Karnataka HC took 'erroneous' view of regulations: Franklin Templeton MF to Supreme Court

Franklin Templeton Mutual Fund (FT MF) moved the Supreme Court (SC) on November 23, seeking relief in the Karnataka High Court’s (HC) order. The fund house has said the decision to move the SC was taken to ensure there is “appropriate implementation of the law in the best interest of unitholders”.

Here are the details of the special leave petition filed by FT MF in the apex court.

Keep halt on redemptions

The fund house wants the pause on redemptions to remain for the time being, as opening up of the schemes can force the fund house to sell investments at distress prices and lead to sharp decline in net asset values of the schemes.

“… if redemptions are not halted while the issues raised in the special leave petition are decided, or at least until consent of unitholders is obtained according to the very terms of the impugned judgment (K’tka HC order), there is a grave risk that a ‘run’ on the schemes will ensue,” the petition read, which is reviewed by Moneycontrol.

The petition adds this would lead to irreversible losses for the unitholders, and it would not be possible to ensure equitable treatment to all unitholders.

The Karnataka HC had put stay on redemptions from the schemes for a period of six weeks, after pronouncing its order on October 24, 2020. While requesting the SC to hear the matter at the earliest, the petition says that the stay on redemptions lapses on December 5, 2020.

‘Erroneous understanding’

The FT MF says the Karnataka HC has misinterpreted law and converted the two-stage process required for wind-up into a three-stage process by introducing an additional step of getting unitholders’ approval.

“The consequence of such an interpretation is that redemptions would remain unrestricted between the time when the trustee makes a decision to wind up a scheme and the time when the vote to obtain unitholder consent is obtained,” FT MF said in its petition.

It added that this would lead to a massive rush to redeem investments, defeating the objective of an orderly winding up. It pointed out that the Karnataka HC’s reliance on regulation 18(15)(c) was misplaced and proceeded on an erroneous understanding of the scheme of regulations.

“The regulation 18(15)(c) does not give rise to an additional or different requirement for unitholder approval (and it is only a reference to the approval required from unitholders under regulation 41(1) for authorising the trustee or any other person to take necessary steps to implement the winding-up),” the petition said.

The regulation 18(15)(c) reads that trustees shall obtain unitholders’ consent, when the majority of the trustees decide to wind up.

The Karnataka HC in its 336-page order had said the unitholders’ approval was a must for wind-up of any mutual fund scheme.