SEBI observer flags discrepancies in voting on Franklin Templeton debt funds closure

TS Krishnamurthy, the SEBI-appointed observer to monitor the e-voting conducted by Franklin Templeton Mutual Fund (FTMF) with regard to the closure of six debt schemes, has highlighted a number of ‘discrepancies’ in his report submitted to the Supreme Court.

FTMF had recently declared that 96 per cent its unit-holders had voted for the voluntary closure of the schemes, which together held over ₹26,000 crore.

Krishnamurthy, who was India’s 13th Chief Election Commissioner, told the apex court: “There were significant variations in the e-voting process followed by FTMF vis-à-vis prescribed under the Companies Act.” Since the SEBI (MF) Regulations, 1996 did not contain specific rules on ‘e-voting or conduct of meeting of unit-holders’, the Companies Act, 2013 was followed by FTMF.

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For a fair vote

One of the key observations made in the report, seen by BusinessLine, is that “each unit-holder was given only one vote irrespective of the number of units held as on cut-off date.” Simply put, those holding one lakh units of the scheme were put on an equal footing as those holding only one unit.

A winding-up approval under the Companies Act requires 75 per cent or more affirmative votes from shareholders. But the report says that FTMF decided to conduct the e-voting on the basis of one-PAN one-vote for those who had PAN. For those who did not have a PAN “the voting was one unit one vote”. Hence, approval was based on a “simple” majority in FTMF e-voting, the observer said.

The report further flagged issues related to the cut-off date set by the company. The cut-off date for eligible voters cannot be earlier than seven days before the date of meeting. Since the meeting was on December 29, the cut-off date could not have been earlier than December 22. In this case, the cut-off date had to consider unit-holders whose names appeared in the register as on April 23, 2020, the date on which the winding-up was announced. But FTMF provided voting rights to “unit-holders who purchased units through off-market deals up to December 3, 2020.” The rationale for this deviation on the guidelines on cut-off date was “not clear”, the report said.

Among other discrepancies highlighted by the observer one was thatFTMF did not annex material facts regarding the business to be transacted at the meeting in its notice to unit-holders. No information on disclosure of interest by directors, key managerial persons and their relatives was provided. FTMF did not provide a ‘window for inspection of documents’ connected to the subject matter or material facts. Most glaringly, all six notices sent to unit-holders were dated December 6 and issued under the name of Alok Sethi, Director, Franklin Templeton Trustee Services (FTTS). “The said director, however, digitally signed the notices only on December 28. The reason for deviation is not explained.”

E-voting platform

KFin Technologies (Karvy Fintech) was appointed for providing the e-voting platform. KFin’s appointment was discussed by the FTTS board on April 29, 2020. “However, no specific approval for KFin’s appointment was recorded by the board.” There were 3.15 lakh unit-holders but FTMF provided data of only 3.09 lakh unit-holders on the grounds that data for rest was not available.

Emails sent to 6,560 unit-holders bounced. SMS notice delivery to 1,766 unit-holders failed and their emails too were not available. The email addresses of 10,548 unit-holders were not available. The procedure was alleged to create an impression that FTMF was actively canvassing for “Yes” votes since that was in green colour and “No” was in red, the report said, citing a complaint from a unit-holder. About 38 per cent of unit-holders participated ‘on an overall basis’ in the e-voting, the report said.

FTMF had also warned unitholders in their notices about the consequences of voting "No."

“There were many grey areas in the procedure adopted, which raised doubts and apprehensions in the investor minds. Even FTMF did not have a clear idea about the procedures. This is because an exercise of this kind was done for the first time without clear guidelines,” the observer said.