Karnataka HC Restrains Franklin Templeton From Proceeding With Winding Up Of Debt Schemes Without Investors' Consent

In a major victory for investors, the High Court of Karnataka today (24 October) restrained Franklin Templeton (FT) India's decision from winding up its six debt schemes without obtaining the consent of unitholders.

Pronouncing the verdict in petitions challenging the winding-up of six debt fund schemes of FT, a division bench of Chief Justice A S Oka and Justice Justice Ashok S Kinagi directed that trustees should not take any action on the winding up of the six schemes till a simple majority consent of unit holders is obtained.

"We hold that no interference is called for in the decision of trustees to winding up of the said schemes. We hold and declare that the decision of the trustees to winding up the six schemes cannot be implemented until consent from the unitholders is obtained in accordance with Sub Clause C of Regulation 15. Hence, we restrain the trustees to take any further steps based on the notice 23 April 2020 and 28 May 2020, issued till the consent of the unitholders is obtained. It will open for trustees to obtain the consent of unitholders and to take further steps," the division bench stated in its 330-page order.

Market regulator SEBI should have played a more active role in the matter and it failed in its duty towards taking prompt actions, the court noted, adding that the forensic audit report in the case is tentative and doesn't include final findings.

In view of the Supreme Court's vacation, the operation of the order has been stayed for six weeks to give time to FT India to appeal the order, the Karnataka High Court ruled, directing that status quo on refund and redemptions should be maintained till then.

It also restricted the asset management company and trustees from taking on any fresh borrowings in the six debt schemes, which were shut in April.

Notably, on 23 April amid severe redemption pressure and illiquidity, Franklin Templeton had decided to shut down its suite of six debt schemes, affecting 3,00,000 investors adversely and assets under management of Rs 26,000 crore.

On 3 June, the Gujarat high court stayed a scheduled e-voting and on 8 June, rejected a Franklin petition to vacate it. SEBI and FT then separately moved the Supreme Court to lift the stay. On 19 June, the apex court transferred all the cases to the Karnataka high court. As a result, the scheduled e-voting to begin on 9 June got deferred.

Almost three lakh investors are set to be impacted by Franklin Templeton's decision to wind up its debt mutual fund schemes. Franklin Templeton cited lack of liquidity in the bond market due to Covid-19 for its decision.

The Karnataka High Court clarified that the consent of unitholders as per the regulations is to be obtained before going through the winding-up process.

(This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.)