Ravishekhar Pandey and Anubhav Ghosh
Franklin Templeton is an American Mutual Fund Company, named after Benjamin Franklin. It runs 15 schemes in India. Franklin Templeton is the country’s ninth-largest mutual fund house. On April 23 2020, it announced that it was winding up six debt schemes: (i) Franklin India low duration fund, (ii) Franklin India dynamic accrual fund, (iii) Franklin India credit risk fund, (iv) Franklin India short term income plan, (v) Franklin India ultra short bond fund and (vi) Franklin India income opportunities fund.
Together these schemes had nearly 3,00,000 investors and Rs.25,658 crores assets, equivalent to a quarter of all assets that Franklin Templeton was managing. Such a move is unprecedented for India, where the last time a mutual fund was forced to wind up a scheme was because of regulatory and legal orders. The reasoning provided by Franklin Templeton for this action is twofold – (i) Negative Sentiment in the market due to COVID19 (ii) Excessive Redemption by investors. Due to liquidity crisis and non- maturity of its ultimate debt investment, Franklin Templeton claims to not have adequate liquidity at the present time to satisfy redemption by investors.
Franklin Templeton derives its right to windup its schemes from Reg. 39(2)(a) of the SEBI (Mutual Fund) Regulations, 1996. The regulation provides that the trustees of a fund can close the scheme on happening of any event which the trustees feel it is in the best interest of the investors to close the fund. Hence, exercising this wide discretion, the Fund Manager decided to wind up the 6 schemes. It is the stand of Franklin Templeton that till the first quarter of March 2020, there was no default in the scheme and it was only thereafter that the decision to wind up the six schemes was taken and consequently a public notice was issued as per the SEBI (Mutual Funds) Regulations, 1996. The reason for the decision to wind-up the schemes is the dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the Covid-19 crisis and the resultant lock-down of the Indian economy. It can be seen in the public advertisement that the Mutual Funds, especially in the fixed income segment, are facing continuous and heightened redemptions and the Trustees of the Asset Management Company in India, after careful analysis and review of the recommendations submitted by the Asset Management Company and in close consultation with the Investment Team are of the considered opinion that an event has occurred, which requires these schemes to be wound up and that this is the only viable option to preserve value for unit-holders and to enable an orderly and equitable exit for all investors in these unprecedented circumstances.
Pursuant to Regulation 41(1) of the Regulations, the Asset Management Company issued a Notice for E-voting and Unit-holders’ Meeting . The unit-holders were given the option to cast their votes authorising the Trustees or Deloitte Touche Tohmatsu India LLP (Deloitee) to take further steps for winding up the six schemes. It was also stated in the Notice that Kotak Mahindra Bank (Kotak) shall be assisting the Trustees (under option 1) and / or the Asset Management Company (under option 2) and providing independent advice, wherever required, in liquidation of assets. It was further contended that the Covid-19 pandemic and the economic uncertainty reduced the market liquidity, heightened redemption volumes and reduced the volumes to unsustainable levels and therefore, there was a risk of complete denudation of the underlying assets, resulting in significant loss of value for investors. Franklin Templeton has maintained its stand that in spite of the present economic situation, the Asset Management Company carefully considered all the available options, including temporary suspension of the redemption until the market conditions stabilize without winding up of the schemes, but, thereafter, it was decided that other available options were either inadequate to meet the scheme on account of the pandemic or would lead to loss in investors value and carry the risk of disorderly liquidation.
Franklin Templeton also maintains that it was in continuous consultation with SEBI, and after consultation with the Regulator, it took this step as the only possible recourse available so as to protect the interest of the unit-holders.
As a consequence of such decision, an uproar has been seen amongst a large number of brokers and unit holders. On April 24, 2020 Association of National Exchange Members of India (ANMI) a body of Asset Management Companies addressed a grievance against this decision of Franklin Templeton to Ministry of Finance, Ministry of Corporate Affairs and the Chairman, SEBI, suspecting foul play and mismanagement of assets of the subject 6 Franklin Templeton schemes. The opposition to the decision of winding up, liquidation and e-voting were not only reported to the ministries and regulator, these acts were also challenged by way of Writ Petition before the Hon’ble Gujarat High Court and Delhi High Court, amongst the other high courts.
In a Writ Petition by Areez Phirozsha Khambatta, challenging the decision of liquidation and e-voting by Franklin Templeton, the Hon’ble Gujrat High Court passed an interim injunction maintaining the status quo and staying the process of e-voting. The primary contentions of the Petitioners were suspicion of foul play and lack of adequate data to make an informed decision during the process of e-voting. Relying on regulation 18 of the SEBI (Mutual Fund) Regulations, 1996, the petitioner further contended that 51% of consent from the unit holders was also mandatory before making the decision of liquidation of the assets of the fund. Subsequently, attempts were made by Franklin Templeton to vacate the stay on e-voting stating that stay would only prolong the suffering of the investors and delay the redemption for unit holders. In response to the said arguments, the unit holder petitioners made reference to the recent announcement by Reserve Bank of India, regarding Rs.50,000 Crores Special Liquidity Package for Mutual Funds, and the plea for vacating the stay was opposed by submitting that the applicant-Asset Management Company should take advantage of the said package and prevent any immediate loss as apprehend by them. Considering the rival submissions, the Hon’ble Gujarat High Court rejected the application for vacating of the stay and continued the stay order till forensic audit reports are not made available. Franklin Templeton has challenged the said order before the Hon’ble Supreme Court. The matter is sub-judice as of now. Franklin Templeton has also prayed for unification of all on-going proceedings before the various High Courts and clubbed hearing of all the matters before the Hon’ble Supreme Court. However, on June 12, 2020, the petition for unified hearing has been dismissed as withdrawn.
In the meantime, a group of petitioners challenging the acts of Franklin Templeton before the Hon’ble Delhi High Court have also moved intervention applications for intervening in the proceedings before the Hon’ble Gujarat High Court. Throughout the proceedings, the stand maintained by the financial markets regulator SEBI has been uniform. SEBI has been of the view that irrespective of the modus obtained by Franklin Templeton, the unit holders must redeem their units and the loss of unit holders must be minimised. In absence of forensic audit report or an independent report on management of the assets of the mutual funds, SEBI has not charged Franklin Templeton with violation of any of the SEBI regulations. The fate of the unit holders shall be decided only after a conclusive report on the dealings of the assets of the 6 wound up schemes by Franklin Templeton is available. Alternatively, if the Hon’ble Supreme Court vacates the stay order of the Hon’ble Gujarat High Court, there can be closure of the scheme proposed by Franklin Templeton.