[Franklin Templeton Case] SEBI Was A Silent Spectator; Prompt Action Was Needed : Karnataka High Court

A division bench comprising Chief Justice Abhay S Oka and Justice Ashok S Kinagi observed :

"All that can be said is that SEBI should have been prompt and proactive especially when this perhaps is the first case of winding up under Regulation 39(2) (a)(of Mutual Funds Regulations). A prompt action by SEBI was necessary to sustain the confidence of the investors. As a watchdog, SEBI was expected to play a very proactive role by questioning AMC, Trustees and Sponsor about the compliances with the provisions of the Mutual Funds Regulations."

The court noted that one of the main obligations of SEBI is to protect the interest of the investors. The second obligation is to ensure that the Trustees and AMC of Mutual Funds strictly abide by the provisions of the SEBI Act and the Mutual Funds Regulations. The confidence of investors in the capital market can be sustained by ensuring that the interest of the investors is protected. The very scheme of the SEBI Act suggests that SEBI has to act as a watchdog to protect the interests of the investors.

Narrating the facts of the case, the court said "SEBI was not even possessing a copy of the resolution dated 23rd April 2020 passed by the Board of Directors of the Trustees providing for winding up. SEBI did not respond to the email dated 14th April 2020 sent by AMC. SEBI failed to reply to the letter dated 20th April 2020 addressed by the Trustees, in which, permission and guidance of SEBI was sought for winding up of the Schemes. SEBI was not aware whether compliance of sub-clauses (a) and (b) clause (3) of Regulation 39 was made by the Trustees."

It added "Even for SEBI, such a winding up was an extraordinary event. SEBI did not bother to even enquire about the compliance with clause (3) of Regulation 39 by the Trustees. SEBI did not bother to ascertain whether redemptions and borrowings ceased assuming that compliance of clause (3) of Regulation 39 was made."

The court even raised an objection to the manner in which SEBI, only after being questioned by the court, submitted a copy of an order appointing a Forensic Auditor. The copy was produced on 2nd September 2020, though the hearing commenced on 12th August, 2020. No material was placed on record to show the present status of the Forensic Audit.

"We fail to understand why a copy of the order appointing a Forensic Auditor was not produced by SEBI on its own. Some of the petitioners have filed complaints with SEBI. They are entitled to know the action taken on their complaints."

It concluded by saying "The investors/unit-holders of the said Schemes will be justified in their criticism that SEBI was a silent spectator."

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