The Karnataka high court on Saturday ruled that Franklin Templeton cannot implement its decision to wind-up six debt schemes unless it gets the consent of unit holders by a simple majority.

Franklin Templeton MF had shut six debt mutual fund schemes on April 23, citing redemption pressures and lack of liquidity in the bond market.

A division bench on Saturday ruled that while it will not interfere in the decision taken by the trustees on April 23, consent by its unit holders will be required.

“We hold and declare that the decision of the trustees (Franklin Templeton Trustee Services Pvt Ltd) to wind up the six schemes... by taking recourse to sub-clause (a) of clause (2) of Regulation 39 of the mutual funds regulations cannot be implemented unless the consent of the unit-holders is obtained in accordance with sub-clause (c) of clause (15) of Regulation 18,’’ the bench said.

Under Sebi’s mutual fund regulations, trustees should obtain consent of the unit holders to wind up or prematurely redeem the units.

In a 336-page order, Chief Justice Abhay S Oka and Justice Ashok S Kinagi also directed the Securities and Exchange Board of India (Sebi) to examine the report submitted by the forensic auditor and take a decision on further action. This decision shall be taken within six weeks from the date of the receipt of the forensic audit report.

The market regulator had earlier appointed Chokshi & Chokshi to conduct a forensic audit on the six schemes.

The Karnataka high court also pulled up the market regulator. “Sebi should have been prompt and proactive especially when this is perhaps the first case of winding up under Regulation 39(2)(a).

“As a watchdog, Sebi was expected to play a very proactive role ... The investors/unit-holders of the said schemes will be justified in their criticism that Sebi was a silent spectator,’’ the bench said.

Janak Dwarkadas, the counsel representing the AMC and trustees, prayed for a stay on the operation of the judgment so as to appeal the order.

“Considering the nature of issues involved, we deem it appropriate to stay the operation of the final judgment and order for a period of six weeks from today subject to the condition that none of the respondents will take any steps to implement or to act upon the impugned notices dated April 23 2020 and May 20 2020.”

During these six weeks, there will not be any redemptions or borrowings for the six schemes.