What should be the focus of Franklin Templeton case?

Recently, the Supreme Court, in an unusual order, remitted the cases filed in the Madras, Gujarat and Delhi High Courts against Franklin Templeton — for closure of six of its debt schemes — to the Karnataka High Court for a decision. While the approach to avoiding multiple courts dealing with the same issue is certainly logical, the decision to involve an unconnected High Court to deal with the matter is perhaps opening up a new page in the concept of jurisdiction of courts.

For the affected investors, the FT case getting stuck in courts should be a matter of serious concern. The decision of the fund house to close the schemes and repay whatever possible to investors based on realisation was perhaps the only right decision it has taken. The closure of the schemes has hit millions of small investors, who, one fine day, discovered that the fund management had been quite cavalier in the conduct of its affairs right under the nose of the regulator, SEBI.

The filing of cases, which has stopped the process of winding up, is most detrimental to the investors’ interests in the current circumstances.

The issue of challenging the decision based on unclear provisions in the SEBI rules is most inopportune as the situation was perhaps never contemplated in drafting the rules. Neither the lawyers nor the judges would understand the peculiar issues involved, which essentially have less to do with law or regulations and more with fund management.

The Supreme Court should have ideally understood the controversy and as an exceptional case ordered the winding-up process to go through, with liberty for the parties to go ahead with the case before the nominated High Court.

Unfortunately, the petitions are on issues of procedure which matter little. The key aspect to uncover in this matter are essentially the following:

Was the investment made by the fund in these affected schemes in line with the mandate of the investment document?

Was there any quid pro quo or kickbacks to any of the officers of the fund in making any of these investments?

Were the investors who redeemed significant amounts in the few months preceding the closure privy to any privileged information that was not known to the common investors?

How did SEBI, which gets all the information monthly, not notice the fact that the fund was selling off all its good and marketable investments to meet redemptions, thereby risking the liquidity of residual investors?

How did SEBI not notice significant borrowings made by the schemes to meet the redemption pressure?

Had SEBI been more watchful, it could have raised an alarm even by mid-2019 when the inflows had almost stopped and the redemptions had started; in later months the redemptions accelerated, resulting in the closure of the schemes on April 23, 2020.

Therefore, the cases should be fought not on which rule or regulation should be applied or the absence thereof, but to unearth wrongdoings, if any, by the fund management, its trustees and the board of directors.

If any of them is found to have acted knowingly to the detriment of the investors, the AMC or its parent company should be asked to fully recompense the investors in the same way Union Carbide was asked after the Bhopal gas tragedy.

The role of SEBI is a matter of great concern in this episode. One way ahead will be to create a separate regulator for mutual funds, similar to IRDAI, and relieve SEBI of the burden of handling MFs.

The writer is a chartered accountant

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