Supreme Court Directs Distribution Of 9122 Crores To Unit Holders Under Franklin Templeton's Six Mutual Fund Schemes

A division Bench of Justice Abdul Nazeer and Justice Sanjeev Khanna issued the directions while hearing plea by Franklin Templeton challenging a Karnataka HC order which restrained winding up of six of its debt schemes without obtaining the consent of its investors by a simple majority. The Bench was examining objections to the e-voting results to decide if disbursal or payment to the unit holders should be made.

The Court has asked the Franklin Templeton Trust services and the asset management company to cooperate with SBI Mutual Funds in this regard and furnish to them entire data and details.

The Bench has further directed the process to preferably be completed in period of 20 days from date of this order and has given liberty to the parties to can move an application and approach the Court in case of any difficulty in the process.

During the hearing, Advocate Nithyaesh Natraj appearing for an intervenor submitted before the Court that it was incumbent on Franklin Templeton to go to SEBI and ask for the process to be followed, considering there was a vacuums on the process to be followed. However, they chose to take laws in their hand instead.

In response to the Court's question if they wanted their money, Advocate Natraj responded and stated that as a unit holder, he definitely wants his money back, but the question that arises is the manner in which he wants it. While as a contractual owner, he had the right to redeem it, by virtue of the winding up decision an open ended scheme was converted to a close ended scheme, and violated another statutory obligation.

"As far as modification and winding up are concerned, they're interconnected but partially. If you want to exercise your right to redemption, you will be paid, but if you don't, you will be taking a major risk then. That's why we posed the question" – the Bench observed.

Natraj stated that he would prefer that the money is returned in exercise of his right of redemption. He added that presently, people believe that they will suffer a loss. Every unit holder wants their money back. If Franklin Templeton can give a commitment that principal of unit holder is safe and it will honour its commitment no unit holder will have a grievance

Advocate Madhurima Bhattacharjee, appearing for an impleading party, submitted that the notice issued by Franklin Templeton for e voting only had assumptions and projections which cannot be done according to the advertisement rules. Notice was completely illegal because it had projections and assumptions, and is not allowed.

Abhishek Manu Singhvi appearing for Franklin Templeton Asset Management submitted that the Court should not lose sight of the main focus of the case. The court has advanced public interest the maximum and it is not the destination or result that the Bench is here to second guess, its the Journey and the process.

Dr. Singhvi added that there should not be rush in redemption, as that will have a negative impact on everyone.

"Let them have a fair transparent choice. They have the right to have a choice. If you project that if they don't agree their investments will be wiped off, that's not right."- the Bench noted.

Dr Singhvi also clarified that the votes that were cast did not emanate from a single source. OTPs were sent for voting and messages were sent after votes were cast. Therefore, no one IP address was used to cast multiple votes.

The Bench told Dr Singhvi that they can wait till the end period when winding up period is passed, and then distribute the funds. However that will not be possible unless the Court says it is ordering winding up now, and will decide on legal questions later. Singhvi agreed, calling it 'the most virtuous path' and added that even if the court orders winding up, Franklin Templeton will follow the Court's timeline and will nog delay it.

Senior Advocate Harish Salve submitted before the Court that there has to be a proper procedure that will have to be followed for equal distribution to all share holders. Its a debt portfolio, where money keeps accruing and going. He added that there are only a handful of people who have invested in this very high risk portfolio. There are different types of portfolio with different level of risks. The present portfolio is a high risk portfolio and id people have a risk appetite they go for these portfolios.

"My submission is that winding up should be ordered. Whoever is nominated by SEBI, we will coordinate with them so they could wind up in best possible way" - Harish Salve stated.

Expressing displeasure over the kind of argument made during the hearing, Mr Salve submitted that arguments that slander people should be discouraged by the Court. Just because someone is privileged to be in the Supreme Court and cannot be hauled up, doesn't mean they can just say anything they want to.

Advocate P Venugopal appearing for SEBI informed the Court that SEBI believes that the Amount should be immediately distributed and suggests that SBI Mutual Fund be appointed to regulate it. SEBI also suggest that amount be distributed immediately in proportion to their respective interest but not in less that 10-12 months, as shorter period may lead to distress sale.

The Supreme Court had in December 2020 had allowed Franklin Templeton Trustees to call for a meeting of unit holders to seek their consent/approval. The top court had hauled up SEBI adding that it had a lot to answer for and why did it not intervene when unit holders started seeking redemption, much like how RBI intervened in cases of banks, to protect depositors.

Franklin had stated that in May 2020, the trustees had sought a vote by unit investors for validly undertaking an orderly sale of the debt securities held in the funds and return money to Unit investors. However, the process could not be completed. It had stated that after judgement of High Court of Karnataka, it considered all possible options to start returning money to unit holders in the shortest possible time in an orderly manner. This included the option of seeking unit holder consent according to the judgment of the High Court. However, after detailed deliberations, it 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 unit holders. This action took some time because these steps needed to be carefully and thoughtfully taken to ensure that it can return unit holder 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.

The Karnataka High Court had heard the petitions challenging the winding up of six debt fund schemes of the Fund House.While the court had refused to interfere with the decision of winding up the schemes, it had 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 had stated in the order.

Franklin Templeton had in April announced its decision to wind up six debt funds citing low liquidity. Nearly three lakh investors are estimated to be affected by this decision. It was after this decision that some investors moved various High Courts. Petitions across High courts were clubbed by the Supreme Court vide an order dated June 24 in the transfer petition filed by Franklin Templeton seeking consolidation of various petitions filed with respect to the winding up of debt funds.