After nearly a year of tumult, investors in six schemes of Franklin Templeton Mutual Fund’s Indian arm will start to receive some of their money back. The Supreme Court on February 12, 2021 ordered that SBI Fund Management will oversee the liquidation of assets of the six schemes and distribute the money to the unitholders.

But where do things stand now? Here is a short timeline of events

What happened and how will investors be repaid?

When Franklin Templeton Mutual Fund informed its investors in April 2020 that six of its debt funds would be wound up due to redemption pressures, around Rs 26,000 crore of investors’ money was on the line. The fund blamed the economic uncertainty caused by the COVID19 pandemic for the bad outcomes of its investment bets in highly risky bonds.

It was a rude shock for investors who had earlier lapped up these schemes thinking they would be getting high and assured returns on debt instruments. Due to falling markets and the illiquid nature of the debt instruments Franklin Templeton Mutual Fund had invested in, the fund had to borrow to pay redemption proceeds to investors.

When the borrowings became too much at the peak of the lockdowns in April 2020, the fund with the acquiescence of the trustees, shuttered six schemes—Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund. This left 3 lakh investors in the lurch.

Investors rushed to the courts against the shuttering of the six schemes without their nod. High Court orders called into question the role of markets regulator Securities Exchange Board of India and Franklin Templeton Mutual Fund and also stayed the shuttering of the six schemes. Eventually, the Supreme Court of India transferred the cases from multiple High Courts across India to the High Court (HC) of Karnataka. After the Karnataka HC ordered a vote by investors to approve the liquidation of the six schemes, Franklin Templeton went in appeal to the Supreme Court. The top court upheld the HC order.

The Supreme Court ordered SEBI to appoint an observer for the vote by investors in December 2020 on whether the six schemes should be shut down. And then last week, ordered that investors should be repaid whatever money that the fund has managed to collect from the bonds they hold as of January 15, 2021. This adds up to around Rs 9,122 crore after paying off the debt the fund had taken to meet redemptions. Since April 2020, the fund has collected around Rs 14,000 crore from the issuers of those ill-fated bonds. There are still Rs 17,000 crore worth of securities to be realised from the schemes

In focus: SEBI’s role as protector of investors’ rights

This fracas with one of the world’s largest mutual fund companies and Indian investors has shined the light on the market regulator’s actions. Till the courts hauled it over the coals, SEBI claimed that whatever Franklin Templeton India did was according to its regulations. 

And SEBI is right in this.The regulations weren’t meant to tackle such a black swan event, and Franklin Templeton used SEBI’s regulations as cover to buttress its argument that it acted legally in summarily shutting down the six schemes. The fact that the trustees of its schemes—Franklin Templeton Trustee Services—voted in favour of the shutdown without conferring with investors, is what led to the long legal battle in courts.

SEBI has taken actions to bring mutual funds to heel, but like black swans, we do not know when another such event will show up and leave investors high and dry.

But investors could finally vote on whether the schemes should be shut down or not. This bodes well for investors. It sows the seeds of democracy in the working of mutual fund schemes, even though  some investors alleged irregularities in the voting process. The Supreme Court upheld the voting process while ordering investors be repaid.

But the mutual fund industry definitely does not want investors’ consent when a scheme is shut down, as can be seen from industry body Association of Mutual Funds of India’s special leave petition in the Supreme Court of India arguing against the need for investors’ agreement to such a move.

The larger matter of whether investors’ nod should be sought by a mutual fund in case a scheme is shut has not been decided by the top court yet.

Attention to detail: Investors and SEBI need to buck up

On their part, investors need to understand the risks they are taking. Gone are the days of assured returns on any investment product. If a deal offered to investors smells too good, then they must do their own extra due diligence. There are many such instances in the recent past with respect to debt instruments, which are presumed to be safe.

The fact that in Franklin Templeton’s case investors made sure that their grievances were heard by the top court of the land hopefully means that investors will start taking their rights seriously. But SEBI’s perceived role here as the protector of investors’ interests has taken a beating. During her budget speech, the Finance Minister Nirmala Sitharaman announced  an investor charter that will be unveiled for all products. This charter needs to extract some kind of responsibility from the market regulator as well.

For now, the investors in Franklin Templeton’s six ill-fated debt schemes will start receiving some of their funds back starting today. Hopefully, in the era of low interest rates, they will start making informed decisions with their savings and not lean on old adages like ‘debt is a safe investment’ and chase high yielding investment options.