Franklin’s legal troubles are far from over

PALAK SHAH | Updated on February 02, 2021

SC is yet to rule on key questions, including alleged illegalities in the fund’s dealings

The Supreme Court’s (SCs) directions on Tuesday with regard to the disbursal of ₹9,000 crore to investors do not put an end to the matter involving the now shut six debt schemes of Franklin Templeton Mutual Fund (FTMF). The apex court has directed the disbursal of cash as it was lying ideal with the fund house, and the hearing with regard to FTMF’s proposal over winding up of the debt schemes will continue, legal experts told BusinessLine.

FTMF has proposed winding up of these debt schemes which held around ₹30,000 crore of 3.15 lakh investors. But it has already halted redemptions in the schemes for nearly nine months now. FTMF's reasoning has been that its schemes were affected due to Covid-19 crisis and the SC will have to decide if this is a justifiable ground to propose closure of the schemes .

SEBI regulations

The sections of SEBI MF Regulations, under which FTMF has proposed the winding-up, have been opposed by the petitioners. A ruling with regard to allowing winding-up under the SEBI MF Regulations will also set a precedent in India’s MF industry, experts said.

The SC has also reserved its order on upholding the validity of the ‘e-voting’ process conducted by FTMF in December seeking investor consent for winding up of the schemes. This order is likely to be pronounced in the next 3-4 days, the petitioners said. SEBI appointed observers had raised grey areas in the voting. Further, the question of such a voting itself is pending before the court. The court will have to give a view on whether FTMF can announce closure of open-ended debt schemes first and then seek investor consent.

FTMF's actions have amounted to changing the attributes of the debt schemes without prior consent of investors. There is also a question to address if FTMF had defaulted on its schemes as their borrowings had risen over 20 per cent, much before the closure was announced.

Crucial aspect

Other prayers that the SC has to decide is on the forensic investigation reports that have alleged irregularities and wrongful conduct on the part of FTMF with regard to the $2 billion worth sudden redemptions in the schemes just days ahead of the announcement of their closure on April 22, 2020.

The SEBI has already issued a show- cause notice to FTMF for wrongful conduct based on the finding of the forensic report by Choksi and Choksi LLP. This is the most crucial aspect as it alleges illegalities in the fund’s dealings. Then, the SC will have to direct under what net asset value of the fund the final payment should be made to investors.

“Both FTMF and SEBI still have to answer as to how the attributes of the six debt schemes were closed before seeking investor consent. Other questions before the SC involve the forensic audit findings and if FTMF’s winding-up proposal itself was legal. It is a good idea that cash with FTMF will be disbursed but the case may go on for long,” said Anil Jain, partner Kaj Associates, one of the petitioners.

Published on February 02, 2021

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