Franklin Templeton case: Karnataka HC says consent of unit holders needed

The Karnataka High Court on Saturday said the Franklin Templeton trustees should have taken the consent of unit holders before giving the nod for winding down of six debt schemes.

The court has restrained the trustees from taking any further steps till the consent of unit holders via simple majority is obtained. It said the duties of trustees are in the nature of public duties. "If Trustees violate SEBI Act or the MF Regulations, a High Court can issue Writ of Mandamus under Article 226 to the Trustees," the court observed, adding that trustees had an obligation to provide the minutes of meeting dated April 20 and April 23 to the unit holders.

It also said that the market regulator Securities and Exchange Board of India should have played a more active role in the matter, while maintaining that Sebi had no jurisdiction under Section 11-B of the Sebi Act to interfere with the winding-up decision taken by the trustee.

It added that the report given by Sebi in a sealed cover to the court is not final but tentative and was not relevant for adjudication of the present issues. The court has given Sebi six weeks to make a decision on the forensic audit report.

The High Court has stayed the operative part of the judgment for six weeks for appeal, during which time no redemptions will be allowed. It asked the trustees and the AMC not to make any borrowings or clear any liabilities during this period.

"We are studying the order issued by the Hon'ble Karnataka High Court and will take appropriate steps in consultation with legal experts in the best interest of unit holders," said a Franklin Templeton spokesperson.

Earlier this month, the court passed an order to take on record duly notarised copies of affidavits filed by the asset manager (e-filed originally) as per the standard operating procedure of the court.

The case against the asset manager was filed by some unitholders of the six debt schemes that were shut in April.

In April, Franklin Templeton decided to wind up six of its debt schemes oriented towards high-yield investments with total assets under management of over Rs 25,000 crore. It cited continued redemption pressure and lack of liquidity in the debt market, amid the coronavirus-induced lockdown, for the closure. 

A few weeks ago, the EOW of the Chennai Police registered a first information report (FIR) against the asset manager and Franklin Templeton Trustee Services for an alleged criminal conspiracy to defraud 300,000 investors by causing wrongful loss to them and unlawful gain to themselves.