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SEBI backs Franklin on debt schemes winding up at SC

PALAK SHAH Mumbai | Updated on January 31, 2021

‘Principle of proportionality’ should not be followed for MF, market regulator tells SC

Market regulator SEBI has backed Franklin Templeton Mutual Fund (FTMF)’s position on winding up the six debt schemes. In its latest affidavit filed with the Supreme Court, SEBI has affirmed that FTMF’s winding-up proposal was approved by an “overwhelming majority of over 96 per cent unit-holders” in the recent e-voting.

SEBI’s stand is in contrast to that of TS Krishnamurthy, the e-voting observer appointed by the regulator itself, who said that only 38 per cent of the 3.15 lakh investors had participated.

‘Grey areas’

SEBI’s 14-page affidavit, seen by BusinessLine, is a response to the ‘grey areas’ highlighted by the observer. Though SEBI has issued a show-cause notice to FTMF for wrongful conduct based on the revelations by a forensic auditor, the regulator asked the Supreme Court to allow FTMF to wind-up the schemes. Investments worth nearly ₹30,000 crore are stuck in these schemes but SEBI told the Court to let FTMF ‘immediately disburse ₹9,000 crore’.

As per SEBI’s fresh stand in the SC, the ‘principle of proportionality’ should not be followed for MF investors. This could set a precedent for winding-up of MF schemes, lawyers said.

“Large unit-holders may hold a large number of shares in an MF scheme and if voting is provided in accordance with holding of a unit-holder then institutional investors, by virtue of their holdings, could easily sway the decision and retail investors would suffer. There is no concept of minority shareholders in MF regulations,” SEBI told the top court. The principle of proportionality is an approved test in law, which in the current context could simply mean voting rights in proportion to the units held.

The observer had highlighted that FTMF gave one vote to one PAN (permanent account number), which was a deviation from the Companies Act norm. The FTMF followed the Companies Act for the voting process but not in concluding the results, the observer said.

A winding-up approval under the Companies Act requires 75 per cent or more ‘affirmative’ votes, but FTMF approved it by a simple majority among 38 per cent participants. The observer said that FTMF had provided voting rights even to “unit holders who purchased units through off-market deals up to December 3, 2020 while the schemes were shut in April”.

SEBI’s affidavit now says that MF trust deeds should lay down procedures for unit-holder approvals in specific circumstances. “Had advised FTMF to follow general MCA (Ministry of Corporate Affairs) guidelines for the extra ordinary general meetings,” SEBI told the top court. The Companies Act too falls under MCA preview. On the point of why the observer did not check the voter know your client to ascertain their identities, SEBI said verifying physical copies would have required several months and it was not the observers job and hence they relied on the data from KYC Registration Agency.

KFin Tech was the KRA agency in this voting that also provided the e-voting platform. A forensic audit has revealed that several votes came from the ‘servers’ of KFin, which the agency has blamed on a glitch. On the point of difficulties in voting raised by several investors, SEBI has said the complaints were forwarded by the observer to FTMF and KFin and they were addressing it.

SEBI has said appointing any court officer to examine the findings of forensic audit against FTMF will render its role as ‘nugatory.’

Published on January 31, 2021

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