Franklin Templeton Case: Karnataka HC Directs Trustee To Obtain Consent Of Unit Holders, Upholds MF Regulations

The Karnataka High Court, in an order on Saturday, said the decision to wind-up six schemes of Franklin Templeton cannot be implemented unless the trustee obtains the consent of unit holders by a simple majority as per SEBI’s Mutual Fund regulations.

The order, however, concluded that no interference is called for in the decision taken by the trustee to wind-up six of its debt schemes.

The High Court has restrained the trustees from taking any further steps on the basis of notices issued by Franklin Templeton on April 23 and May 28 till consent is obtained from the investors.

A bench comprising Chief Justice Abhay Oka and Ashok Kinagi directed the Securities and Exchange Board of India to ensure that Franklin’s forensic auditors submit their report at the earliest. Further, it has directed the market regulator to decide on any action needed against the fund house under the mutual fund regulations within six weeks of getting the report.

Refusing to grant any other relief, the High Court has also found that unit holders are not entitled to get a copy of the forensic report which was submitted in a sealed cover.

On the request of the trustees, the High Court has granted a stay on the order for a period of six weeks, subject to the condition that the trustees and other parties will not take any steps to implement or act upon the two notices issued by Franklin Templeton.

The court has also directed that there will be no redemptions during the stay and has prevented the asset management company, along with the trustees, from making any borrowings or creating any liability during this period.

The Story So Far

In April, Franklin Templeton Mutual Fund decided to wind up six of its credit funds. The asset manager cited reasons like severe market dislocation and illiquidity caused by the Covid-19 pandemic as reasons for the move.

The six credit-risk schemes had assets worth nearly Rs 28,000 crore. Seeking to repay investors of these debt schemes, the fund house offered unit holders two options - either let the fund appoint a trustee to monetize the assets or hire a third party to conduct the process. To be clear, SEBI’s regulations require a mutual fund to seek prior approval of unit holders before winding up a scheme.

Franklin Templeton offered investors a choice between Deloitte Touche Tohmatsu LLP, a liquidation and restructuring firm or a trustee to be appointed by the asset manager to conduct the further process. Investors were granted an electronic voting facility between June 9 to 11 to submit their decision.

Aggrieved unit holders moved Gujarat, Delhi and the Madras High Court seeking various reliefs against the asset manager. A batch of investors, including Rasna India’s founder Areez Khambatta, argued at the Gujarat High Court that trustees must acquire consent and repay unitholders before winding up or prematurely redeeming units of a scheme, which was not done in the present case. In response, the Gujarat High Court stayed the e-voting process in June.

Franklin Templeton challenged the high court’s decision before the Supreme Court. The apex court transferred all pending cases to the Karnataka High Court and directed it to decide the case in three months. The Apex Court transferred the cases so that all the petitions can be heard afresh and independently from the existing approach taken by different high courts due to the multiplicity of petitions involved.

In the present case, investors have challenged the process adopted by Franklin Templeton as well as the legal validity of SEBI’s regulations governing winding up of mutual funds.