Franklin Templeton debt schemes: Supreme Court to hear challenge to Karnataka High Court verdict, orders stay on redemptions

The Supreme Court today agreed to hear a challenge to the Karnataka High Court verdict by which it was ordered that no interference can be made in the decision to wind up the six debt schemes of Franklin Templeton..In the meanwhile, the Court has ordered a stay on redemptions by investors..The Bench of Justices Abdul S Nazeer and Sanjiv Khanna ordered today,"Place on record cross SLPs by SEBI (Securities and Exchange Board of India) and others. In the meanwhile, without prejudice to rights of all parties, trustees are permitted to call meeting of unitholders to seek their consent for approval. Steps in this regard will be taken within a period of one week.".At the outset of today's hearing, Justice Khanna observed,"The issue is big. People wanted refund...let SEBI answer.".The Court also asked, "If they knew people will withdraw money like anything during COVID, why didn't SEBI do something like RBI?"Advocate Pratap Venugopal, appearing for SEBI, contended that the regulator has no powers in the winding up process..The Bench ultimately said that it would hear the matter next week. It ordered,"Without prejudice to anyone, we permit trustees to hold the meeting and the result be declared.".On October 24, the Karnataka High Court refused to interfere in the decision of the trustees to wind up the six debt schemes of Franklin Templeton. The Court, however, clarified that the consent of unit holders as per the regulations is to be obtained before going through the winding-up process..Further, the Court also held:Regulations 39 to 41 of the Mutual Funds Regulations to be legal and valid.Securities and Exchange Board (SEBI) to take a decision on taking action against the company after receiving the Forensic Audit report, within six weeks.Copy of the said report is to be given to the unit holders in a sealed cover if they apply.Duties of trustees are in the nature of public duties. If rrustees violate SEBI Act or the Mutual Fund Regulations, a High Court can issue Writ of Mandamus under Article 226 to the trustees.The Forensic Audit Report given by SEBI in sealed cover is not a final report and at best can be termed a tentative report. It is not relevant for adjudication of the present issues, and hence the issue of privilege is not gone into by the Court.Trustees have an obligation to provide the minutes of meetings dated April 20 and April 23 to the unit holders as there is no confidentiality attached to the said documents.SEBI has no jurisdiction under Section 11B of the SEBI Act to interfere with the winding up decision taken by the trustee..Pertinently, the Court opined that "SEBI ought to have played a more proactive role" in the matter and that SEBI had failed to perform its duties..The High Court also deemed it appropriate to stay the operation of its judgment for a period of six weeks. It also restricted redemptions for this period. Franklin Templeton was also directed to refrain from taking any steps on the basis of the notices issued to wind up the debt schemes in April and May..Franklin Templeton then asked SEBI for permission to hold a vote on the issue on November 8. However, on November 10, SEBI directed the asset manager to seek clarifications from the Karnataka High Court on restrictions on redemptions and whether the schemes would remain closed till the vote is completed..Therefater, a plea was filed in the Supreme Court challenging the Karnataka High Court order..The plea outlines the request to the regulator and proposes an electronic vote to be held from November 30 to December 2..No interference in decision of Franklin Templeton trustees to wind up 6 debt schemes: Karnataka High Court; judgment stayed for 6 weeks .Franklin Templeton, India’s ninth-largest fund house, had in April notified its investors that it was winding up the Franklin India low duration fund, the dynamic accrual fund, the credit risk fund, the short term income plan, the ultra-short bond fund and the income opportunities fund, cumulatively worth nearly Rs 28,000 crore..Almost three lakh investors were affected by Franklin Templeton’s decision to wind up its debt mutual fund schemes. The company had cited lack of liquidity in the bond market due to COVID-19 as the reason for its decision.In June this year, the Supreme Court transferred the petitions filed on the issue from the Delhi, Gujarat and Madras High Courts to the Karnataka High Court..As the High Court was bound to dispose of the matter within three months as per the apex court's direction, hearings were scheduled even on Saturdays as well as holidays by the High Court before it pronounced the verdict on October 24..The plea by Franklin Templeton was filed by Advocate on Record Jasmeet Singh. .(Read order)