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As is expected, Franklin Templeton MF will approach the Supreme Court on the Karnataka High Court judgement mandating unitholders’ consent for the winding up of the six debt mutual fund schemes.

The Trustee of Franklin Templeton decided to wind up 6 of the debt funds in April 2020. The decision, according to Franklin, was taken because the markets had become illiquid due to the severe impact of the coronavirus lockdown. Some investors disagreed with Franklin and had filed court cases.

Do note that Karnataka High Court while delivering its judgement in October in those cases had ruled that the consent of a simple majority of unit holders is required for winding up of mutual fund schemes. Thus, it stayed the winding up till such a vote is taken. 

Sanjay Sapre, president, Franklin Templeton India in a letter said: “Post the judgement of the Hon’ble 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.”

He furthermore said that after detailed deliberations, the fund-house determined that it will be necessary to seek judicial intervention from the Hon’ble Supreme Court to ensure an appropriate implementation of the law in the best interest of unitholders. “This action took some time because these steps needed to be carefully and thoughtfully taken to ensure that we can return unitholder monies at the earliest in an equitable manner, without distress sale of securities (at steep discounts) that would occur if there is a rush of redemptions,” Sapre added.

Franklin approached SC as it wants an orderly redemption of the funds. The Karnataka High Court had ruled that the disbursal of funds will depend on whether or not the decision of the mutual fund trustees to wind up the scheme is held to be valid. If the decision is held invalid, then money will be paid to those who give redemption requests, which could mean chaos if a huge number of investors exit at the same time.

In May 2020, the Franklin MF Trustee 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.

Though the schemes could not actively monetise the portfolio, approximately Rs. 5,900 crore is available for distribution in four out of these six schemes. This shows that the securities held in the funds can be liquidated at a fair value, if the schemes are allowed to undertake an orderly process of liquidation. Sapre argues that this is definitely preferable to a distress sale of securities (at steep discounts) that would occur if a rush of redemptions forces an emergency liquidation of the securities at prices far below their realizable value under normal market conditions.