News Analysis

What the Gujarat High Court order means to Franklin Templeton’s investors

Satya Sontanam | | Updated on: Jun 04, 2020
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If the Gujarat High Court’s stay order is vacated, e-voting may happen on specified dates

The Gujarat High Court on Wednesday stayed the e-voting process for winding up of Franklin Templeton’s (FT) six debt schemes. The order came on a  plea — filed by promoters of Rasna Pvt Ltd who have invested in Franklin Templeton’s schemes — alleging that the fund house did not comply with the SEBI (MF) regulations for winding up of debt schemes. The matter will be heard next on June 12.

“High courts do not interfere when the issues can be resolved by the regulator (SEBI in this case), unless there seems to be irreparable damage to  stakeholders,” said Anandaday Misshra, founder and Managing Partner of corporate law firm AMLEGALS.

Meanwhile, on Friday, reports suggested that Franklin Templeton India has filed a petition before the Gujarat High Court to vacate  the stay order on the company’s e-voting process.

What do the high court’s stay order and the subsequent plea by FT mean for investors?

A recap

Franklin Templeton Mutual Fund in April announced its plan to wind up six of its debt funds — Franklin India Low Duration, Franklin India Dynamic Accrual, Franklin India Credit Risk, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities — due to reduced liquidity in the Indian bond market for most debt securities and unprecedented levels of redemptions following the Covid-19  outbreak.

The trustees of FT, Franklin Templeton Trustee Services Pvt Ltd, after consultations with its investment team and the asset management company (AMC), decided to wind up the schemes.

The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, permit the winding up of an open-ended MF scheme in cases, including the occurrence of an event, which in the opinion of the trustees requires the winding up of a scheme.

The AMC ceased to carry out operations with respect to the six debt schemes from April 24, 2020. Since then purchases or redemptions through systematic investment/transfer/withdrawal plans are not allowed in these six schemes.

On May 28, the unit holders were sent a notice to authorise either Franklin Templeton Trustee Services or Deloitte to take further steps for winding up of the schemes. This e-voting was scheduled for June 9-11. The party authorised has to realise or dispose of the assets of the schemes and the sale proceeds after the discharge of all liabilities and expenses will be paid to the unit holders.

The notice states that if a simple majority of unit holders rejects the authorisation by voting ‘No’, the trustee would propose other options of winding up to unit holders.

Authorisation for the new options would be obtained by a subsequent voting exercise.

The notice also stated that voting ‘No’ to the authorisation will not change the winding-up status of the schemes.

On June 1, director-promoters of soft drink brand, Rasna Pvt Ltd, who have invested about ₹6.55 crore in the FT schemes, filed a petition before the Gujarat High Court saying that the AMC decided to wind up the schemes without the consent of the unit holders.

They pointed to Regulation-18 of the SEBI (Mutual Funds) Regulations, 1996, which implies that when majority of the trustees decide to wind up or prematurely redeem the units, the trustees have to obtain the consent of the unit holders.

Considering the petition, on June 3, the Gujarat High Court stayed the e-voting process till June 12, the day the matter will be heard again.

Responding to this, Franklin Templeton, on June 5, filed a petition in the high court to vacate the stay on the e-voting’s process, said a media report. FT believes there will be grave harm and prejudice to unit holders as the process of returning the money to investors will be delayed.

Franklin’s plea will reportedly be heard in the court on Monday. If the high court’s stay order is vacated, e-voting may happen on  specified dates.

Impact on investors

But if the stay continues, further proceedings may depend on the order that would be pronounced by the court after the hearing on June 12 or later.

For instance, if the order goes in favour of the petitioner, the AMC might be directed to obtain approval from the unit holders whether or not to wind up the schemes. The AMC may seek the approval through e-voting.

If the unit holders (probably simple majority) approve the winding-up procedure, another e-voting may be conducted to decide the procedure of winding up — options on how the schemes have to be liquidated.

If the unit holders do not approve, winding-up may not be carried out and the schemes may continue to float. In this case, the unit holders may choose to either stay with the scheme or opt out from the scheme by redeeming.

Meanwhile, it seems that regulator SEBI has ordered forensic auditing of the accounts of the AMC. Sunil Gidwani, Partner at Nangia Andersen LLP, says if SEBI is convinced of gross violation of mutual fund regulations in managing the funds, it may direct the AMC to compensate the loss to the investors.

Published on June 07, 2020

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