SEBI prostate Gulliver, FTMF unit-holders in darkness

Franklin Templeton is a premier global investment management company.
Franklin Templeton is a premier global investment management company.

Who will supervise the crucial December 26-29 voting?

What can you say about the big issue of Franklin Templeton Mutual Fund (FTMF) whose six debt schemes were abruptly closed in April, 2020? That when it happened it rattled over 300,000 unit holders who had a whopping Rs 26,000 plus crore at stake? And that the schemes accounted for one third of FTMF’s total assets of Rs78,000 crore?

And then, like everything else in India, a prolonged courtroom battle ensued? 

Well, it happened, and a tiny portion of the dust appeared settled. But there are enough chances of a huge sandstorm that could engulf the hapless, disparate unit holders. 

Let us not forget that the process of winding up of six schemes is bizarre, this is the first case in history of the Indian mutual funds.

Now, here comes the decider.

In two days flat and for three consecutive days starting December 26, 2020, an estimated 300,000 unit-holders of FTMF will offer e-votes to register their consent or no consent to winding up of the schemes.

The matter did not reach this stage easily, the permission for e-voting happened only after a tough litigation which resulted in a brilliant order from the Karnataka High Court in favour of the unit holders. Then came the December 9, 2020 order from the Supreme Court which asked Securities and Exchange Board of India (SEBI), the market regulator, to appoint an independent observer who could oversee the e-voting process.

SEBI Headquarters, Mumbai.

But less than 48 hours before the start of e-voting, the market regulator has not announced the name of the observer. Worse, a slow, yet steady campaign is filtering through the social media urging the unit holders to sign away their rights without understanding what it means for them.

Can you offer blind votes? Logically, you should not. 

But what FTMF is seeking is illogical. In short, it wants unit-holders to cast their votes without knowing how much would be the extent of loss, what the unit-holders could get from FTMF and when. Like the proverbial sword of Damocles, the unit-holders are left to fend for themselves like lambs in a wolf-infested jungle. There is a message wafting across the air saying voting against the winding up could mean huge losses to the unit-holders. Amidst all of this, SEBI, the market regulator, lies like a prostrate, disembowelled Gulliver. The market regulator should have ensured that FTMF’s unit-holders are provided adequate information to arrive at an informed decision and not to be frightened into action.

Did SEBI react? The answer is a big No. Even the courts noticed the regulator’s lapse.

Now, the million-dollar question remains: Who will back the hapless, disparate investors against the illogical right and the financial might of FTMF? SEBI, certainly not. Finance Ministry, certainly not. The Supreme Court, well it has acted and issued a very important order that needs some serious implementation from SEBI. 

So let’s place on record what is happening. It is almost certain that FTMF has not been able to collate email IDs of all 300,000 unit-holders. No one knows why FTMF did not agree to a verifiable postal ballot than e-voting. This is not all. FTMF, claims an investor forum, once mentioned a five-year schedule for paying investors. But now, there is no mention of any schedule.

This is 21st Century India, where the Prime Minister himself has repeatedly assured the nation that corruption of any nature will not be tolerated. So who will save the unit-holders from this crisis? The answer is SEBI. But the market regulator is not answering.

SEBI’s silence is a serious matter of concern, ostensibly because the Karnataka High Court has told SEBI in its October 24, 2020 judgement that the regulator did not do enough to sustain confidence of investors and the investors would be “justified in their criticism that SEBI was a silent spectator”. A similar criticism came on December 3, 2020 from Justice Sanjeev Khanna who was critical of the market regulator not doing enough to help investors.

There are enough rumours in the market that FTMF reportedly bullied investors to support the winding up by creating the bogey of distress sale of assets. Read this one: FTMF’s letter to investors says a rejection of the winding up proposal will create havoc and redemption of units will have to be restarted. In short, FTMF has already told the unit-holders that it could be forced to make a distress sale of securities at a very deep discount. 

This is not all.

SEBI has not disclosed details of the forensic audit. Let’s presume the audit has highlighted severe violations, then punishment must follow. Doesn’t it make a huge, huge difference to investors’ vote which is just two days away? There is another issue that merits instant attention from SEBI. There are reports that there could be an ill-liquidity discount of 50 percent on some schemes. Does that mean the investors could be forced to take a neat half haircut on their investment? 

This is not enough. There are other issues that worry the markets. The SEBI has been reportedly asked by one Satyam Jain to act against officials who allowed FTMF to increase borrowing limits from 20 to 30 percent for two schemes, namely, Franklin India Low Duration Fund and Franklin India Short Term Income Plan, and from 20 to 40 percent in Franklin India Income Opportunities Fund and in Franklin India Credit Risk Fund. Jain has reportedly sought disgorgement and cancellation of FTMF’s registration.

The unitholders’ voting will start from 0900 hours on December 26, 2020 and go on till 1800 hours on December 28, 2020. Each unitholder will get one vote for the scheme he/she is exposed to. If the investments are jointly-held, the first unitholder will get the voting right. 

This is not all. This will also be the first time when unitholders of six schemes get a chance to question trustees (in a meeting to be held on December 29) on their decision to wind-up the schemes. Unitholders can also vote during this meeting (each scheme meeting may last one to one-and-half hours), but only if they get on the video conference, which will have a cap of 2,000 attendees.

But most importantly, SEBI must announce the name of the observer for this mega exercise. It should not fail in its fiduciary responsibilities, it should not be the mute spectator.

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