Karnataka HC raps Sebi for not being proactive in Franklin Templeton wind-up

The Karnataka High Court (HC) in its 336-page order has pulled up the Securities and Exchange Board of India (Sebi) for its lack of responsiveness in handling wind-up of six debt schemes by Franklin Templeton Mutual Fund (FT MF).

“It is an admitted position that this was perhaps the first case in the history where Regulation 39(2)(a) was invoked. Therefore, Sebi ought to have been cautious and ought to have played a very active role,” the HC’s order read.

The HC order, reviewed by Moneycontrol, observed certain lapses on the part of Sebi in ensuring compliance with clause (3) of regulation 39.

It said that the market watchdog did not bother to “ascertain whether redemptions and borrowings ceased assuming that compliance of clause (3) of regulation 39 was made.”

The order read that Sebi did not even bother to enquire about the compliance with clause (3) of regulation 39 by the trustees.

The above clause deals with the procedures for wind-up of any MF scheme.

The court also pointed out Sebi’s failure to reply to a letter (dated April 20, 2020) sent by trustees of FT MF, seeking permission and guidance from SEBI for winding up the schemes.

The HC said that prompt action by Sebi was necessary to “sustain confidence of the investors.”

It even went on to say that the unitholders of the affected schemes will be “justified in their criticism that Sebi was a silent spectator.”

“Sebi was expected to play a very proactive role by questioning AMC, trustees and sponsor about the compliances with the provisions of the mutual funds regulations,” HC said.