Franklin Templeton Mutual Fund (FTMF), which sent shock waves in April 2020 by suspending six debt schemes, has written to three lakh unit-holders who invested Rs26,000 crore in these schemes for consent to their winding up. This permission itself is the result hard-fought litigation and an order of the Karnataka High Court and the Supreme Court (SC).
But there is something more worrying, almost sinister, this time. While the e-voting is to take place from 26th December to 28th December, there seems to be an orchestrated campaign using social media to push people into signing away their rights without adequate information. FTMF wants unit-holders to vote blind, without any information about the extent of loss, the culpability of its own fund managers, the failure of its trustees, what investors can hope to get back and the payment schedule.
And, yet, there are two kinds of messages that have been unleashed. First, to amplify FTMF’s message, through friendly distributors and other intermediaries on the fund industry’s gravy train, that voting against the winding-up will probably cause a great loss to unit-holders; the second, more stunning, move is to slander organisations that are fighting to make the regulator accountable and get some semblance of oversight over FTMF’s actions.
Will savers wake up to this new danger? It is bad enough that disparate investors are rarely able to put up a credible fight against the legal and money power of large institutions; but if those who do are targeted, using anonymous, orchestrated campaigns, which is the new norm, fewer people are going to come forward to help savers.
Investors need to look at the FTMF developments with this in mind. Let’s recap the facts. The six debt schemes accounted for a third of FTMF’s total AUM (assets under management) of Rs78,000 crore at the end of October 2020.
Two important investor associations have openly advised investors not to give their consent, since the battle before the apex court is far from over. A third investor has sent a legal notice to Securities and Exchange Board of India (SEBI). The battle is now in the apex court which has merely directed SEBI to appoint an observer to oversee e-voting by FTMF.
SEBI has all the powers to act decisively to protect investors’ interest. It has done nothing so far, forcing investor groups to approach the courts and the economic offences wing (EOW) of the police to get results.
This is not a wild allegation. The 24th October judgement of the Karnataka High Court has been scathing about SEBI’s aloofness and complacency. Given that the winding up of six schemes was, admittedly, an ‘extraordinary event’ and the ‘first case in history’ of Indian MFs, the Court noted that the regulator ought to have been more prompt and proactive in order to sustain investors’ confidence. It also said investors would be “justified in their criticism that SEBI was a silent spectator.”
On 3rd December, in an appeal hearing, Justice Khanna of SC told SEBI that its regulations are sketchy. "We interpret you very liberally by taking you into consideration and impose penalties. This needs to be understood by the layman. Are you satisfied by language of your regulations?" The court, while allowing FTMF to seek investors’ consent within a week, was critical of SEBI not doing enough to help investors.
SEBI ought to be doing a lot more than merely following SC’s directions to observe the e-voting process. India has chosen to adopt disclosure-based regulation. So SEBI ought to have ensured that FTMF’s unit-holders are provided adequate information, to arrive at an informed decision and not be frightened into action. This is what has come in for criticism and a legal notice from the Chennai Financial Markets Accountability (CFMA), which has been an aggressive litigant, the Midas Touch Investors Association and one other litigant named Satyam Jain.
In a letter to chairman Ajay Tyagi, Virendra Jain, founder of Midas Touch, has questioned even the basics. He alleges that FTMF does not even have the email IDs of all three lakh unit-holders affected by the schemes and wants a verifiable postal ballot rather than e-voting. FTMF, he says, had earlier mentioned a five-year staggered schedule for paying investors, while the latest notice mentions no schedule at all.
The CFMA and Midas Touch, both, accuse FTMF of indulging in ‘false propaganda’ to ‘terrorise’ and ‘bully’ investors to support the winding-up by creating the bogey of a ‘distress sale’ of assets. FTMF’s letter to investors says that if the winding-up proposal is rejected, the redemption of units will have to be restarted and this would force the fund house to make a distress sale of securities at a very deep discount. This has caused panic, amplified by social media, because most investors are ignorant, dependent on distributors for guidance and will not make time to study issues. It provides a fertile ground to orchestrate public opinion and obfuscate issues through innuendo and irrelevant questions.
Satyam Jain has sent alegal notice to SEBI seeking an enquiry and action against officials who allowed the FTMF to increase borrowing limits from 20% to 30% for two schemes, namely, Franklin India Low Duration Fund and Franklin India Short Term Income Plan, and from 20% to 40% in Franklin India Income Opportunities Fund and in Franklin India Credit Risk Fund. It has also sought disgorgement and cancellation of FTMF’s registration.
CFMA’s advisory asks investors to vote against the winding-up until there is more information, an estimate of losses, payment schedule and fixing of accountability. These cannot remain open-ended issues; but once FTMF obtains investors’ consent, most issues could be swept under the carpet.
For instance, there is the issue of FTMF’s culpability. Why is the forensic audit a secret? What stops SEBI from disclosing the key findings and acting on them? Had FTMF got a clean chit, one can be sure that the fund house and the regulator would have been happy to reveal this to the courts. If the audit has exposed serious violations and mismanagement or dereliction of fiduciary responsibility, then punishment and possible disgorgement must follow. The details may make a big difference to investors’ vote.
According to CFMA, the six schemes in question have illiquid securities, unlisted securities, low-rated high-risk securities, shares of unknown companies and defaulting companies. The erosion of principal due to these bad investments could be as high as Rs15,000 crore or more. The organisation quotes an email from FTMF which had previously mentioned that there could be ‘ill-liquidity discount of 50%’ on some schemes. Isn’t this just another way of saying that investors may need to take a 50% haircut on their investment? Shouldn’t FTMF provide updated numbers again? (See table posted by CFMA)
The Chennai organisation, correctly, asks, “How can any consent be given with so many unknowns risks?” Why does the regulator fail to understand this? My experience of observing unequal battles between investors and powerful corporates tells us that it is ‘now-or-never’ time for investors. If FTMF is able to push through the winding-up, a majority of investors will quietly accept their loss and do nothing beyond lamenting on social media. CFMA has threatened to take the battle to FTMC’s global parent by filing a class action suit against it. Given the strategic, dogged and effective battle it has fought, we wish them well. But US courts are hardly likely to be sympathetic to the cause of Indian unit-holders, when our own regulator remains mute and unhelpful.
How SEBI deals with this issue has wider implications for FTMF as well as confidence in the mutual fund industry and its fake slogan of ‘mutual fund sahi hai’. SEBI can ensure there is no distress sale due to investors stampeding to redeem units. Instead, the regulator as well as the fund industry want to bury the issue quickly so that it is business as usual for the powerful industry and its extremely well-paid executives. Three lakh investors will just learn to deal with their losses and carry on, like lakhs of others who have lost money to 18 broker defaults, bank defaults and ponzi schemes, like Sahara’s cooperatives, in the past couple years.
But what does it say about a chowkidar government that promised a strong and clean administration?