The Karnataka High Court ruled on Saturday in the case involving the closure of six Franklin Templeton Mutual Fund debt schemes. The plans were frozen on April 23, an action that was suspended by the Gujarat High Court on June 3. The Supreme Court transferred the Gujarat case along with others presented in Delhi and Chennai to the Karnataka High Court on June 19 and asked it to hear the matter without delay. The Karnataka High Court delivered its verdict on the matter in just over four months. We explain what the judgment means for mutual fund investors.
Was the liquidation of the 6 Franklin Templeton debt mutual funds legal?
After making the liquidation decision, Franklin Templeton AMC in May 2020 had given investors a choice on the managing agency for the liquidation process: Deloitte or the mutual fund trustees, assisted by Kotak Mahindra Bank. However, the AMC did not provide shareholders with an option to reject the liquidation entirely. This decision has been effectively overruled by the decision of the Karnataka High Court on October 24. The Court ruled that the consent of a simple majority of the shareholders is required for the liquidation of the mutual fund schemes and, therefore, suspended the liquidation until such a vote is taken. However, the court stayed its own decision for a period of six weeks to give the parties an opportunity to appeal to the Supreme Court.
When will Franklin Templeton debt investors get their money back?
4 of the 6 Franklin Templeton debt schemes have turned cash positive, as Mint reported. The Karnataka High Court did not order the AMC to start repaying the money raised by the schemes. The court ruled that the disbursement of funds will depend on whether or not the decision of the mutual fund trustees to liquidate the scheme is considered valid. If deemed valid, the money will be returned to all investors after repaying the loans and settlement costs. If the decision is found invalid, money will be paid to those who submit requests for reimbursement. Furthermore, the High Court stayed its own decision for a period of six weeks, allowing the parties to file appeals with the Supreme Court. If the Supreme Court grants an additional stay, it is unlikely that the money will be returned until the higher court decides the matter.
Will Franklin Templeton AMC be penalized?
The Karnataka High Court did not elaborate on the accuracy of the investments made by the AMC. The Court said these were business decisions and would not be subject to judicial scrutiny. The Court also refused to request the Serious Fraud Investigation Office (SFIO) to investigate the matter, noting the forensic audit and First Information Report (FIR) in Chennai filed against Franklin Templeton AMC. However, the Court asked Sebi to take appropriate action once Chokshi and Chokshi’s final forensic report had been presented to him.
What happens if the unitholders do not consent to the liquidation?
Since the High Court has suspended its own decision and the Supreme Court may grant a further stay on the matter, a shareholders vote may not take place anytime soon. If a vote is taken and the result is negative, the schemes should be reopened and the refunds should be processed. This may force the AMC to sell its shares at deep discounts to raise money. However, the AMC can take steps such as restricting withdrawals of more than ₹2 lakh per unit holder over a 10 business day period to address large refund requests.
Does the decision set a precedent for investors in other mutual funds?
The Court’s decision clarifies the procedure for the liquidation of mutual fund plans. The procedure previously existed only on paper, without any investment fund actually using it. Therefore, it had a certain level of ambiguity. The ruling clearly establishes the rights of mutual fund shareholders to give or deny consent to the liquidation of mutual fund schemes. It also sets a precedent for investors to challenge mutual fund decisions in court if they violate the 1992 SEBI Act or mutual fund rules outlined by the regulator.
.
