Mutual fund investors have final say in scheme’s closure: Supreme Court

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MUMBAI: The Supreme Court on Wednesday empowered investors in a mutual fund scheme to have the final say on its closure after trustees who manage it give a “reasoned nod” for winding it up. Under present rules, trustees alone have the right to decide on the closure of a scheme.

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The landmark verdict came in the case relating to the winding-up of Franklin Templeton MF’s six debt schemes. In April 2020, Franklin Templeton MF’s trustees had agreed to close down the schemes due to a severe liquidity crunch in the debt market after a Covid-induced lockdown.

The SC also upheld the validity of Sebi’s mutual fund regulation under which these schemes are being closed down. The court held that Sebi can look into the decision of the trustees in case of a closure of a scheme.

The SC judgment came on an appeal filed by Franklin Templeton MF against a Karnataka high court order that had asked the fund house to get the consent of its investors by a simple majority to its decision to wind up the six schemes. Some aggrieved investors had also moved SC challenging the validity of Sebi’s MF regulations.

In their 77-page order, Justices S Abdul Nazeer and Sanjiv Khanna dealt with the interpretation of Sebi’s rules and regulations related to the issue of winding up of a scheme and the process followed during the same.

They also said that to start the winding-up process, the trustees should give a public notice in newspapers to disclose circumstances leading to their decision to close the scheme.

Justice Khanna said that they had “reservations on the said observations (of Karnataka HC) for the simple reason that if there is a violation of the regulations…by the trustees or AMC, it is open to Sebi to proceed in accordance with the law”.

The apex court said that Sebi had the powers to pass directions under Sections 11 and 11B of the Sebi Act which deal with the protection of investors’ interests. SC, however, said that trustees need not take prior approval of Sebi while deciding to close a scheme.

On February 12, the SC had allowed the e-voting process for winding up of six MF schemes. In December last year, the investors had voted their consent to the decision to close down the six schemes but the final results of the voting was not disclosed till February 12 under the apex court’s order.

The SC had also allowed disbursal of funds to investors in these schemes under the supervision of SBI MF. According to the disbursal schedule, by the end of the week nearly Rs 21,100 crore would have been distributed to the investors of the six FTMF schemes, a release from the fund house said last week.

The six schemes are FTMF’s Low Duration Fund, Ultra Short Bond Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund, and Income Opportunities Fund.

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