Franklin Templeton Case-Decision to wind up 6 Schemes can't be implemented

Franklin Templeton Case-Decision to wind up 6 Schemes can't be implemented 

In the Franklin Templeton case, revolving around the event wherein the notice issued by the Franklin Templeton Trustee Services private Limited (Trustees),declared that the Trustees have decided to wind up six Schemes of the Franklin Templeton Mutual Fund, the Karnataka High Court has observed that no interference is called for in the decision of the Trustees but this decision of the Trustees cannot be implemented unless the consent of the unit-holders is obtained in accordance with sub-clause (c) of clause (15) of Regulation 18 of the Mutual Funds Regulations.

The Trustees have also been restrained from taking any further steps on the basis of the impugned notices dated 23rd April 2020 and 28th May 2020, till consent of the unit-holders by a simple majority to the decision of winding up is obtained by the Trustees in accordance with sub-clause (c) of Clause (15) of Regulation 18.

As per the latest update, the Chennai Financial Markets and Accountability (CFMA) which is an investor's protection organisation, has stated that in order to safeguard the entire interests of investors, it would approach the Supreme Court.

It has also been held that Regulations 39 to 40 of the Mutual Funds Regulations are valid.

When the Board of Directors of a Trustee company, by majority, decides to wind up a Scheme by taking recourse to sub-clause (a) of clause (2) of Regulation 39, the Trustee company is bound by its statutory obligation under sub-clause (c) of clause (15) of Regulation 18 of obtaining consent of the unit-holders of the Scheme.

The consent of unit-holders will be by a simple majority.

In view of the obligation of the Trustees under sub-clause (c) of clause (15) of Regulation 18, a notice as required by clause (3) of Regulation 39 can be issued and published only after making compliance with the requirement of obtaining consent of the Unit-holders.

Clause 15A of Regulation 18 of the Mutual Funds Regulations 1996 operates in a different field which has nothing to do with the process of winding up of a Scheme. Therefore, compliance with Clause 15A of Regulation 18 is not a condition precedent for winding up of a Scheme pursuant to sub-clause (a) of clause (2) of Regulation 39.

It has also been opined that considering the duties of the Trustees under the Mutual Funds Regulations, they perform a public duty. Therefore, when it is found that the Trustees have violated the provisions of the SEBI Act or Mutual Funds Regulations, a Writ Court, in exercise of its jurisdiction under Article 226 of the Constitution of India, can always issue a writ of mandamus, requiring the Trustees to abide by the mandatory provisions of the SEBI Act or the Mutual Funds Regulations.

The High Court also commented on SEBI's role in this case by stating that SEBI should have been prompt and proactive. A prompt action by SEBI was necessary to sustain the confidence of the investors. As a watchdog, SEBI was expected to play a very proactive role by questioning AMC(Asset Management Company), Trustees and Sponsor about the compliances with the provisions of the Mutual Funds Regulations.

The Court has also opined that the question whether the decision of winding up of the said Schemes will be ultimately beneficial to the investors/unit-holders or whether it will be detrimental to the interest of the investors/unit-holders can be dealt with only by the experts in the field.

The commercial viability of the decision to wind up cannot be decided by a Writ Court. Merely because of the presence of top brass of AMC in the meeting of the Board of Directors of the Trustees, the decision making process is not vitiated

The Court cannot enter into an arena of the merits of the decision which is essentially a commercial decision. It should be best left to the experts in the field.