Thread by @GSLChambers

The Karnataka HC will shortly resume the hearing on plea challenging #SEBI (Mutual funds) regulations, 1996 regarding the winding up of MF schemes, Regulation 39 to 41.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Yesterday, Sr. Adv. Mr. Ravindra Shrivastava pointed out that the winding up of the mutual fund schemes have put a clog on the redemption on the units.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

This clog on redemption is a change in the fundamental attribute of the scheme.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The petition has been filed through Mr. @sh_abhinav, Partner @GSLChambers .

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Mr. @sradvravindra, senior advocate is arguing for petitioner in the matter transferred from Delhi HC.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Mr. @sradvravindra is reading out the 3rd schedule of the regulations providing the contents of the trust deed.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The trust deed must provide for the power of trustees to dismiss the AMC under the specific events with the approval of the board.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The AMC shall exercise due diligence and care in all its investment decision as would be exercised by other persons engaged in the business.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The CEO of the AMC shall ensure the compliance of these regulations by the MF.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The fund manager shall ensure that the funds are invested in the interest of the unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The AMC and the sponsor of the MF shall be liable to compensate the affected investors for any unfair treatment as a result of inappropriate valuation.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The offer document shall contain disclosure on maximum investments proposed to be made by the scheme in listed securities of the group company of sponsor.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Regulation 39 to 42 is a complete scheme of winding up of a MF.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

A scheme of MF may be wound up after repaying the due amount to unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The scheme may be wound up on the happening of any event, in the opinion of trustee, requires winding up of the scheme.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The second situation is the voluntary winding up by passing resolution by the 3/4th majority of unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

#SEBI may also direct the winding up of the scheme in the interest of unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Bench: are you challenging entire regulation 39 or just regulation 39(2)?

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Mr. @sradvravindra: I am challenging entire provision.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Bench: then there will not be any provision for winding up of a scheme in the interest of the unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Mr. @sradvravindra: I’ll keep that in mind while addressing the arguments.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Bench: a scheme may be wound after repaying the due amount. What is the meaning of the phrase “amount due to the unit holders.”

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Mr. @sradvravindra: the contentions of the respondents is that the amount due is whatever is left after selling the assets and paying the creditors.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

From the date of publication of the notice of winding up in a public newspaper the AMC shall cease to issue or redeem units in the scheme.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

There is a complete cessation on the issuance or redemption of any unit after such publication.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The trustee shall call a meeting of unit holders for approval by simple majority of unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The trustee shall dispose of the assets of the scheme in the best interest of the unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The proceeds of sale shall be utilised first towards discharge of dues payable under the scheme and any other expense connected with winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The balance shall be paid to the unit holders on a pro rata basis.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The decision of winding up is deeply hurtful to the investors as the right of redemption freezes and the time period to complete such winding is 1-5 years.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

There is also no certainty as to how much money will the unit holders get after the scheme is wound up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The circulars and regulations requiring disclosures of half-yearly and annual reports shall continue to apply until winding up is completed.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Bench: regulation 42 talks about satisfaction of #SEBI. Is the satisfaction is in regard to only 41 or 39 as well?

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Mr. @sradvravindra: only regulation 41

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Bench: whether there is any statutory power vesting in #SEBI to ensure compliance of regulation 39?

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Mr. @sradvravindra: this is the crux of the matter. Regulation 42 only contemplates satisfaction of sub-regulation 3 of regulation 41.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

It does not empower #SEBI to judge the prudence of the decision of winding up of the scheme.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Bench: there is no possibility of reading down the regulation because at this stage the assets will be already gone.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Mr. @sradvravindra: The #SEBI should have a more proactive role rather than just preparing a checklist of compliance after the assets have been sold.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Regulation 39 gives the trustee an unbridled power to wind up a scheme on forming an opinion that an event has occurred requiring winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Sub-regulation 3 of 39 contemplates of giving a notice to #SEBI disclosing circumstances leading to winding up of the scheme.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

#SEBI cannot be a mute spectator to such event and has to take action which is not provided in the regulations.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The regulations are totally arbitrary giving power to trustees for winding up without any safeguards.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

In the alternative, regulation 39(2) could be read down.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The MF, trustee AMC, custodian, sponsor shall make disclosures as and when called upon by SEBI to do so.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The trustee shall be bound to make disclosures to unit holders which may have an adverse bearing in their investment.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Regulation 18(15) requires the consent of unit holders. Both these regulations read together require the confidence of unit holders before winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

#SEBI has a power and a duty to investigate into the affairs of a MF on receipt of a complaint.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

If at the end of the investigation #SEBI finds violations of the regulation, the reversal of winding up is not possible.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

According to the scheme information document the redemption request has to be complied with within 10 days.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The risk factors of the scheme mentions that the length of time for settlement may be affected if large number of redemption requests have to be met out.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The redemption of units may be suspended at the sole discretion of the trustee.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

A heightened demand of redemption does not warrant winding up of scheme but merely suspension of redemption.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Fundamental attributes of a scheme include liquidity provision such as repurchase or redemption.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Suspension of redemption of units may be done temporarily when a systemic crisis has occurred or the market liquidity is constricted.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

When market at large becomes illiquid which affects almost all securities and not issue specific security only then redemption may be restricted.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Restriction on redemption due to illiquidity on account of poor investment decision may not be allowed.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The maximum time for suspension of redemption is 10 days within a period of 90 days.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The trustee shall obtain consent of unit holders if a majority of the directors of the trustee decide to wind up the scheme.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The scheme may be wound up if there are changes in the capital markets, fiscal laws or legal system. This definition is vague in itself.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The trustees have not invoked the power under the scheme related document but have expressly referred to the power under regulation 39 in their notice.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

As a philosophy, thr redemption should be restricted when redemption requests are in excess arising out of systemic market crisis rather than entity specific situation.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates

The system of risk management is required to anticipate any market risk in order to take risk mitigation measures in time.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates

Outbreak of #Covid19 should have been taken into account.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The stress test should be carried out on a monthly basis and if required AMC should conduct more frequent stress test.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

If any vulnerability is revealed in a stress test, it shall be brought to the notice of the trustee to take corrective action.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Stress-testing policy shall be reviewed by the board of AMC and trustee on an annual basis.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

MF shall submit details of transactions in secondary market on a daily basis to the Board.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Debt oriented schemes should have an adequate corpus to ensure adherence to the investment objective.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

MF shall have a systems audit conducted by independent auditor.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

AMC shall maintain records in support of each investment decision supported by relevant data.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The risky and bad investment decision has landed the respondent in such a mess and #covid19 has nothing to do with it.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

There are no instructions in the master circular as to how the winding up decision is to be taken.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

When #SEBI shrugs its responsibility where will the investors go?

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

To suggest that there is no power of judicial review will defeat the purpose of the #SEBI Act.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

When #SEBI shrugs its responsibility where will the investors go?

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

To suggest that there is no power of judicial review will defeat the purpose of the #SEBI Act.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Master circular does not contain any guidelines in respect of winding up of a scheme.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

#SEBI temporarily relaxed certain compliance requirements and extended timelines for compliance in April.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

There was no need to take the hurried decision of winding up when there was enough support from #SEBI

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

The delay in payment of interest shall not be considered a default for the valuation of money market or debt securities held by MF if it arises solely due to lockdown or loan moratorium.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton

The amendment to regulations made in September 2019 states that MF shall not invest in unlisted debt instruments.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton

A cap of 10% was also put on the investment in unlisted NCDs.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton

CEO of Franklin Ms. Jennifer Jhonson admitted that the cap of 10% orphaned about a third of their funds.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton

The genesis of crisis is the restrictions imposed by #SEBI in October 2019 and the defaults in #Vodafone Idea.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

#SEBI strongly responded to her statement advising FTMF to focus on returning money to investors.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

In light of credit events since September 2018 there was a need to review regulatory framework for MF.

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai

Despite the regulations being clear some MF schemes have chosen to high concentrations o high risk, unlisted debt securities with low credit ratings and did not rebalance their portfolios even during 12 months available to them.

#gslupdates #franklintempleton #franklinupdates

Bench has risen. The hearing will continue tomorrow at 2:30 PM

@amrutanikam26 @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdates #mutualfundsahihai