AMFI against seeking prior nod of investors to shutter schemes

The Association of Mutual Funds in India has filed a special leave petition (SLP) in the Supreme Court in the ongoing case related to the closure of six debt schemes by Franklin Templeton.

The industry body has opined that prior approval of investors should not be made mandatory for closure of schemes, and trustees should be given full powers to decide on discontinuing the scheme in the interest of investors, said sources in the know.

Investors are parking money in mutual funds based on trust, as there is no guaranteed return, and all schemes are open to market risk. As a guardian of trust reposed by investors, trustees should be given a free hand in decision- making, he said.

If prior permission of investors is made mandatory for closure of schemes, there will be huge redemption, leaving nothing to close and return to investors. In unforeseen circumstances, like in the case of the Covid pandemic, tough decisions had to be taken swiftly to protect investors’ interest, said the CEO of a mutual fund.

Franklin Templeton India had to borrow ₹4,100 crore to meet the redemption in six debt schemes before taking the tough decision to close the schemes.

If the schemes had not been closed, the fund house would have resorted to distress sale of debt papers held by the schemes, leading to value erosion and ultimate loss to small investors who still consider that debt investments are without any market risk, said an analyst.

Informed corporate and high networth investors would have gauged the pandemic impact and would have redeemed their investments in advance, he added.

Voting process complete

As per the Supreme Court direction, Franklin Templeton has completed the voting process and the result has been submitted to the apex court. The next hearing in the case is scheduled for Monday.

Investors had about ₹26,000 crore in the six schemes prior to the closure, amid liquidity issues caused by the pandemic last April.

Of the six closed schemes — Franklin India Low Duration Fund, Ultra Short Bond Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund and Income Opportunities Fund — five have repaid loan outstanding and have surplus cash for distributing to investors.