Franklin Templeton MF: SC Reserves Order after Completing 1st Phase; Next Hearing in July
The Supreme Court completed hearing arguments from all sides in the Franklin Templeton Mutual Fund (FTMF) matter. However, while reserving its order, the apex court decided to hold the next hearing in July when market regulator Securities and Exchange Board of India (SEBI) will complete its investigation into allegations of wrongdoing against FTMF. Separately, the Enforcement Directorate (ED) has registered an enforcement case information report (ECIR) against FTMF on which the Association of Mutual Funds in India (AMFI) has raised objections. AMFI wants SEBI and not the ED to investigate FTMF matter.
A bench comprising justices S Abdul Nazeer and Sanjiv Khanna, made it clear that it will pronounce its order on the legal status of MF Regulation 18(15)(c), which mandates consent of unitholder for the winding up of a scheme.
According to reports, the apex court may pass the order over the next 10 days.
Quoting Paritosh Gupta of Gupta Law Associates, who is counsel for Areez and Persis Khambatta, the earliest unitholders to have petitioned before a court, a report from Moneycontrol says
, “It appears that the Supreme Court would prefer an expert regulatory body like SEBI to first investigate and adjudicate the various allegations against Franklin Templeton and its officials, before hearing the case further. When SEBI passes an adjudication order, there will be much more clarity and SC can then pass appropriate orders in the matter."
A report from Mint says
, AMFI has reiterated its stand that the FTMF matter should be investigated by SEBI only and not by ED or police.
Last year in October, AMFI has raised an objection upon a first information report (FIR) registered by Chennai Financial Markets and Accountability (CFMA), with the economic offences wing (EOW) of Chennai police. At that time, the investor group had accused the Association of protecting FTMF and its senior management against the FIR.
NS Venkatesh, chief executive (CEO) of AMFI, told the newspaper that “There is no change in AMFI’s stand in the matter. We firmly believe that the matter is entirely within SEBI’s purview. SEBI has adequate powers to take appropriate action against anyone found to be in contravention of the SEBI Act or the rules and regulations."
AMFI had urged the market regulator to intervene in the matter since it has 'vast jurisdiction containing administrative, civil and penal domains' and prevent the case from 'getting translated into a criminal investigation'. Notably, it had further requested the SEBI to exercise its statutory powers to shield one of its members—FTMF—and to insulate the MF industry from any undesirable and unwarranted precedent.
By covering up the misdeeds of FTMF's and not saying even a word in favour of the unitholders, the CFMA had said, AMFI failed to address the grievances of investors aggrieved by the freezing of six of the debt schemes of FTMF.
Last month, the Supreme Court had directed FTMF to distribute Rs9,122 crore among unit-holders of the six schemes that were shut by the mutual fund house in April last year and said the distribution of funds needs to be undertaken by the SBI Fund Management and completed within 20 days.
The apex court had said the unit-holders should be repaid in proportion to their respective share in assets of the scheme and the distribution of funds would be undertaken by SBI Fund Management as agreed by both Franklin Templeton Trust and SEBI.
Later the apex court upheld the validity and results of e-voting of unit-holders of six mutual schemes of Franklin Templeton and said Rs9,122 crore will be disbursed as per its earlier order. The top court noted that the consent of unit-holders means consent of majority of unit holders and not just party to the scheme.
Earlier in November, Franklin Templeton Trustee Services, which initially had argued that mutual funds are empowered to wind up schemes without unit-holders' consent, sought permission from SEBI to hold a vote on the issue on 8th November.
The Karnataka High Court, in its judgement in October 2020, had said the decision of FTMF to wind up the six schemes cannot be implemented unless the consent of the unit-holders is obtained.
Earlier, on 23 April 2020, FTMF had announced shutting down six debt fund schemes due to poor and illiquid investments amid the coronavirus crisis, leaving lakhs of investors in a lurch. The total assets under management (AUM) of the six schemes were over Rs25,000 crore, spread across Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund. (Read: Rs30,000 Crore Stuck in Franklin India Proves Why Debt MF Scheme Categories Are Not Worth the Risk
Meanwhile, an analysis of the final forensic audit report by Moneycontrol
revealed interference in risk management, liquidity issues, deficient investment policy, use of inter scheme transfers (ISTs) for managing the liquidity, neglect towards early warning and miscalculation of Macaulay duration of portfolios among others. (Macaulay duration basically measures how long it takes for the price of a bond to be repaid by the cash flows from it.)
According to the report, in July 2019, the head of risk management at FTMF sent a presentation, which incorporated concerns with respect to holding in debt securities of certain issuers such as YES Bank, DHFL, and Vodafone in the debt schemes. However, following concerns raised by chief investment officer (CIO) of FTMF, and nod from the seniors, the initial concerns raised on the debt securities of these certain issuers were excluded from the presentation sent by the head of risk management.