SC allows Franklin Templeton to seek investors' nod for winding up schemes

Top court slams Sebi for staying on sidelines when unitholders began redeeming their investments; redemptions to remain suspended till further notification

The Supreme Court (SC) on Thursday issued an interim order allowing the trustees of Franklin Templeton Mutual Fund to seek consent of unitholders for winding up of the six debt schemes under section 18(15)(c) of Sebi (Mutual Fund) Regulation 1996. Redemptions will continue to be suspended till further notification.

The apex court, which was hearing the asset manager’s plea challenging the Karnataka High Court’s verdict given in October, also slammed market regulator Securities and Exchange Board of India (Sebi) for staying on the sidelines when unitholders began redeeming their investments. The regulator had also drawn flak from the Karnataka HC, for failing to reply to the letter dated April 20 addressed by the trustees, in which permission and guidance of the regulator was sought for winding up the schemes.

“We believe that the Supreme Court order will be helpful in ensuring orderly monetization and distribution of scheme assets. We will issue the notice for seeking consent of unitholders shortly. We deeply appreciate the support of our investors and partners till date and hope to commence distribution of investment proceeds at the earliest,” Franklin Templeton said in a note after the order.

The two-member bench will hear the matter again next week.

According to an earlier update provided by the asset manager, the six schemes had received total cash flows of Rs 11,576 crore till November 27 since winding up from maturities, pre-payments and coupon payments out of which Rs 2,836 crore was received in the month of November.

The cash available as of November 27 stood at Rs 7,226 crore for the four cash positive schemes, subject to fund running expenses. Individually, Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund and Franklin India Credit Risk Fund had 48 per cent, 46 per cent, 33 per cent and 14 per cent of their respective AUM in cash.

“Post the judgement of the High Court of Karnataka, we considered all possible options over the last few weeks to start returning money to unitholders in the shortest possible time in an orderly manner. This included the option of seeking unitholder consent according to the judgment of the Hon’ble High Court. However, after detailed deliberations, we determined that it will be necessary to seek judicial intervention from the Supreme Court to ensure an appropriate implementation of the law in the best interest of unitholders,” Franklin Templeton had said in a note put out earlier.

Franklin MF shut six of its debt schemes on April 23, citing redemption pressures and lack of liquidity in the debt market.

In May, the trustees had sought a vote by unitholders under section 41(1) of the Sebi Mutual Fund Regulations, to permit the Trustee (or Deloitte) to undertake an orderly sale of the debt securities held in the funds, and return money to unitholders. However, the process could not be completed.

Taking action

• SC issues interim order 
• Allows FT to seek unitholders’ nod for winding up six debt schemes
• The apex court also slammed Sebi for failing to take appropriate action as the crisis unfolded
• Two-member SC bench to hear the matter again next week
• FT to issue notice for seeking consent of unitholders shortly
• Six schemes have received total cash flows of Rs 11,576 crore