SEBI Turned A Blind Eye To Franklin Templeton's Violations: Unit Holder Argues In Supreme Court

Unit holders and Investors in the Franklin Templeton case on Thursday argued before the Supreme Court that the Securities And Exchange Board Of India (SEBI) was aware of all the violations being done by Franklin Templeton, but it turned a blind eye and took no action. A division Bench of Justices Abdul Nazeer and Sanjeev Khanna was hearing the plea by Franklin Templeton challenging a Karnataka High Court's order which restrained winding up of six of its debt schemes without obtaining the consent of its investors by a simple majority. After deciding on the validity of the e voting process, the top Court will now hear arguments on various other issues involved in the matter including malfeasance, validity of the regulation, question of vires, etc. Advocate Puneet Jain appearing for a unit holder submitted that the High Court had made two fold observations, that no consent under law has been taken and there isn't even a pleading that a notice was put it in a newspaper. In response to Jain's argument that as per the Master Circular only after 2 years of winding up can the money be recovered, the Bench stated that it is deciding on the process of winding up and not redemption, and winding up will happen only when it is ensured that recovery through other means is not possible. Advocate Jain appearing on behalf of investor Sanyam Jain submitted that the SEBI should have laid down the winding up in a proper manner, but SEBI has since the beginning abdicated itself and left it to the trustees to decide as to what has to be done, what would happen to trustees, etc. Jain submitted that Franklin Templeton had started extending loans. Due to Nirav Modi and other similar scams, banks had become reluctant in giving loans, but several companies were still in need of funds. Since the banks were not giving loans, they approached these debt funds. They then negotiated with Franklin Templeton who would agree to give loan asking them to buy debentures. But this was clear violation of regulation 44(3). That's how this mechanism started in 2012 & got busted in 2018 when IL&FS took place, which is when SEBI realised all this was happening. Further, Jain stated that the 7th schedule of mutual fund regulations was amended through amendment in 2019 M, and a relaxation was given my amending 5% to 10% in liquid securities there was a limit of 5%. It was a relaxation and not a condition. Jain argued that Franklin Templeton said in April 2020 that Covid19 effected them, but they should have cleaned their mess long before that. They knew their situation and Covid had nothing to do with that. "Isn't it also SEBI's duty to see if there was sufficient liquidity? "- Jain said. Talking about segregation of portfolio, Adv Jain stated that they started segregating portfolios in several other cases, with the first segregation in Jan 2020 being of Yes bank and Vodafone portfolio. However the same segregation procedures were not followed for other portfolios. "Segregated portfolio is that that portfolio becomes segregated so investors who come in won't have to bear the loss but the unit holders will still continue? "- the Bench asked. "There are separate unit holders for segregated port folio. So far as segregated portfolios are concerned they are being dealt with by them separately even though they are part of the same scheme. Its not being made part of the winding up process"- Adv Jain answered. According to Jain, SEBI had basically told Franklin Templeton through its letter that their house was not in order and they were blaming SEBI for it. It issued a circular of May 2020 and allowed listing of these winding up portfolio. However If schemes are listed for winding up the question of redemption is gone. Adv Puneet Jain further submitted that prior to the circular of 6th Oct 2017, every Mutual fund had its own mechanism with a certain investment objective, etc. SEBI through its circular decided to harmonise it and give it a name, enabling the investors to decide the best schemes based on their investment horizons now. Different schemes were defined by SEBI along with the kind of investments that could be made in those schemes. "SEBI was aware of everything but they took no action, and kept a blind eye to violations done by Franklin Templeton. Three of the portfolios were segregated already by them in the same portfolio. Why were the other schemes not segregated then?"- Jain stated. With regards to disclosure of the value of securities, Jain stated that once the portfolio is under winding up, at least now they should disclose full value of the securities. SBI could do this, so at least the real value of these securities would be known. "When a winding up takes place, circular issued on 20th May stated that close ended funds also be listed. Character of schemes which was open ended fund becomes cold ended fund" - Adv Puneet Jain...

SEBI Turned A Blind Eye To Franklin Templeton's Violations: Unit Holder Argues In Supreme Court

Srishti Ojha

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