The Karnataka High Court has ruled that the trustees of Franklin Templeton Mutual Fund cannot take any action on the winding up of the six schemes till they obtain a simple majority consent of unit holders.
However, this does not necessarily mean a voting will happen anytime soon. As the Supreme Court is on vacation, Karnataka HC has stayed the operation of its own order for six weeks to allow the fund house to appeal the order in the Supreme Court. Till then, status quo on refund and redemptions would be maintained in these schemes.
Meanwhile, the fund house said that it is considering the order and will take appropriate steps in consultation with their legal experts. This could broadly lead to two outcomes:
Case 1 - FT MF decides not to appeal the Karnataka HC order in the Supreme Court
Case 2 - FT MF decides to challenge the Karnataka HC order in the Supreme Court
Let us understand how the two scenarios can impact investors.
Case 1
If FT MF does not challenge the Karnataka HC order, it has to conduct a voting on winding up of the 6 schemes to obtain a simple majority consent of unit holders. In this case, there could be two outcomes:
- Majority unit holders give their consent to wind up these 6 schemes. As a result, money will be returned to all investors after repaying borrowings and the expenses of liquidation.
- If majority unit holders vote against the winding up process, the 6 schemes will have to be reopened. And money will be paid to those investors who give redemption requests. This scenario, however, will be full of risks for investors.
This situation could result in considerable redemption requests and could force FT MF to sell the debt securities at deep discount. As a result, the value of unit holders' investments in these schemes could be eroded further. The AMC may undertake steps such as restricting withdrawals for a certain period in order to deal with large redemption requests. However, current regulatory framework allows fund houses to put a maximum suspension period of 10 working days in 90 days and the requirement to honour redemptions up to Rs.2 lakh per day per investor.
Case 2
If FT MF decides to challenge the Karnataka HC order in the Supreme Court, 2 things can happen:
- One, the Supreme Court accepts the appeal. In this case, it will take some more time before any final order. In the meantime, the status quo will prevail i. e. investors will have to wait for their money. And no active monetization of assets will happen, although interest payments, prepayments of securities etc will continue.
A FT MF spokesperson told Cafemutual that if they appeal to the Supreme Court, the fund house will ask the apex court to allow them to distribute the cash lying in 4 funds to unit holders. About Rs 5,200 crore is currently accumulated in FT's 4 cash positive schemes. The spokesperson said that a similar stance was taken in the Karnataka HC as well.
- Two, the SC does not admit the appeal. In such a scenario, FT will have to seek consent of the nearly 3 lakh investors in those 6 schemes on the winding-up decision.
