Franklin Templeton Mutual Fund position on winding up six schemes backed by SEBI

Franklin Templeton Mutual Fund position on winding up six schemes backed by SEBI

The market regulator tells SC that the 'Principle of proportionality' should not be followed for mutual funds

Franklin Templeton Mutual Fund's (FTMF's) position on winding up the six debt schemes has been backed by market regulator SEBI. SEBI in its latest affidavit filed with the Supreme Court (SC) confirmed that "an overwhelming majority of over 96 per cent unit-holders" ratified FTMF's winding-up proposal.

The stance of the e-voting observer appointed by SEBI – TS Krishnamurthy – is that only 38 per cent of the 3.15 lakh investors had participated. Reportedly, the 14-page affidavit filed by the SEBI responds to the problem areas highlighted by the observer. SEBI asked the SC to permit FTMF to wind up the schemes although it has issued a show-cause notice to FTMF for unlawful conduct based on the disclosures by a forensic auditor. SEBI told the SC to allow FTMF to "immediately disburse ₹9,000 crore" although nearly ₹30,000 crore-worth of investments are caught in these schemes.

The "principle of proportionality" should not be followed for mutual fund investors, according to SEBI's new stance. Lawyers said this could set an example for MF schemes' winding up. SEBI told the apex court, "Large unit-holders may hold a large number of shares in a MF scheme and if voting is provided in accordance with holding of a unit-holder then institutional investors, by virtue of their holdings, could easily sway the decision and retail investors would suffer. There is no concept of minority shareholders in MF regulations."

An accepted test in law, the principle of proportionality in the present context can simply mean voting rights in proportion to the units held. In a departure from the Companies Act norm, the FTMF gave one vote to one PAN (permanent account number), the observer had stressed. For the voting process, the Companies Act was followed by FTMF but not in concluding results, the observer said. FTMF ratified the winding-up proposal by a simple majority among 38 per cent participants whereas under the Companies Act, approving a winding-up proposal requires 75 per cent or more 'affirmative' votes

FTMF had given voting rights even to "unit holders who purchased units through off-market deals up to December 3, 2020 while the schemes were shut in April", the observer said. MF trust deeds should lay down procedures for unit-holder approvals in specific circumstances, SEBI's affidavit now states. SEBI told the SC, "Had advised FTMF to follow general MCA (Ministry of Corporate Affairs) guidelines for the extraordinary general meetings." Even the Companies Act comes under the MCA preview. Verifying physical copies would have taken many months and it was not the observer's job to check the voter 'know your client' to ascertain their identities, which is why they depended on KYC Registration Agency data.

The KRA agency in this voting was KFin Tech which also provided the e-voting platform. Many votes came from the KFin "servers", a forensic audit has disclosed. However, the agency has pinned the blame on a glitch. About the difficulties in voting raised by many investors, SEBI said that the observer forwarded the complaints to FTMF and KFin and both were looking into the same. SEBI's role will be rendered as "nugatory" by appointing a court officer to check the results of the forensic audit against FTMF, the market regulator said.