No interference in decision of Franklin Templeton trustees to wind up 6 debt schemes: Karnataka High Court; judgment stayed for 6 weeks

The Karnataka High Court today held that no interference can be made in the decision of the trustees to wind up the six debt schemes of Franklin Templeton. .However, the Court clarified that the consent of unit holders as per the regulations is to be obtained before going through the winding-up process. .Highlighting these aspects, a Division Bench of Chief Justice Abhay S Oka and Justice Ashok S Kinagi held as follows:."We hold that, no interference in called for in the decision of the Trustees taken on 23rd April, 2020 of winding of the said six schemes. We hold and declare that the decision of the Trustees to wind up 6 schemes mentioned in paragraph 1 of the judgment, by taking recourse to sub-clause (a) of clause 2 of Regulation 39 of the Mutual Fund Regulations cannot be implemented unless the consent of the Unit Holders is obtained in accordance with sub-clause (c) of clause 15 of Regulation 18. Hence, we restrain the trustees from taking any further steps on the basis of the impugned notices dated 23rd April 2020 and 28th May 2020, with the consent of the unitholders by a simple majority till the decision of winding up is obtained by the Trustees in accordance with sub-clause (c) of clause 15 of Regulation 18 of the Mutual Fund Regulations."Karnataka High Court.The Court also deemed it appropriate to stay the operation of its judgment for a period of six weeks and directed the respondents to refrain from taking any steps on the basis of the notices issued by Franklin Templeton in April and May..During this period, there will be no redemption by investors, the trustees cannot make any borrowings, or clear any liabilities during this period, clarified the Bench..Further, the Court also held that, .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..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..This apart, the conclusions drawn by the High Court include the following;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..These findings and conclusions were pronounced by the Bench in a batch of pleas related to the winding up of six Franklin Templeton mutual fund debt schemes, after conducting video conference hearing for 25 days..Before pronouncing its judgment, CJ Oka orally remarked,."This must be the longest video conference hearing conducted. It was held for 25 days. Participants joined from London, New Delhi, Calcutta and Chennai.".The Franklin Templeton team from Trilegal included Partners Harsh Pais, Kunaal Shah, Ashish Bhan, and Counsel Mohit Rohatgi, who briefed Senior Advocates Harish Salve and Janak Dwarkadas..Senior Advocates KG Raghavan and Uday Holla also appeared for the Franklin Templeton group. .As for the pleas transferred from Delhi High Court, the petitioner was represented by Senior Advocate Ravindra Shrivastava who was briefed by Advocate Abhinav Shrivastava(Partner, GSL Chambers) and Advocates Chaitanya SG, Garima Tiwari and Karan Kohli..SEBI was represented by Solicitor General of India, Tushar Mehta, Senior Advocate Arvind Datar along with Advocates of M/S King and Partridge, Pratap Venugopal, Nithin Prasad, Vidur Nair and Suryanarayana. .In June this year, the Supreme Court had transferred petitions filed on the issue from the Delhi High Court, the Gujarat High Court, and the Madras High Court, to the Karnataka High Court..SC transfers all pleas challenging winding up of Franklin Templeton debt schemes to Karnataka HC, directs CJ to decide matter in 3 months.As the High Court was bound to dispose of the matter within three months as per the Apex Court's direction, the hearings were accordingly taken up on Saturdays as well as holidays..Franklin Templeton debt schemes: Karnataka HC to first hear pleas transferred from Delhi HC on August 12.The Court had began hearing the submissions from August 12. The hearings came to a close on September 24..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 are set to be affected by Franklin Templeton’s decision to wind up its debt mutual fund schemes. The company had cited a lack of liquidity in the bond market due to COVID-19 for its decision.