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The Franklin saga - How long will it linger on?

While the verdict is in favour of investors, the uncertainty around cash distribution remains

The Franklin saga - How long will it linger on?

After the four-month-long court proceedings, the Karnataka High Court finally declared the verdict yesterday. To summarise the judgment, the HC stated that while the trustees can take the winding up decision but the same can't be done without obtaining the consent of unitholders. This holds the earlier notification from Franklin, released in April, void. Hence, the fund house cannot move ahead without taking the simple majority consent of investors. Read on for more details and the way forward.

The background
It all started in the late evening of April 23, when Franklin Templeton shook the mutual fund industry with the announcement of winding-up of its suite of six yield-oriented funds. The AMC cited an extremely challenging credit climate and the fall in liquidity owing to the pandemic as the reasons. At the onset, the AMC elucidated that the decision had been taken to preserve value for investors.

The six schemes - Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund - together had over Rs 25,000 crore in assets.

And the litigation began...
In late May, the AMC released notices on e-voting to get the unitholders' approval on how to go ahead with the winding-up process. Here, the investors were required to choose between the trustees or Deloitte to take care of the liquidation process in consultation with trustees and Kotak Bank. Soon, various investors filed writ petitions in Chennai, Delhi, Ahmedabad High Courts against FT's winding-up decision and also managed to get a stay on the e-voting process on June 3.

FT appealed to the Supreme Court when the Gujarat Court rejected its plea. But the top court refused to interfere, as the matter was being heard in different high courts. The SC then transferred all the cases to Karnataka High Court for a fresh hearing. The hearing in the Karnataka High Court started in August.

While a lot happened in the interim with news around forensic audits, of allegations and counter- allegations, all these eventually climaxed in the verdict released yesterday. For a detailed timeline of all the happenings, you can read this story.

The verdict
The verdict was sort of a big win for investors, as the HC clearly stated that the fund house would need to obtain a simple majority consent of unitholders before proceeding with the winding-up process. The HC stayed the operation of the judgment for a period of six weeks, during which investors can't redeem and the AMC also can't make any fresh borrowings. Further, the court observed that SEBI could have been more proactive.

If the early indications from the fund house are anything to go by, there is a likelihood that the AMC will appeal to the Supreme Court. In a letter to investors, FT said that it would seek appropriate directions regarding the return of accumulated cash of over Rs 5200 crore in the four cash positive schemes and any additional cash that the AMC might receive while the matter remains under the consideration of the court.

This means that the matter may continue to drag. Notwithstanding what will happen in the apex court if it reaches there, in the current context, the verdict sets a precedent for mutual funds in terms of the requirement of unitholders' consent for winding-up. However, the biggest downside, as of now, is that even the money available for distribution to investors continues to be stuck and as things stand now, their wait may just get prolonged.