Franklin Templeton case: Unitholders vote in favour of winding up of six debt schemes

The Supreme Court to hear the matter on January 25, 2021, to give directions on how the funds should be paid back to the unitholders at the earliest

January 19, 2021 / 07:20 AM IST

The verdict is in. Unitholders of the six schemes in Franklin Templeton Mutual Fund (FT MF) have voted in favour of winding up the six debt schemes, showed the observers’ report submitted before the Supreme Court (SC), which was disclosed on January 18, 2021.

According to people in the know, more than 90 percent of the votes cast for the six schemes were in favour of the wind-up. The SC will next meet on January 25, 2021, to give directions on how the funds in the schemes should be paid back to the unitholders.

"The Supreme Court made it clear that it wanted to give priority to resolving the issue of repayment of funds back to the unitholders without prejudice to the larger legal and factual issues in the matter which can be heard thereafter,” said Paritosh Gupta of Gupta Law Associates.

Some objections were also raised on the wording of the e-voting notice issued by FT MF, deterring investors from considering the ‘No’ vote.

The voting results now indicate the fund house would now not be required to resort to a distress sale of its underlying assets; which it had cited as one of the fallouts of a ‘No’ vote.

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"We deeply appreciate the support of our investors and partners and hope to commence distribution of investment proceeds at the earliest," said a spokesperson for Franklin Templeton.

No distress sale means orderly wind-up

According to lawyers who attended the SC hearing, the court focused on repaying funds to unitholders at the earliest and if another round of voting can be skipped. The name of SBI was also proposed as a third-party to be given the authorisation without holding another vote.  

If the SC gives direction to hold the second vote, Franklin Templeton would reach out to its six debt funds’ unitholders to authorise trustees with the winding-up process or a third-party. After the results of the second vote are out, unitholders would start getting their money back, slowly and steadily.

How soon can investors start getting their money?

If the second round of voting is not needed, the unitholders are likely to get cash lying in the schemes sooner. This could also mean that the vote may, after all, happen but the disbursal of cash that a majority of schemes have collected can be given to unitholders right away.

If, however, the second round of voting is called for, the appointed authority will get the mandate to start disposing off the underlying securities at the best possible price it could fetch, depending on the market conditions. After the vote, the cash lying in the schemes can be disbursed to the unitholders.

The six shut schemes of Franklin Templeton Mutual Fund have received Rs 13,789 crore from maturities, pre-payments and coupon payments since these were shut in April last year.

Five of these six schemes are now cash positive, with the cash available at Rs 9,190 crore as of January 15, 2020. This final cash available for distribution will be subject to some fund-running expenses.

Franklin India Ultra Short Bond Fund holds 63 percent of assets in cash. Among other schemes, Franklin India Duration Fund holds 50 percent cash, Franklin India Dynamic Accrual Fund (41 percent), Franklin India Credit Risk Fund (26 percent) and Franklin India Short Term Income Plan (nine percent).

Borrowing levels in Franklin India Income Opportunities Fund has come down and now stands at six percent of scheme assets.

The Franklin Templeton story so far

In April 2020, Franklin Templeton had taken the unusual step of winding up six of its debt schemes. It had cited extreme illiquidity in the market that had got accentuated by COVID-19. The six schemes had multiple securities in them which the fund house had been finding it difficult to sell. The other alternative, the fund house had said, was to sell them at throw-away prices that would have resulted in massive losses.

The fund house had reached out to unitholders to vote on this in May 2020, before the matter became sub-judice, and this voting had to be put on the backburner.

The Karnataka High Court, which heard all the cases pertaining to the matter, finally ruled that trustees cannot wind up schemes without the approval of unithodlers.

Following which, Franklin Templeton appealed to the SC, as it maintained that the trustee has the authority to take a call on wind-up of the schemes. However, the fund house also sought permission to seek unitholders’ vote, even as the SC examines whether such voting is mandatory or not.

In December 2020, capital market regulator Securities and Exchange Board of India (Sebi) gave the go-ahead to the fund house to conduct the voting exercise and appointed former chief election commissioner Taruvai Subayya Krishnamurthy as observer for e-voting for Franklin Templeton’s schemes. The voting was held between December 26, 2020, and December 28, 2020. Unitholders were also allowed to vote during video conference with trustees on December 29, 2020.
Jash Kriplani
first published: Jan 18, 2021 05:03 pm

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