Thread by @GSLChambers

The Karnataka High Court will shortly resume the hearing on plea challenging the validity of #SEBI (Mutual Funds) Regulation, 1996 pertaining to winding up of MF schemes Regulation 39 to 41.

@sradvravindra @sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton

Yesterday, Sr. Adv. @sradvravindra appearing on behalf of the Petitioner pointed out that in a press release #SEBI condemning the actions of some MF schemes.

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

He cited the #SEBI press release which said that some MF houses have chosen to high concentration of high risk, unlisted debt securities with low credit ratings and did not rebalance their portfolios even during 12 months available to them.

#gslupdates #franklintempleton

The Petition is filed by Adv. @sh_abhinav, Partner, @GSLChambers. It is being argued on behalf of the Petitioner by Sr. Adv. @sradvravindra.

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

Mr. @sradvravindra: Regulation 43 states that a mutual fund may invest monies collected under any of its schemes only in instruments mentioned thereunder.

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

Any investment so made shall be in accordance with the investment objective of the MF schemes.

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

The regulations contemplate that restrictions can be imposed therefore MF house cannot contend that they were taken by surprise when such restrictions were imposed.

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

Mutual fund shall not borrow except to meet temporary liquidity needs of the MF for the purpose of redemption of units etc.

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

The objective of the scheme is to provide stable returns to the investors by investing in fixed income securities.

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

The respondents have developed a high risk investment module by investing in high risk securities to obtain higher returns.

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

The MF house requested for enhancement of borrowing limits from 20% to 30% on 09.04 which was acceded to by SEBI on 13.04.2020.

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

On 14.04.2020, Sanjay Sapre of Franklin wrote an email to Muralidhar Rao of #SEBI giving various reasons for anticipating liquidity stress for themselves and the industry.

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

One of the reason was that the unlisted NCDs held in the portfolio as on 30.09.2019 have become illiquid as MF are no longer permitted to invest in unlisted papers.

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

It was also stated in the email that as a last resort, Funds may be required to resort to suspension as permitted by #SEBI.

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

Therefore, on 14.04.2020 the winding up was not in their contemplation and a decision on winding up cannot be taken overnight.

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

They also requested #SEBI to remove the restriction of suspending a fund for 10 days in 90 days.

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

There is nothing on record to show the response of #SEBI to this email.

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

Within 7 days, they submit a proposal to #SEBI to wind up certain fixed income schemes of FT due to prevailing market situation caused by #Covid19.

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

The proposal stated that the funds being wound up have experienced high level of redemption since 01.03.2020.

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

The net outflow in the period of 01.06.2019 to 30.09.2019 is 1855.39 crores whereas over the next quarter it increased over 4 times.

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

Both these quarters were before the outbreak of #Covid19. To say that heightened redemption were faced due to #Covid19 is incorrect according to their own figures.

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

The investor fears relate back to the #ILFS crisis and it has nothing to do with #Covid19.

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

The proposal stated that the economy is going through unprecedented financial stress which has impacted the ability of certain schemes to raise adequate liquidity.

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

Proposal also stated that the sustained redemption pressure has not abated even after the borrowing limit was increased from 20% to 30%.

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

Around 33% of AUN held in unlisted papers accord these funds has become illiquid and is no longer tradeable in market.

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

Within 6 days, a suspension on redemption which was considered as a last resort became unviable without any change in circumstances.

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

FT did not wait for response on request for relaxation on norms concerning suspension of redemption.

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

The proposal stated that the suspension of redemption or elongation of redemption payment will not be effective to resolve liquidity concerns.

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

Other MF houses did not face any stress on account of #Covid19 even though the circumstances were same for everyone.

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

The counter affidavit is conspicuously silent about deliberations made to arrive at the conclusion of winding up of the schemes.

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

The proposal stated that cessation of redemption pending an orderly winding up of the schemes would enable them to raise cash in the meantime.

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

The unit holders will be paid interim payments once the borrowings in the funds have been paid down.

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

Halting redemption is not in the interest of the investors.

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

The requirement under regulation 39(3)(b) was entailed to be met by giving notice via the AMC website, e-newspapers and SMS etc. to the unit holders.

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

Pending the authorisation under regulation 41(1) the AMC continued to monetise the assets of the scheme. Only the redemption was halted.

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

Bench: Regulation 39(2) does not require permission of #SEBI.

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

Mr. @sradvravindra: But they still did and there is nothing wrong. It was only a proposal. It would have taken final shape after approval from investors.

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

FT having sought the permission of SEBI did not wait for a response from SEBI.

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

Not even 2 working days expire FT issued notice of winding up of the schemes.

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

The decision was made hurriedly only with a view to put a clog on redemption.

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

The notice of winding up only mentions the concluded decision of winding up and not describing circumstances leading to such decision.

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

There is no certainty as to what amount the unit holders will be paid and when will the payment be made.

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

There is no reference to regulation 18(15) which contemplates the taking of consent of the unitholders before winding up of the scheme.

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

The impugned notice for e-voting was only for the purpose of authorizing the trustee or Deloitte to take steps for winding up.

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

It was stated in the impugned notice that voting "no" to the authorization will not change the winding-up status of the scheme.

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

RBI announced Rs. 50K Crores special liquidity facility for MF to try to salvage the situation.

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

The winding up should have been the last resort rather than the first measure.

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

On 17.05.2020 FT continued to write to SEBI for enhancing borrowing limit even after the winding up decision was taken.

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

There is no averment in the counter affidavit regarding publication of notice as contemplated under Regulation 39(3)(b).

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

On 27.05.2020 SEBI ordered forensic audit in the affairs of FT. It is suggestive of the fact that SEBI found something amiss in the affairs of FT.

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

An RTI was filed regarding this forensic audit in Gujarat and SEBI responded that SEBI will neither confirm or deny the existence of investigation.

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

In the order of Delhi HC dated 08.06.2020 that pursuant to a complaint dated 25.05.2020 received from the petitioner herein, SEBI has initiated forensic audit of respondent Nos. 5 and 6.

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

It was also stated in the order that in the event #SEBI are of the view that further action is warranted pursuant upon the forensic audit, necessary action in terms of Regulation 61 of the said Regulations shall be taken.

@LiveLawIndia @barandbench #gslupdates #franklintempleton

In the counter affidavit filed on behalf of Respondent No. 3 it was stated that repayments mentioned in Regulation 39(2) refer to repayment of the amount due to unitholders upon selling of assets and properties of MF and not to redemption in terms of the regulation.

#gslupdates

Even in global financial crisis of 2008 no MF was wound up.

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

It was averred in the counter affidavit that if the decision of winding up is reversed, the trustee would have to reopen the schemes for transaction and all unit holders will put 100% redemption requests immediately.

#gslupdates #franklintempleton #franklinupdates

Without referring to regulation 18(15) it was stated in the counter that regulation 39(2) does not envisage consent of unit holders.

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

It was also stated that if any violation is found appropriate action will be taken under the law and the inspection process shall not be linked with the decision of the trustee to voluntary winding up of the scheme.

#gslupdates #franklintempleton #franklinupdates

The determination whether an event has occurred requiring the winding up of the scheme has to be made by the trustees alone.

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

The regulations do not accord finality to the decision of the trustee which is contrary to the stand taken by SEBI.

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

The regulation do not envisage any consent of unit holders and the voting is only to authorise trustees to take steps for winding up of the scheme.

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

The counter affidavit does not deal with regulation 18(15) which talks about consent of the unit holders.

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

39(2)(a) should be harmoniously interpreted with 18(15)

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

The Apex Court has held time and again that SEBI is the watchdog.

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

The bench has risen. Hearing to continue on Tuesday at 2:30 PM.

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