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Franklin Templeton Debt Schemes: Supreme Court asks SEBI to appoint observer for e-voting process; stay on redemptions to continue

The Supreme Court today asked the Securities and Exchange Board of India (SEBI) to appoint an observer to oversee the e-voting process in relation to the Franklin Templeton debt schemes that were wound up this year.

In the meanwhile, the stay on redemptions by unit holders earlier ordered by the Court will continue.

The Bench of Justices Abdul S Nazeer and Sanjiv Khanna had earlier agreed to hear a challenge to the Karnataka High Court verdict by which it was ordered that no interference can be made in the decision to wind up the six debt schemes of Franklin Templeton.

Today, Senior Advocate Meenakshi Arora argued that SEBI does not have a clear policy for the small investors. However, the Court said that this issue was already addressed by the Karnataka High Court.

One of the lawyers appearing for the unit holders urged that Franklin Templeton must give unit holders the option of voting on winding up of the schemes through postal ballot or physical appearance. The Court said that it would investigate the same.

Senior Advocate Ravindra Shrivastava suggested that some independent authority must be appointed to oversee the voting at the unit holders meeting. He also pointed out that the High Court had said that a retired High Court judge can be appointed for this purpose.

At this point, Senior Advocate Abhishek Manu Singhvi said, “Let SEBI have an observer in the meeting…SEBI is a statutory body, and such aspersions cannot be cast on the body.”

In response, Senior Advocate Arvind Datar said, “SEBI does not have the expertise to oversee electronic voting.”

Singhvi then replied, “Surely a retired judge does not have more expertise than SEBI!”

Pointing out the issue with appointing a retired judge to oversee the e-voting, Justice Khanna said, “People who conduct voting may be located at different places and a judge may be located somewhere else. E-voting needs to be certified with record. Hence that’s a problem in appointing a retired judge.”

The Court ultimately asked SEBI to appoint an observer to oversee the voting process. The matter will be next heard in the third week of January.

On October 24, the Karnataka High Court refused to interfere in the decision of the trustees to wind up the six debt schemes of Franklin Templeton. The Court, however, clarified that the consent of unit holders as per the regulations is to be obtained before going through the winding-up process.

The High Court also deemed it appropriate to stay the operation of its judgment for a period of six weeks. It also restricted redemptions for this period. Franklin Templeton was further directed to refrain from taking any steps based on the notices issued to wind up the debt schemes in April and May.

Franklin Templeton then asked SEBI for permission to hold a vote on the issue on November 8. However, on November 10, SEBI directed the asset manager to seek clarifications from the Karnataka High Court on restrictions on redemptions and whether the schemes would remain closed till the vote is completed.

Thereafter, a plea was filed in the Supreme Court challenging the Karnataka High Court order.

The plea outlines the request to the regulator and proposes an electronic vote to be held from November 30 to December 2.

On the last date of hearing, the Supreme Court had agreed to hear the matter, noting in its order,

“Place on record cross SLPs by SEBI (Securities and Exchange Board of India) and others. In the meanwhile, without prejudice to rights of all parties, trustees are permitted to call meeting of unitholders to seek their consent for approval. Steps in this regard will be taken within a period of one week.”

In the meanwhile, the Court ordered a stay on redemptions by investors.

Franklin Templeton, India’s ninth-largest fund house, had in April notified its investors that it was winding up the Franklin India low duration fund, the dynamic accrual fund, the credit risk fund, the short-term income plan, the ultra-short bond fund and the income opportunities fund, cumulatively worth nearly Rs 28,000 crore.

Almost three lakh investors were affected by Franklin Templeton’s decision to wind up its debt mutual fund schemes. The company had cited lack of liquidity in the bond market due to COVID-19 as the reason for its decision.


Via Bar & Bench
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