Can’t wind up mutual funds sans consent: Karnataka High Court

The trustees had contended that they had informed SEBI on April 20, that the net outflow between in the Oct-Dec 2019 quarter was Rs 8,697.53 crore and Rs 1,855.39 crore in the next quarter.
Karnataka High Court (File Photo | Debdutta Mitra, EPS)
Karnataka High Court (File Photo | Debdutta Mitra, EPS)

BENGALURU: In a big relief to investors, the Karnataka High Court on Saturday declared the decision of Franklin Templeton Trustee Services Pvt Ltd to wind up six schemes cannot be implemented unless the consent of the unit-holders is obtained.Declining to interfere in the decision of the trustees, taken on April 23, to wind up the schemes, a division bench of Chief Justice Abhay Shreeniwas Oka and Justice Ashok S Kinagi, however, restrained them from taking further steps on the basis of the notices, dated April 23 and May 28, till the consent of the unit holders by simple majority is obtained by the majority of the trustees. This should be done in accordance with Clause 15(c) of Regulation 18 of the Mutual Funds Regulation, to redeem the units prematurely, the court said.

Petitions were filed by unit holders Amrutha Garg in Delhi High Court, Areez Phirozsha Khambatta and his wife in the Gujarat HC, challenging the decision to wind up schemes. A criminal petition was filed by M/s Chennai Financial Markets and Accountability in the Madras HC against those who were allegedly responsible for winding up the schemes. On June 19, 2020, the Supreme Court transferred all petitions to the Karnataka High Court.

The petitioners contended that the decision to wind up the schemes on the pretext of the pandemic was illegal  and that liquidity stress had arisen much earlier and SEBI had failed to discharge its duties. The trustees could have postponed the redemption of units to meet the exigency created, the petitioners’ counsel said.

The trustees had contended that they had informed SEBI on April 20, that the net outflow between in the Oct-Dec 2019 quarter was Rs 8,697.53 crore and Rs 1,855.39 crore in the next quarter. The decision to wind up the schemes is not based only on what has happened due to Covid-19, but on prognosis. If freedom is not given to the trustees, they will have to sell the assets by making a distress sale which will affect the capacity of the FT-AMC to borrow, they said.

The bench directed SEBI to ensure that the forensic auditors submits their report at the earliest. After examining the report, the SEBI or its chairman should take a decision on taking action within six weeks, it added.The bench also stayed the operation of the judgment and order for six weeks, to enable the trustees to approach the Supreme Court, on the condition that the respondents will not act upon the April 23 and May 20 notices. During this period, there will be no redemptions, and the AMC and Trustees should not make any borrowings and should not create liabilities for the schemes, it said.The Karnataka HC is perhaps the first to hold one of the longest video conference hearing - 61 hours over 25 working days - the bench said in its 336-page judgment in the case.

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