[Breaking] Karnataka High Court Restrains Franklin Templeton From Proceeding With Winding Up Of Schemes Without Obtaining Consent Of Investors

The High Court of Karnataka on Saturday restrained Franklin Templeton Investments(FT) from proceeding with the winding up of debt fund schemes without obtaining the consent of unit investors.

A division bench of Chief Justice AS Oka and Justice Justice Ashok S Kinagi held a special sitting on Saturday to pronounce the verdict in petitions challenging the winding up of six debt fund schemes of FT.

While the court said that it was not interfering with the decision to wind up the schemes, it said that FT has to take the consent of the unit holders before taking further steps on the basis of the decision.

"The decision of the trustees to wind up the six schemes is not interfered by the court subject to it obtaining consent from the unit holders", the court stated in the order.

When the board of directors of trustee company winds up the scheme, the trustees company is bound by the statutory regulation of taking consent from the unit holders, the court said.

The Court has stayed the operative portion of the judgment for six weeks from today subject to the condition that none of the respondents will take any steps to implement the impugned notices.

Status quo as on today should be maintained for the next six weeks.

The Court in its 330-page judgment said "We hold that no interference is called for in the decision of trustees to winding up of the said schemes. We hold and declare that the decision of the trustee to winding up the six schemes cannot be implemented until consent from the unit holders is obtained in accordance with Sub Clause C of Regulation 15. Hence we restrain the trustee to take any further steps based on the notice 23 april 2020,and 28th may 2020 issued till the consent of the unit holders is obtained. It will open for trustees to obtain consent of unit holders and to take further steps."

The bench also held that Regulations 39 to 41 of the Mutual Funds Regulations to be legal and valid.

*The court has directed the Securities and Exchange Board (SEBI) to take a decision on taking action against the company after receiving the Forensic Audit report, within six weeks.  

*It has directed the trustees to provide true copies of the minutes of the meetings to unit holders.

*It held that unit holders are not required to be given the forensic audit report copy.

Notably, the court also observed that "SEBI ought to have played a more proactive role."

In July, the Supreme Court had transferred petitions filed in different High Courts against the FT's decision to the Karnataka High Court.

The HC had begun hearing the matter on a daily basis from August 12, through video-conferencing. The judgment was reserved on September 24, after hearing submissions made by all the parties.

"This must be the longest VC hearing conducted. It was held for 25 days. Participants joined from London/ New Delhi and Chennai", Chief Justice AS Oka said before pronouncing the operative portion of the 333-page judgment. 

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