were heard without any major technical glitches for 61 hours spread over 25 days of court sessions since July and internet connectivity was lost only once, the Bench appreciated the participation of lawyers.

Six schemes

The six schemes to be wound up are: Franklin India Low Duration Fund; Franklin India Dynamic Accrual Fund; Franklin India Credit Risk Fund; Franklin India Short-Term Income Plan; Franklin India Ultra Short Bond Fund; and Franklin India Income Opportunities Fund.

Holding that the unit holders are entitled to the copies of the resolution of the trustees to wind up the schemes, the Bench directed the trustees to given to the petitioners copies of the resolutions dated April 20 and May 28, which were submitted to the court in sealed cover.

Forensic audit

While stating that petitioners are not entitled to copies of SEBI’s forensic audit/investigation report on six schemes as the audit has not yet reached its final conclusion, the Bench directed the SEBI to examine the question of taking action within six weeks after completion of audit/investigation.

SEBI’s role

The Bench said that the SEBI should have played a very proactive role in such matters though there was no need for the trustees to take prior approval from SEBI for winding up the schemes. The also upheld the constitutional validity of the regulations related to winding up of mutual fund schemes in SEBI’s regulations.

The SEBI had supported the contention of the trustee and FT AMC that 39(2)(a) of the MF Regulations does not prescribe ratification by the unit holders to wind up the schemes.

Also, the SEBI had favoured continuation of the winding up process requesting the court to allow e-voting by unit holders as per the May 28 notice to authorise the trustees or any agency to liquidate assets.

“If the decision to wind up is reversed, the trustees would have to reopen the schemes for transaction and all unit holders would put 100% redemption requests immediately. To meet such redemption requestions, MF would have to sell securities in distress at very deep discount as the whole market is aware of the present distress… Any distress sale of assets of a scheme would reduce NAV (Net Asset Value) which will be detrimental to all the unit holders of the schemes. This in turn would create a wide spread contagion effect across the entire mutual fund industry and harming the interest of all the investors at large,” the SEBI had argued

Petitioners’ contention

It was contended on behalf of the petitioners that the winding up process was illegal as no consent from the unit holders was sought, while alleging that the problem of ‘liquidity stress’ had arisen much prior to impact of COVID-19 and the pandemic situation was used only as an excuse for winding up. The petitioners had also alleged that the SEBI had failed to discharge its duties affectively while challenging the constitutional validity of the regulations related to winding up of mutual funds.

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