Franklin Templeton order: Supreme Court upholds consent of unitholders must in winding-up of mutual fund schemes

Franklin Templeton had approached Supreme Court to appeal against Karnataka High Court’s order.

The next hearing on other aspects of the case is slated for October, 2021, unless early hearing is sought by the parties.

The Supreme Court (SC) has ruled that consent of unitholders is mandatory when winding-up schemes of a mutual fund. While the order on other aspects of Franklin Templeton wind-up case is still pending, the apex court gave its view on how SEBI’s wind-up regulations should be interpreted.

In November, 2020, Franklin Templeton Mutual Fund (FT MF) had moved SC to appeal against Karnataka High Court’s (HC) order that unitholders’ consent is needed before winding-up.

According to sources, the SC has taken view that after notice is sent to unitholders, fresh investments and redemptions in the schemes can be frozen, but after this unitholders’ consent on winding-up needs to be taken.

The next hearing on other aspects of the case is slated for October, 2021, unless early hearing is sought by the parties.

What is the contention?

Regulation 39 of SEBI’s MF regulations states that the fund house can close an open-ended scheme if the trustees feel it is required or if 75 percent of the unitholders of a scheme pass a resolution to wind up the scheme or if SEBI directs the winding up in unitholders best interests.

Franklin Templeton has said that it exercised the first option, when deciding to wind-up six of its debt schemes in April, 2020.

However, certain unitholders of the schemes approached the courts, stating the fund house should have followed regulation 18(15)(c), which says trustees shall obtain consent of the unitholders before winding-up.

Franklin Templeton also followed regulation 40, which says that after trustees decide to wind-up, the schemes must stop all redemptions and investments immediately. In accordance with regulation 41, FT MF followed up by asking unitholders to vote on whom they would want to appoint for liquidating the schemes. However, this voting got stayed as the Khambatta family, who held investments in FT schemes, sought Gujarat HC’s intervention.

(This is a developing story. Please check back for updates)

Jash Kriplani is a journalist with over ten years of experience. Based in Mumbai. Covering mutual funds, personal finance. His last stint was with Business Standard, where he covered mutual funds and other developments in the financial markets