Investors of the six wound-up schemes of Franklin Templeton mutual fund will have to wait for a little longer to cast their votes to decide which entity would execute the winding-up process. On June 3, the Gujarat High Court issued a stay order on the upcoming voting process that Templeton had initiated for choosing either its own trustees or Deloitte for the winding up process of the six debt schemes. The fund house had wound up these six schemes on April 23. The stay order was sought by an Ahmedabad-based petitioner, Areez Khambatta, the second-generation owner of Rasna Ltd; the makers of the Rasna soft drink concentrate and one of India’s most iconic brands. To be sure, Areez and his family are the petitioners and not Rasna Ltd.
The petitioners have sought to set aside the April 23 decision of winding up of the schemes and contested that Franklin Templeton violated the Securities and Exchange Board of India’s (SEBI’s) mutual fund regulations and did not seek unitholders’ approval before deciding to wind up. The senior Khambatta’s family also wants SEBI to constitute an independent authority to take over these six schemes and return the money to their unitholders. Last Friday, Franklin Templeton filed a petition in the Gujarat High Court to vacate the stay. As per the stay order, the High Court will hear the matter again on June 12, but it could come up sooner than that. But if the matter gets heard on June 12 or later, the upcoming vote, that was to have happened between June 9-11 followed by an online meeting between its trustees and investors on June 12, will get postponed.
The question is: if the High Court decides that Franklin Templeton’s actions were wrong and reverses the winding up process, will investors benefit? Or will this matter get dragged on for a few more months?
Paritosh Gupta, who is the lawyer representing Areez Khambatta, refused to comment for this story. But two people who are privy to the rationale behind Areez’s petition spoke. At the heart of the petition is the grievance that Franklin Templeton hasn’t left the unitholders with much choice. Also, there is a warning that a delay in choosing between the two would mean investors could find it difficult to get their money. The petitioners perceive this to be some sort of “coercion.”
This is what the Templeton notice said: “If a simple majority of unitholders voting, rejects the Authorization by voting ‘No’ to the Authorization, then the Trustee will be required to propose other options to unitholders, seeking their authorization by way of a subsequent voting exercise, which may result in delay in monetizing the Scheme assets and distributions to the unitholders. Although the decision on how to vote vests with the unitholders, the Trustee advises unitholders to vote ‘Yes’ to the Authorization as a rejection of such Authorization may result in delays as described above. Please note that voting ‘No’ to the Authorization will not change the winding-up status of the Scheme.”
The first person – as well as the High Court stay order – pointed to Regulation 18 (15) c of SEBI MF regulations, which says that trustees shall obtain unitholders’ consent “when the majority of the trustees decide to wind up or prematurely close the scheme.” But the matter gets complicated. Regulation 39 of SEBI MF regulations, that specifically and in detail, deals with the winding-up of schemes, says that a fund houses can wind up the schemes if the trustees decide so, or if 75 percent of unitholders approve that the scheme must be wound up or SEBI directs the fund house to wind up the scheme. Franklin Templeton has relied on Regulation 39 to decide on winding up the scheme.
“We are examining the matter and will take appropriate steps as may be required. We continue to follow due process, both in making investment decisions and in the winding up of these schemes. We have acted in the best interest of our investors and in accordance with all regulations,” says a Franklin Templeton spokesperson.
Are SEBI rules poorly worded?
The petitioners claim that Regulation 39 doesn’t come into the picture since the scheme has not yet been wound up. A closer look at Regulation 39 reveals that a scheme can only be considered as “wound up” if the money has been returned to the unitholders. “That has clearly not happened; only the decision to be wound-up has been taken,” says the second person mentioned above. Therefore, this person insists that the fund house ought to have looked at Regulation 18 (15) c which speaks about taking investor consent “when the majority of the trustees decide to wind up or prematurely redeem the units.” He stressed upon the phrase ‘decide to wind up’ as being the state in which the scheme are, at the moment. Both people who Moneycontrol spoke to requested anonymity.
Legal experts appear divided as to which section takes precedence. And, more importantly, whether the two regulations, 39 and 18 (15)(c) are indeed at cross purposes. Regulation 39 clearly talks about winding up of schemes in detail. Having said that, the presence of regulation 18 (15)(c) talks about trustees’ right and obligations; it says that investor consent needs to be taken. "Ordinarily, the word consent refers to prior permission, rather than a post facto process. The court can take a view that investor consent ought to have been taken, or it could view it together with Reg. 39 to say that it is only a post-facto process, but SEBI regulations on this regard could have been worded more clearly. This leaves room for different interpretation; no wonder the matter has reached the courts,” says Sandeep Parekh, managing partner, Finsec Law Advisors.
Nazneen Ichhaporia, partner, ANB Legal says that whenever any regulations within a specific set of guidelines appear to be contradictory, the ‘principle of harmonious construction’ is to be used in law to clear the air. In simple words, this principle looks at the intent of the regulation. “And the intent of the SEBI regulations is investor protection”, she says. Further, she adds, Regulation 39 talks about the events in which the winding up process takes place, but Regulation 18 (15) c talks about the obligations (and rights) of the trustees which says they need to ask for investors’ consent. Nazneen says that legally speaking, Franklin Templeton should have asked investors.
The challenge in taking investors’ consent
The two people familiar with Areez’s petition claim that many unitholders are not comfortable waiting for a long time for Franklin Templeton to return the money back. One of the two people says that ideally the fund houses’ American parent company should bail out investors. Mutual fund industry officials say that many such aggrieved investors have actually applied for redemption, even after April 23, the day the fund house decided to wind up the schemes. If the Gujarat High Court eventually reverses Franklin Templeton’s decision, such investors may well get their monies back. How the fund house would generate the redemption amount in these illiquid markets, especially in those schemes that still owe banks funds it had borrowed to meet its earlier redemptions, is another matter.
Legal interpretations aside, financial advisors believe that many investors may not have voted to wind-up the scheme and would have instead asked for their monies back instantly. This would not have served any purpose, says Deepak Chhabria, CEO and Director, Axiom Financial Services. “The fund house need to sell the securities to return the amounts due to investors. Whatever the fund house could have sold at a reasonable price, it has already done do. Any further redemptions can now only be met when the underlying assets are sold off, preferably at prices that are as fair as possible. That can only happen when this liquidation process moves on. The fund house cannot go back to status quo,” he says. Deepak says that if this matter drags on in the court, then all investors, including the petitioners, will suffer.
Srikanth Bhagavat, managing director, Hexagon Capital Advisors says that in complex financial matters where retail investors may or may not understand the implications, they may cast the wrong vote. “Like it or not, the trustees and the fund house know what to do with the securities, how to tackle illiquidity; it’s best we leave it to them now to clear this mess. They have got us into this mess, but they also know better than investors as to how to get out of it; leave it to the experts,” he says.
There is no doubt that Franklin Templeton has landed itself and its unitholders in a mess. That’s also partly due to SEBI’s relaxed guidelines on scheme classification, but mostly due to the fund house’s inability to see the storm approaching. Now, what’s the best way to move forward and how to get the money back? SEBI has already initiated an inquiry into the fund house’s management and the decision to wind up these schemes. This report is expected to be submitted within 30 days. Allowing the winding up process to move on as quickly as it can would be in unitholders’ best interests, so that they get their monies back.
If the fund house is as serious about continuing its business in India as it claims to be, it is best served by giving the money back to investors at the soonest. Besides, as Deepak of Axiom sensibly points out, a bail-out of around Rs 25,000 crore (the combined size of these six schemes) by its international parent for its domestic fund house that earned a profit of just Rs 402 crore (as on September 2019) looks highly unlikely.
Of course, if SEBI’s probe finds something incriminating, the plot would thicken.