“Investments by the unitholders constitute the corpus of the scheme. To deny the unitholders a say debilitates their role and right to participate,” the Supreme Court order said. “It is an in-contestable position that the unitholders exercise informed choice and discretion when they invest or redeem the units.” A bench comprising Justices S Abdul Nazeer and Sanjiv Khanna pronounced the verdict.
Franklin Templeton had contested the Karnataka High Court’s order which restrained it from winding up its six debt schemes without obtaining the consent of the unit holders by a simple majority.
“The unitholders, when in doubt, as prudent investors may be advised to abstain, but they are not placid onlookers, impuissant and helpless when the trustees decide to wind up the scheme in which they have invested,” the top court said. “The stature and rights of the unitholders can co-exist with the expertise of the trustees and should not be diluted because the trustees owe a fiduciary duty to them.”
The Supreme Court however differed with the Karnataka High Court on Securities and Exchange Board of India (Sebi) power to intervene in such matters. It said the capital markets regulator has the power to go after mutual funds and trustees in the event of violations or wrong decisions.
Justice Khanna clarified that one of the reasons for withholding the judgement briefly was to ensure that Sebi passes the order independently before it. He said the Supreme Court has only examined the law in a “theoretical exercise of interpretation”.
The Supreme Court will now hear the case in October as Franklin Templeton has challenged Sebi’s order in Securities Appellate Tribunal. The Sebi order on June 7 had banned Franklin launching any new debt schemes for two years and imposed a Rs 5 crore fine. The regulator had also directed the fund house to refund the investment advisory and management fees for the six closed debt schemes.
In April 2020, Franklin, one of India’s most prominent mutual fund houses in fixed income, shut down these schemes, resulting in Rs 26,000 crore of investor money getting locked up for the next 10 months. Investors challenged Franklin’s move in multiple Indian courts, preventing the local arm of the US firm from distributing or monetising any assets in the six schemes in that period.
Senior counsel Arvind Datar and Supreme Court advocate Pratap Venugopal appeared for Sebi, while senior advocates Harish Salve and Abhishek Manu Singhvi represented Franklin Templeton.