Mumbai: Karnataka’s high court ruled on Monday that Franklin Templeton India’s decision to liquidate its set of six debt schemes required the consent of a simple majority of shareholders.
The court ordered that the trustees should not take any action on the liquidation of the six schemes until the consent of a simple majority of shareholders is obtained. This means that for any other liquidation action, they would need the consent of the unitholders.
However, considering that the Supreme Court is on vacation, the operation of the order it has been postponed for six weeks to give Franklin Templeton India time to appeal the order. Until then, the status quo on refunds, refunds should be maintained, the Karnataka high court ruled.
It also prevented the asset management company and trustees from taking any new loans in the six debt plans, which closed in April.
A bench in the division of Chief Justice Abhay Shreeniwas Oka and Judge Ashok S. Kinagi said it found no merit in interfering with the trustees’ decision, as they have the power pursuant to Board regulations 39-40 Stock Exchange and Securities of India (Sebi) of mutuals. regulations. But under the rules, they failed in their duties by acting on the liquidation of the six schemes without the consent of shareholders.
“We are studying the order issued by the Honorable High Court of Karnataka and will take appropriate action in consultation with legal experts in the best interest of shareholders,” Franklin Templeton said in a statement.
On April 23, amid severe bailout pressure and a lack of liquidity, Franklin Templeton had decided to shut down its set of six debt schemes. This affected 300,000 investors and assets under management (AUM) of ₹26,000 crore.
Aggravated by this decision, some investors moved the courts in June.
No liquidation process could be concluded without the consent of the participants, as set out in sub-regulation 15 (c) of regulation 18 of the Sebi mutual fund rules. The trustees had to obtain the prior consent of the shareholders by a simple majority, the court ruled.
Section 18-15 (c) of Sebi’s mutual fund regulations says that trustees must have the consent of the unitholders to liquidate or redeem units prematurely.
The Karnataka high court was hearing at least four petitions filed by investors in Franklin’s schemes that had previously been heard in various high courts, in Gujarat, Delhi and Madras. Petitions and counter-petitions were continuously heard in the superior court for the past 45 days.
These investors had petitioned the courts that Franklin’s decision to cancel the six schemes was illegal and required the investor’s consent. They also alleged that these schemes were mismanaged.
Under Sebi’s rules, mutual funds must obtain shareholder consent through an electronic voting process. The vote would have authorized the Franklin or Deloitte trustees to monetize the underlying assets for the liquidation process. On June 3, Gujarat’s high court suspended a scheduled electronic vote and on June 8 rejected a petition from Franklin to annul it. Sebi and Franklin Templeton then separately petitioned the Supreme Court to lift the suspension.
On June 19, the high court transferred all the cases to the Karnataka high court. In the process, electronic voting, which was scheduled to begin on June 9, was postponed.
The Karnataka high court also concluded that the markets regulator should have acted more proactively and did not fulfill its duty to act quickly.
Sebi has also performed a forensic audit of all six schemes during a period from April 1, 2018 to April 23, 2020. The forensic audit is a third-party document that the fund house responded to on September 3. Sebi places them in front of a panel of division heads. They will recommend action under section 11 / 11B – instructions and order, sanction procedures.
Choksi and Choksi’s 106-page audit highlights that Franklin’s schemes faced unusually high redemption pressures; They failed to take timely corrective action when illiquidity crept into the secondary market for lower-rated paper.
The higher court said it is not necessary for the report to be made public or for a copy to be provided to shareholders.
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