Franklin Templeton Judgement: Karnataka High Court Schools SEBI on Its Role and Duty
Franklin Templeton Mutual Fund (FTMF) has emailed investors that it is likely to appeal ‘some aspects’ of the hard-hitting Karnataka High Court (KHC) judgement and seek directions on how to distribute accumulated funds in the six debt schemes that it shut down on 23 April 2020.
 
The schemes, with a total corpus of about Rs26,000 crore, directly affected 300,000 investors, damaged the credibility of the mutual fund (MF) industry which garnered Rs 27,74,146 crore (September 2020 data) of the savings of ordinary Indians, with a big boost coming from its sweeping slogan ‘mutual fund sahi hai’.
 
The MF industry has been involved in all sorts of shenanigans for the past 25 years but has rarely been dragged to the court. This time, it was different, mainly because of the intervention of Chennai-based Chennai Financial Markets and Accountability (CFMA) which attacked on multiple fronts and presented an incisive case in court. There was another reason as well – by a quirk of fate, the case landed before one of the best benches that investors could have wished for which was unimpressed by the market watchdog’s claims. 
 
The 24th October judgement of the KHC is not your usual high court judgement that leads to an appeal. The Securities and Exchange Board of India (SEBI) and FTMF filed an appeal in the Supreme Court (SC) against a Gujarat High Court order. 
 
On 19 June 2020, the apex court clubbed four petitions before the High Courts of Gujarat, Madras and Delhi to KHC and requested Chief Justice AS Oka to have them heard by a division bench (Justice Ashok S Kinagi was the second member of the bench), resulting in a detailed 336-page order. Although the Court has allowed six weeks to file an appeal to the SC, it is unlikely to be a cakewalk for FTMF to have it overturned. Let’s examine what the KHC had to say. 
 
The judgement gives SEBI a whipping and an education on its role. Reading it provides an insight into why investors, cheated by intermediaries in a highly regulated industry, go to the high court for justice. 
 
Franklin and Role of Trustees 
The order upheld the decision of the trustees to wind up the six schemes but ONLY after obtaining the consent of unit-holders through a simple majority (under sub-clause C of regulation 15) with a stern reminder to the trustees that regulation 18 casts on them “a legal duty to do or not do an act.” The arguments were focused on whether winding up was the only solution (especially after the MF industry was the first to be bailed out with a Rs50,000 crore special liquidity facility from the Reserve Bank of India – RBI -- on 27April, 2020). 
 
The second issue was whether consent obtained from investors of FTMF’s six schemes was to wind up the schemes or toauthorise trustees to decide who will take steps for the winding up. What happens next will depend on the SC hearings; but it is likely that the trustees may end up having to share the basis on which they decided on winding up and whether other alternatives were considered. What is more significant for India’s 20 million investors is how the regulator behaved during this crisis.
 
SEBI’s Many Failures:
For several years now, SEBI has chosen to remain sphinx-like silence on distressing market developments or assuage investors’ anguish —whether on corporate governance failures, a series of broker frauds or the shenanigans of the MF industry. This may have worked well for SEBI’s top brass, but the KHC judgement, ripping SEBI’s failures, ought to be a wake-up call even for the finance ministry which supervises SEBI. 
 
The 28-year old regulator had to be told by the Court that “prompt action by SEBI was necessary to sustain the confidence of the investors. As a watchdog, 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. The investors/unit-holders of the said Schemes will be justified in their criticism that SEBI was a silent spectator.”
 
Isn’t it ironical that, despite repeated amendments to the SEBI Act to give it more powers, the watchdog has forgotten that its first duty is to investors, so much so that investors are increasingly approaching civil courts to push the regulator to do its job?
 
The Court order says, SEBI’s ‘main obligation’ is to “act as a watchdog to protect the interests of the investors” and the second to ensure that trustees and asset management companies (AMCs) “strictly abide by the SEBI Act and mutual funds regulations.” Did it? Read what the Court had to say. 
 
a) Even for SEBI what happened on 23rd April was an ‘extraordinary event’ and the ‘first case in history’ of Indian MFs where the winding up clause was invoked to shut six schemes. Yet, SEBI admitted that it had not bothered to ascertain compliance with sub-clauses (a) and (b) clause (3) of regulation 39 which that requires them to issue a notice in two newspapers disclosing the circumstances leading to the closure of its schemes. 
 
b) SEBI did not bother to ascertain whether redemptions and borrowings had ceased, simply assuming that FTMF had complied with the regulations. 
 
c) SEBI had to be ordered to file on record the ordering of a forensic audit which is still incomplete and was submitted in a sealed cover.
 
d) The Court further noted that SEBI did not even possess a copy of the 23April 2020 resolution by FTMF’s trustees to wind up the six schemes. 
 
e) SEBI failed to respond to FTMF’s e-mail of 14 April 2020 or reply to the letter dated 20 April 2020 addressed by the trustees, seeking permission and guidance to wind up the schemes. 
 
SEBI’s stand in Court is significant. The regulator attempted to steamroller the case on three main planks. First, that SEBI is a ‘specialised sectoral regulatory authority’, which is already conducting a forensic audit/inspection/ investigation and the Court should ‘not exercise its jurisdiction’ when the petitions involved ‘disputed questions of fact’. 
 
Secondly, that Section 11 of the SEBI Act and its comprehensive MF regulations empower the regulator “to take any measures as it thinks fit in order to protect the interests of the investors in securities and promote the development of, and to regulate the securities market.” Since these powers were granted by the legislature, courts should ‘refrain from interfering’ in this matter. The judgement exposes how SEBI had failed to use its vast powers. 
 
Thirdly, it argued that petitioners had “not exhausted the efficacious remedies available to them by approaching the Securities Appellate Tribunal.” It was suggested that having filed complaints on SEBI’s complaints redress system (SCORES), investors should wait for the regulator to do its job at its own pace. 
 
The petitioners pointed out that there is “no provision under the SEBI Act for adjudication of complaints of the investors, as a matter of right.” So there is no straight-forward appeal to SAT. Isn’t it ironical that, despite repeated amendments to the SEBI Act to give it more powers, the watchdog has forgotten that its first duty is to investors, so much so that investors are increasingly approaching civil courts to push the regulator to do its job? This is exactly what has been argued by hundreds of petitioners in the Anugrah Stock & Broking scam, where SEBI as well as other first-line regulators have been made a party to the proceedings. 
 
The Role of CFMA and AMFI
CFMA’s role in countering the legal power of SEBI, FTMF and others with incisive points and a multi-pronged attack is important. Apart from the legal route, CFMA got the economic offences wing (EOW) of Chennai police to register an offence. This had Association of Mutual Funds in India (AMFI) rushing to the regulator seeking its intervention against what it called a ‘dangerous and undesirable precedent’. The action exposed AMFI as being nothing but a powerful lobbying organisation very confident of its influence over the regulator, while protecting dodgy behaviour by its own members. CFMA went ballistic over AMFI’s lack of empathy for FTMG’s 300,000 investors and, probably, ensured that SEBI did not heed its pleas. CFMA also filed Right to Information (RTI) applications which brought to light SEBI’s lack of action and refusal to acknowledge the forensic audit it has commissioned, let alone share it with investors. 
 
FTMF and SEBI will, once again, deploy powerful legal power to make their case in SC and we don’t know which way that will go. Hopefully, the legal community will realise that a watchdog that barks on time and bites when necessary is good for everybody’s savings. 

 

 

  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    adityashah90

    4 weeks ago

    Whilst I am in complete agreement with the author in so far as the role of SEBI is concerned. However in my view this is the not the most appropriate case which required judiciary wakeup call. Unless there are any fraudulent practice or violation of regulation, the decision by AMC seems to be in interest of all the unit holders. There is one more incident / case of Yes Bank, where the shares of the company was issued at face value whereas market value was atleast 2.6 times of the face value with involvement of MoF and since its a parent body of SEBI, they didn't act upon.

    dayanandakamath29

    4 weeks ago

    All regulators ministries and authorities are facilitators and protectors of culprits and turning nelsons eye to the red flags and helping them to eliminate the whistleblowers to protect their own inadequacies. One more example given in the link
    https://m.facebook.com/story.php?story_fbid=3779403475455376&id=100001572814280

    S.SuchindranathAiyer

    4 weeks ago

    Plight of Mutual Fund Investors: Remarkably (for India's judiciary), the Karrinayithikka High Court has called out the Government-like SEBI babudom for its dereliction of duty!

    umeshs62

    4 weeks ago

    In India, if you take care of regulator’s personal interest then you can get away with any kind of fraud, and cheating. Time and again, this has been proved. SEBI has been a toothless tiger all along. It mews instead of roaring,

    gopaliyer1950

    4 weeks ago

    Indeed very pathetic to note very passive roles played by SEBI and AMFI.Instead of protecting interest of Investors they want to go in for appeal etc.Is it that Frankling managed to buy off big wings of regulators to the detriment of 3 lacs plus investors.Would Frankling think of shutting /wind up schemes in their own country which I suppose is US.

    Nahom

    4 weeks ago

    SEBI/RBI/IRDAI are systematically important institutions for wealth transfer from middle class to Cronies. Middle classes have to "work till death" as their hard earned savings have been looted and lost in the Corrupt Bureaucratic Maze.

    ganesanjaicare

    4 weeks ago

    franklin templeton going for appeal understandable. why sebi going for appeal .india insider trading very rampant.recently hdfc life insurance shares price brought down from 595 to 556 only to kanow insider got information for nearly 1 crore shares.sebi only lip service.

    Why Have Most Equity Schemes Struggled To Beat Benchmark Indices?
    Investors in equity mutual fund (MF) schemes may have noticed a certain trend—their investments are not performing nearly as well as the market. It means that while large-cap indices are making, say, 30% returns, large-cap schemes are struggling to achieve the same feat. This applies also to mid-cap schemes, or style-based schemes like ‘value’, ‘focused’, etc.
     
    Actively-managed...
    Premium Content
    Monthly Digital Access

    Subscribe

    Already A Subscriber?
    Login
    Yearly Digital Access

    Subscribe

    Moneylife Magazine Subscriber or MAS member?
    Login

    Yearly Subscriber Login

    Enter the mail id that you want to use & click on Go. We will send you a link to your email for verficiation
  • Franklin Templeton Mutual Fund: Karnataka HC Restrains FTMF from Winding Up 6 Debt Schemes without Consent of Unitholders

    In a major victory for mutual fund (MF) investors, the Karnataka High Court (HC) on Saturday restrained Franklin Templeton Mutual Fund (FTMF) India's decision from winding up its six debt schemes without obtaining the consent of unitholders. The HC also passed strictures against Securities and Exchange Board of India (SEBI) saying that the market regulator failed to strict action in this matter.  
     
    Pronouncing the verdict in petitions challenging the winding up of six debt fund schemes of FTMF, a division bench of chief justice AS Oka and 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 bench 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 FTMF 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 23rd April, amid severe redemption pressure and illiquidity, FTMF decided to shut down its suite of six debt schemes, affecting over 300,000 investors adversely and assets under management of Rs26,000 crore.
     
    On 3rd June, the Gujarat HC stayed a scheduled e-voting and on 8 June 2020, rejected a petition filed by FTMF to vacate it. SEBI and FTMF then separately moved the Supreme Court to lift the stay. On 19th June, the apex court transferred all the cases to the Karnataka HC. As a result, the scheduled e-voting to begin on 9 June 2020 got deferred.
     
    Almost 300,000 investors are set to be impacted by FTMF's decision to wind up its debt mutual fund schemes. FTMF cited lack of liquidity in the bond market due to COVID-19 for its decision.
     
    The Karnataka HC clarified that the consent of unit-holders as per the regulations is to be obtained before going through the winding-up process.

    Earlier this month, Chennai Financial Markets and Accountability (CFMA), an investor group, had accused the Association of Mutual Funds in India (AMFI), a nodal association of mutual funds across India, of protecting FTMF and its senior management against a first information report (FIR) registered with the economic offences wing (EOW) of Chennai police.

    The CFMA had alleged that the AMFI, the body that claims to protect and promote the interests of mutual funds and their unitholders, has been a mute spectator ever since the FTMF scam, which ballooned to a whopping Rs28,000 crore, broke in April this year, and has now suddenly rushed to defend the indefensible fund house by calling an FIR registered against it as 'dangerous and undesirable precedent'.

    The CFMA had also expressed its concern over the AMFI's complete lack of empathy for 300,000 investors whose over Rs28,000 crore is stuck amidst fears of a hair-cut of 80% which means a loss of Rs20,000 crore. In doing so, the AMFI is going against its very core objective of being a self-regulatory organisation, it said adding that the performance of bodies like the AMFI itself needs closer examination to stop the recurrence of risks like FTMF. (Read: Chennai Investor Group CFMA Accuses AMFI of Protecting Franklin Templeton MF against EOW FIR)


    Manoj K Sheth, president of CFMA, while speaking with Moneylife, had said, "We are collecting information from investors and would file the class action suit against FTMF in Madras High Court. We have received information from about 300 investors till date and more would be joining the suit soon." (Read: Franklin Templeton Debt MF Schemes: Chennai-based CFMA Gets Ready To File Class Action Suit)

  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    MONIL

    4 weeks ago

    Why SEBI ALLOWED FT TO SHUT DOWN 6 FUNDS...SEBI NOT WORKING IN FAVOUR OF INVESTORS IN THIS CASE..AND SEBI IS ALWAYS WORKING IN REDUCING COMMISSION OF DISTRIBUTORS..INVESTORS REQUIRED SECURITIES & FAITH IN MF NOT ONLY CHEAP PRODUCTS..SEBI FOCUSED ONLY TO REDUCE EXPENSE RATIO ...BUT NOT WORKING ON CAPITAL PROTECTION OF INVESTORS.
    SEBI & FT BOTH MUST PUNISHED BY PAYING PENALTY & THAT MONEY MUST BE ADDED IN NAV & PASS ON TO INVESTORS...WHY INVESTORS MINUS THEIR RETURNS BECAUSE OF WRONG STRETEGY OF. AMC & SEBI?

    s5rwav

    1 month ago

    #TotallyCorrupted #SEBIIndia Chairman Mr #AjayTyagi should be Publicly Hanged at the Entrance of Supreme Court of India for Unpardonable Crimes against the Investors. I am Babubhai Vaghela from Ahmedabad. Thanks.....

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 4 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)
    FREE: Your Complete Family Record Book
    Keep all the Personal and Financial Details of You & Your Family. In One Place So That`s Its Easy for Anyone to Find Anytime
    We promise not to share your email id with anyone