Majority unitholders’ consent must to shut debt schemes: SC

In a key verdict, the Supreme Court Wednesday held that the consent of majority unit-holders will be required before closing debt schemes and markets regulator Sebi will have the power to intervene if the trustees violate the regulations.

The apex court's judgement came on pleas, including the appeal filed by Franklin Templeton, against the Karnataka High Court order restraining the company from winding up its six of mutual fund (MF) schemes without obtaining the consent of its investors by a simple majority.

A bench of justices S Abdul Nazeer and Sanjiv Khanna dealt with the interpretation of rules and regulations on the issue, and not with the facts of the case related to the winding up of the six mutual fund schemes of Franklin Templeton.

“We have interpreted the statutory provisions. We have agreed with the views expressed by the High Court” on consent of the majority of shareholders for shutting down the debt schemes, the top court said, adding that “this requirement will be post publication of notice”.

Upholding the validity of regulations, Justice Khanna, pronouncing the judgement for the bench, said if trustees violate them, the Sebi can look into the allegations.

“We have not examined the facts at all. Those will be left open,” it said, adding that the appeal of the firm and others for adjudication on facts will be taken up in October for hearing.

“This is basically a theoretical exercise of interpretation. We have not touched upon a lot of things,” it said.

The apex court had upheld on February 12 the validity of e-voting process for winding up of the MF schemes and said that disbursal of funds to unitholders will continue. Prior to this, on February 2, it had ordered that ~9,122 crore be disbursed to the unit-holders.

It had said that disbursal of money would be done by State Bank of India (SBI) Mutual Fund in proportion to unit holders' interest in the assets.

The e-voting with regard to the winding up of the schemes had taken place in the last week of December last year and it has been approved by a majority of unit holders.

The six schemes are: Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund.

Franklin Templeton MF closed these six debt mutual fund schemes on April 23, 2020 citing redemption pressure and lack of liquidity in the bond market.

Till November 27, 2020 these schemes received a total cash flows of ~11,576 crore from maturities, pre-payments and coupon payments since April 24 of the previous year.