Karnataka HC had concluded hearings on September 24, 2020
Investors in Franklin Templeton’s debt schemes, six of which are currently being wound up, are likely to find answers on how they could get back their investments on October 24, 2020. Parties to the case suggest that the final judgment would be out on Saturday, but there is some possibility that this may be an interim order.
Acting under the direction of the SC, the Karnataka HC bench heard the matter swiftly from June 2020, even on holidays. After concluding the hearings on September 24, 2020, the HC directed all the parties to submit a summary of their arguments by October 1.
The petitioners in the case were a set of affected unitholders. Franklin MF and the Securities and Exchange Board of India (SEBI) were the other parties to the case. Here are some arguments made before the court.
Was the winding-up done after following all legal provisions?
Did Franklin Templeton violate any laws in winding up its schemes; shouldn’t it have asked investors’ approval first?
Investors that approached the court are of the view that such a winding-up of schemes requires unitholders’ consent. “As MF schemes are in the nature of a trust, consent of unitholders is a must. That is what has been argued before the court,” said Paritosh Gupta of Gupta Law Associates, counsel for Areez and Persis Khambatta – who were among the earliest to have petitioned before the court.
Franklin has maintained that the move to wind-up its six yield-oriented debt schemes was done in compliance with existing regulations, as trustees’ approval was already taken. After Franklin Templeton shut down the schemes in April, it had set-up an e-voting facility for unitholders to authorise selling the assets of the six funds. The e-voting had to be deferred after the Gujarat HC passed its order.
The validity of the regulations related to winding-up of the MF schemes has also been challenged in the court.
The Karnataka High Court is highly expected to clarify the interpretations of SEBI regulations while delivering its verdict.
Can Franklin pay back investors?
Franklin Templeton has already recovered around around Rs 8,302 crore (as of October 15, 2020) by way of coupon payments, maturities and pre-payments. Should it wait till after the e-vote to distribute this amount?
Unitholders are of the view that amounts that have flown into the schemes due to routine repayments from investee companies, scheduled maturities and so on, can be distributed from cash-positive schemes. They add that regulations require authorisation from unitholders only for monetisation of scheme holdings.
Franklin has said that the interpretation of regulation in this regard is under the consideration of the HC and so it would be inappropriate to comment on the same.
"We will be happy to distribute the investment proceeds realised by the schemes in compliance with the applicable regulations, at the earliest. As we have always maintained, the decision on winding up of the six schemes was taken with the sole objective of safeguarding the interest of our investors. Our focus is to return the maximum possible value to all investors in the shortest possible time in these unprecedented times, and we continue to make progress in this regard," an earlier statement from the fund house read.
Questions on unlisted investments of the schemesInvestors have called into question the debt schemes’ deployments in unlisted debt securities. Franklin has maintained that its investment decisions were very much within the regulatory framework at that time and exposure to unlisted securities was only one of the contributing factors for the winding-up.
In an earlier statement, the fund house had said that the challenging credit environment during the immediate aftermath of the COVID-19 pandemic had led to liquidity challenges in the unlisted investments. “Heightened redemptions after the lockdown led to increased concentration of unlisted bonds which were needed to be held till maturity,” a Franklin spokesperson had said.In October last year, SEBI stated that debt MF schemes shall not have more than 10 per cent exposure to unlisted debt securities. While the MF industry earlier needed to comply with this rule by June 30, 2020, SEBI later extended the deadline to December 31, 2020, due to the pandemic.However, it remains to be seen whether the court would pass a judgement on the merits of the investment decisions taken by Franklin Templeton’s debt funds or leave it to the purview of SEBI, which has commissioned a forensic audit of the wound-up schemes.