Thread by @GSLChambers

The Karnataka High Court will shortly resume the hearing on Plea challenging the validity of #SEBI (Mutual Fund) Regulations, 1996 relating to winding up of MF schemes Regulations 39 to 41.

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

In the last hearing it was summarised by Sr. Adv. @sradvravindra that Regulation 39(2)(a) should be harmoniously construed with regulation 18(15) which requires the consent of unit holders for taking the decision of winding up.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates

Mr. @sradvravindra : The Court may ask #SEBI at some stage regarding the outcome of forensic audit being conducted against FT.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The Respondent company continued to carry out it's activities in contravention to the rules and regulations of #SEBI and did not take any effort to maintain sectoral exposure limit.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Various reports and expert opinions point to the fact that Respondent company opted for higher risk exposure than mandated under the schemes to generate higher return which resulted in illiquidity.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton

According to an article in Money Control shows that many companies have 100% exposure to the 6 debt funds and many of those don't even have a website and their financial details are not their in public domain.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton

Respondent 5 and 6 have miserably failed in their duties to ensure that the money of the investors is adequately protected by investing in NCDs without adequate liquid security.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton

Bench: Newspaper have different versions of the story. Can they be relied upon?

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Mr. @sradvravindra: Respondents have themselves filed these reports and have not controverted them.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

On 14.04.2020 the Respondent proposed suspension and on 23.04.2020 they suddenly decided to wind up the 6 schemes.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

There is definitely more than what meets the eye. The FAQ issued by the Respondent company left the question of time frame dangling by giving vague response.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Purchase, repurchase, and redemption of the units of the schemes being wound up were disallowed.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

No priority is given to small investors.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

A majority of investment were done in paper rated AA and below.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Regulations 39 to 42 is violative of Article 14. There is a class discrimination. There is also arbitrariness in these regulations.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Regulation 39 is violative of Article 21. This the constitutional challenge. The regulations are ultra vires the SEBI Act, 1992.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It fails to secure the object and purpose of the Act which is to protect the interest of the investors.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The Supreme Court has held that the main function of #SEBI is to give directions to curb unfair market practice.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The Apex Court has also held that #SEBI has to deal sternly with companies dealing with market abuse and insider trading. Fraud and deceit has no place in the market.

@sh_abhinav @LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

There is a serious concern and the investor confidence in the securities market has shaken by the unprecedented winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

#SEBI has tried to completely shrugged its responsibility as far as decision of winding up is concerned.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Because of the reluctance of #SEBI to interfere in the matter the present writ petition has been filed.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Citing a judicial precedent Mr. @sradvravindra state that it must be remembered that #SEBI is the watchdog of the securities market. It is the guardian of the interest of the shareholders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

#SEBI has no power to frame a regulation for the purpose of winding up much less winding up at the instance of trustee.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

According to #SEBI Act, power given to #SEBI to make regulations consistent with the Act but the regulations are contrary to the purpose of the Act.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

#SEBI may take certain measures by a reasoned order to restrain persons from accessing the securities market.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

#SEBI may issue directions in the interest of investors to any person associated with securities market as may be appropriate in the interest of investors.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The judge of the interest of investors is #SEBI. The power of winding up has to be read into the power to issue directions.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The power of winding up should not have been given to the trustee and therefore it is ultra vires.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Bench: whether #SEBI can issue directions to stop the process of winding up?

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Mr. @sradvravindra: if this power is read along with regulation 39 (2) then the #SEBI cannot issue directions because no scope is left to issue directions.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Determining the interest of investors is the primary function of SEBI and trustees cannot be left in charge of that.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Making trustees the sole arbiter of winding up makes them a judge in their own cause.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It gives them a power to cover up whatever violation of market regulation they have committed.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Section 12 of the Act clearly mentions trustee of a trust deed and intermediary associated with the securities market and therefore a direction by #SEBI under section 11B can be issued to them.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

According to #SEBI (intermediaries) Regulations, 2008 an AMC is an intermediary and therefore within the clutches of section 11B.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

If there are reasons to believe that the transactions in securities are dealt in a detrimental manner #SEBI has a duty to order investigation into the affairs of such intermediary.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

If #SEBI finds that a person has violated the Act it can pass order requiring such person to cease and desist from causing such violation.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The only embargo on the power to issue directions is that an enquiry should be conducted and #SEBI must be satisfied that directions are necessary in the interest of the investors.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Regulation 39 is utterly vague. A vague provision is considered to be antithesis to the principle of equality.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The expression "amount due" should have also been defined in the regulation. Regulation 39(2)(a) does not lay down any procedure for winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The power given to trustees is a totally unguided power. It gives sole power to the trustees who are inherently interested in the winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It could have been that the trustees may themselves have been responsible for the situation giving rises to winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustees should be assumed to be biased for taking a decision of winding up. No checks and balances are provided in regulation 39 over the decision of winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It does not envisage any supervisory control by #SEBI.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The role of #SEBI has been reduced to a dropbox and the only requirement under the regulation is to give a notice to #SEBI about the decision of winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

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

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Bench: once there is a notice published in the newspaper the winding up has come into existence.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

An analogy can be drawn with section 59 of insolvency and bankruptcy code which talks about voluntary liquidation of corporate person. It requires audited financial statements for past 2 years. There is no such requirement for a trustee in the SEBI regulation.

#gslupdates

The dissolution of such corporate person can only take place by making an application to the adjudicating authority.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The procedure of winding up of MF involves payment to creditors, adjustment of expenses by selling the assets. Such power cannot be given to trustees.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

If the trustees were to act as liquidator there is no guarantee whether they will not plunder the amount so received.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

There could be a collusive sale of assets without any control or checks and balances.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The possibility of fraudulent sales will ultimately diminish the NAV.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The regulation does not provide a time limit for the completion of the winding up. The investors' money is stuck for an indefinite period.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The involvement of #SEBI under regulation 42 is only to the extent of regulation 41(3) which is restricted to the procedural aspect of winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The certificate from the auditors of the fund could be obtained from internal auditors. There is no requirement of the audit to be conducted by independent auditors.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The Regulations do not allow #SEBI to enter into the arena of judging the correctness of the decision of winding up. It does not control market abuse but on the other hand allows it.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The bench has risen. The hearing to continue tomorrow at 2:30.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate