Franklin Templeton India case: Karnataka HC says trustees cannot wind up schemes without investors' consent

In a big win for investors, Karnataka High Court October 24 ruled that Franklin Templeton’s trustees must take unitholders’ permission for winding up of the six debt funds that it had chosen to wind up earlier in April. The court upheld the rights of the trustees to wind up the schemes but said the trustees must take investors’ consent.

A copy of the 333-page long judgement is awaited. But investors of the fund house will have to wait for some more time before they can get clarity on when exactly they’ll get their money. The court upheld the Securities and Exchange Board of India (SEBI) mutual fund (MF) regulations 39 and 40 that gives the right to the fund house to wind up its schemes. Regulation 39 of SEBI MF guidelines allows winding up of schemes if trustees opine that the scheme has to be wound up, or if at least 75 per cent of unitholders pass a resolution favouring winding up or the fund house’s board decides to do so.

But, the court also observed that as per SEBI regulations, consent of unitholders is required. Regulation 18- that elaborates in detail the trustees’ rights and obligations- also specifies they have to take unitholders consent when the trustees decide to wind up or prematurely redeem units. “This means that the winding-up stands but consent is required of the investors for winding up to actually happen. If a consent not granted by a simple majority then the winding up will not happen,” says Abhinav  Shrivastava, partner GSL Chambers, a law firm that represents a section of Franklin Templeton investors in the matter.

The High Court said Franklin Templeton trustees violated the provisions of SEBI. The court also held that SEBI ought to have played a more proactive role and SEBI has failed to perform its duties.

The court has stayed the operative part of the judgement for six weeks, during which the fund house can appeal to the Supreme Court if it wishes to do so. In this period, no redemptions are allowed, no borrowings can be made nor can Franklin Templeton repay its lenders.

"We are studying the order issued by the Hon'ble Karnataka High Court and will take appropriate steps in consultation with legal experts in the best interest of unitholders," a Franklin Templeton spokesperson said.

Franklin Templeton has recovered around Rs 8,302 crore (as of October 15, 2020) by way of coupon payments, maturities and pre-payments since closing down in April.

Franklin Templeton had shut six debt mutual fund schemes on April 23, citing redemption pressures and lack of liquidity in the bond market.