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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)