Supreme Court Upholds Validity Of E-Voting Process For Winding Up Of Franklin Templeton's Six Mutual Fund Schemes

The Court has observed that for the purpose of clause (c) to Regulation 18(15), consent of the unitholders would mean consent by majority of the unitholders who have participated in the poll, and not consent of majority of all the unitholders of the scheme. The matter will be taken up on 17th February 2022 for hearing arguments on other issues.

The Court has further added that SBI Funds Management Pvt. Ltd. will follow the best effort principle to ensure expeditious and timely payment to the unitholders and assure the best possible liquidation value of the assets or securities to the unitholders. However, the distribution of funds to the unitholders can be made in tranches without waiting for liquidation of all the securities or assets.

A division bench of Justice Abdul Nazeer and Sanjiv Khanna has issued the directions after hearing objections to the e-voting results to decide if disbursal or payment to the unit holders should be made.

The Court has been hearing the plea by Franklin Templeton challenging a Karnataka High Court's order which restrained winding up of six of its debt schemes without obtaining the consent of its investors by a simple majority. The Court has also approved the application for impleadment filed by SBI Mutual Funds and SBI Funds Management Pvt Ltd. The matter has been posted on 17th February 2021 for final arguments.

Supreme Court in its previous hearing had approved the application filed by SBI Mutual Fund and SBI Funds Management Pvt Ltd, for placing on record the distribution mechanism proposed to be followed while distributing Franklin Templeton's 9122 crores amongst its unit holders, under the six mutual fund schemes. The application followed the top Court's previous order whereby it had directed SBI Mutual Funds to undertake the distribution, dividing the amount amongst unit holders, in proportion to their respective interest in assets of scheme, as agreed by both Franklin Templeton Trust and SEBI.

Following the application, the Court has approved that SBI Mutual Funds be replaced with SBI Funds Management Pvt Ltd. in its last order 2nd February 2021.

According to the top Court's direction, the amount of 9122 crores that is cash ready with Franklin Templeton as on 15th January 2021 be distributed amongst the unit holders under the six mutual fund schemes. The Court was examining objections to the e-voting results to decide if disbursal or payment to the unit holders should be made. The Court had 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. It 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.

In December 2020, the Supreme Court 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.