Winding-up of Franklin Schemes: Fund House to Soon Start Voting Process

May 15, 2020

It's been over 20 days since Franklin Templeton decided to wind up six schemes of its debt schemes. The decision took the mutual fund industry and its investors by surprise. Investors in the schemes were left with no choice but to wait for the fund house to make repayments.

Few days ago in my article, I mentioned the payout timeline of various Franklin Templeton schemes, i.e. by when investors are likely to receive payouts. It is imperative to know that the fund will have to discharge its liabilities, including borrowings, before it can start making payout to the investors.

As per regulation, the fund house needs to take an important step to initiate the payout process.

Regulation 41 of SEBI (Mutual Fund) Regulation 1996 requires unitholders to complete a voting exercise so that the Trustees can take the next steps in the liquidation of portfolios. Payment schedule/payouts can only be finalized and implemented, post the successful completion of the voting process.

Trustees are an independent body appointed by mutual funds to ensure that the SEBI regulations are complied with and that the interest of the unitholders are protected.

[Read: Should Retail Investors Stay Away From Debt Mutual Funds Altogether?]

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SEBI regulation states that in case of winding up of schemes, the Trustees will have to call a meeting of the unitholders. At the meeting, unitholders by way of their vote can authorize the Trustees or any other person to take steps for winding up of the scheme. A simple majority of the unitholders present will be required to enable the Trustees to take the next steps.

The voting activity for each of the six schemes will be conducted separately. If you are an investor in one or more of the wound up schemes, you will be required to vote separately for each scheme.

Unitholders whose names appear in the register of unitholders as on close of business hours of April 24, 2020 will be entitled to vote on the resolution.

The schemes that were wound up:

Investors in the said schemes will receive an e-mail with a notice related to the voting process over the next few days. The vote can be cast electronically through registered E-mail IDs.

Will it be wise on investors' part to vote?

Some of you may have a misconception that by voting in the 'Negative' the winding up will be reversed and that the six schemes will recommence the redemption and subscription process.

However, FTMF has clarified that this is not true.

The purpose of the voting process is to enable Trustees to take the next steps for disposal of the assets of the scheme and distribution of the proceeds to the unitholders in accordance with regulations. If Trustees do not receive authorization to proceed with disposal of assets of the scheme, it may delay the process of monetizing such assets and distribution of proceeds.

In other words, the liquidation of the schemes will get stuck and payouts to investors will be delayed if investors do not authorize the Trustees to proceed.

Do note that the SEBI regulation does not mention the process to be followed if the majority of investors vote in negative.

In such a case, the only feasible option will be to enable the Trustees to go ahead and expedite the process of returning money by way of voting.

FTMF has reiterated that the decision was the only viable way to preserve value for investors, despite the immediate challenges this may bring. The fund stated that it is receiving inflows regularly and that there has been a marked reduction in borrowing levels across some of the funds.

[Read: Who Is to Blame for the Franklin Templeton Fiasco?]

 

Warm Regards,
Divya Grover
Research Analyst

 

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