Thread by @GSLChambers

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

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

Yesterday, Sr. Adv. Mr. @sradvravindra pointed out to the court that an event speculated under Regulation 39 should be of such a nature so as to make it impossible to continue with the scheme and not merely making it uneconomical for the company to continue with it.

#gslupdates

Mr. @sradvravindra: #SEBI has the power and therefore the duty to protect the interest of investors.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The right to redemption of units is a very valuable right of the investors. It has been regarded as a fundamental attribute of the scheme. The effect of winding up has thrown the right of redemption out of the window.

@LiveLawIndia @barandbench #gslupdates #franklintempleton

When a closure of an industry takes place there is a provision which requires payment of compensation to the workers. The validity of the provision was challenged in a judicial precedent.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It was held therein that a state of financial difficulties of undisposed stocks may be temporary. The closure on account of financial difficulties is accordingly not necessarily the result of unavoidable circumstances.

@LiveLawIndia @barandbench #gslupdates #franklintempleton

The circumstances underlying the opinion do not exist and are irrelevant as it is. Therefore the opinion formed to wind up the MF schemes is illegal.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The writ petition is maintainable as against respondents 5 & 6 qua the winding up decision. There is a total absence of a corrective machinery and no provision for appeal or revision is provided to challenge the decision of the trustees.

@LiveLawIndia @barandbench #gslupdates

The decision of winding up has inherent consequences which are not only civil but has far reaching monetary consequences.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The decision of #SEBI is appealable before the SAT but the decision of the trustees cannot be challenged in any forum.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In a judicial decision it was observed that as social norms and values change laws too have to be re-interpreted and recast. Law is a dynamic instrument fashioned by society for the purpose of achieving harmonious adjustment.

#gslupdates #franklintempleton #franklinupdate

The scope of Article 226 is much wider than Article 32. Even the administrative action of a private entity is amenable to the writ jurisdiction of the High Court.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In another judicial precedent a private arbitration award was held amenable to the writ jurisdiction of the High Court.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The functions of the AMC and the trustees are akin to a public function.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It was held in a judicial precedent that if there is a violation of any statutory obligation or rights of citizens the aggrieved party may not have a relief under Article 32 but the violator cannot go scot free merely because it is not a State.
#gslupdates #franklintempleton

A private body will be amenable to the writ jurisdiction if it exercise the functions in the nature of a public duty.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustee is supposed to be acting in public interest even though they are acting as a private business otherwise it may not have been required to be regulated.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The element of public duty has to be attached to the acts of respondents 5 and 6. It is dealing with a large number of individuals. It is not a bi-party contract.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In a judicial decision it was held that a judicial review is designed to prevent the case of abuse of power and neglect of duties by public authorities. However Article 226 is couched in a way that a writ of mandamus could be issued against a private body as well.

#gslupdates

A body is performing a public function when it seeks to achieve some collective benefit for the public and is accepted by the public to have the authority to do so.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The source of power of winding up is under the statute therefore the body in question is subject to judicial review.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In cases where there is an alternative remedy or where a special method of resolving disputes has been agreed upon by the parties a judicial review may not be appropriate. However, this not the case in the present petition.

#gslupdates #franklintempleton #franklinupdate

There are more than a dozen of UTI-MF currently running. MF are also run by many nationalized banks. Everyone is governed by the SEBI regulations under challenge.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It is an indicator that the functions of a MF house are in the nature of a public function.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

While drafting a trust deed it is important to incorporate the contents of schedule 3 of the regulations therefore it becomes a statutory trust deed.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The court has risen for 10 minutes on account of some administrative work.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The bench has resumed the hearing.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Mr. @sradvravindra: As an investor there is no other remedy either under the regulations or the #SEBI Act.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In a judicial precedent it has held that the powers of the HC under Article 226 are plenary and it is constitutionally empowered to issue directions to any person for the enforcement of a fundamental right or any other purpose.

#gslupdates #franklintempleton #franklinupdate

The action of the trustee of winding up of the scheme is open to judicial intervention.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Respondent 7 is the sponsor of the MF and the Respondent 8 is the parent company. Both of them are based in USA. They have raised a contention that they are not amenable to the laws of India.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

This contention is not correct as they have brought this MF in India and the sponsor has the power to create the trust. The sponsor has an implied obligation to come forward and salvage the situation.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

If they have honest intentions they could extend various measures to save the situation.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Final submission on behalf of the petitioner are that the Regulations under challenge are ultra vires. The impugned notices deserve to be quashed as being illegal ex facie.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Since #SEBI has already begun the forensic audit it will be easier for them to decide whether it was in the interest of the investors to wind up the MF.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The report of forensic auditor have not seen the light of the day. A newspaper published 2 weeks ago claimed that the report of the forensic audit has already come but it has not been placed on record.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The manner in which SEBI has conducted itself does not inspire confidence of the investors.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

This is a great opportunity to give a direction to the entire securities market and also to the investors.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

A totally incompetent regulatory framework of SEBI regulation is not only dereliction of their duty but also in violation of the constitution.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The bench has now moved on to the Petition transferred from Gujarat.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The submissions on behalf of petitioners are advanced by Sr. Adv. Mr. Aditya Sondhi.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Mr. Sondhi: The petition does not challenge the vires of the regulations.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The opinion is not even been formed by the trustees to arrive at the decision of winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

An email was written to the trustee from the parent company which does not contain anything to shed light on the reasons for winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

A letter was written to the investors by FT stating that the ability to liquidate assets at a reasonable price to fund redemption for the schemes is under severe stress.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The factors leading to winding up were stated as heightened redemption volumes and reduced inflows to unsustainable levels due to the extension of lockdown.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It stated that the trustees were left with no option except to initiate the winding up of the schemes on order to protect the interest of the unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It appears that AMC has influenced the decesion to a great deal. The investment team of the AMC has taken great participation in arriving at the decision of winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The regulations do not contemplate any role of AMC to reach the decision of winding up. The involvement of AMC to take the decision of winding up vitiates the decision itself.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

FAQs provided by FT state that the investor manager did not believe that it was prudent to continue funding redemption through potentially increasing levels of borrowings.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The liquidity stress was anticipated due to the illiquidity of unlisted NCDs held in the portfolio. The value of unlisted papers held by the schemes we as on 22.04.2020 was 32% of the AUM.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Rather than placing the decision of borrowings and sale of assets to the trustee the AMC placed it before the investors alongwith the decision of winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In lieu of winding up 3 decisions were proposed and the ineffectiveness of each one was laid down by the AMC itself thereby making it a rhetorical question.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

All 3 reasons are demonstrably contrary to the material on record.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

A request was made to SEBI by the trustee on 20.04.2020 to relax the 10 day period of restricting redemption.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The net outflows for the quarter of June 2019-Sept 2019 jumped almost 6 times in the next quarter which was very well before the Covid time.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The percentage jump in the net outflows for the next quarter is not as much as compared with the previous quarters.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Since there was an increased demand of redemption the respondents asked for an elongation for suspension of redemption which would have been acceded to by SEBI. However, within 3 days the company decided to wind up the schemes.

#gslupdates

The company also made exploration to sell the securities on discount however there is no material on record to demonstrate such efforts.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

If distress sale was not found to be a viable alternative how is it that the winding up of the schemes is found to be winding up when winding up is in itself a distress sale of the assets.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It is a self-contradictory proposition by the respondent company.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The unit holders at no stage have had a say in the matter of arriving at the decision of winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Acting under dictation from another agency such as the AMC is sufficient enough to vitiate the decision of winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustee and the AMC in the statement of objections have stated that they are merely service providers, undertaking the task of investing and managing the funds of unitholders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The company secretary of the AMC has been authorised to sign the affidavits on behalf of the AMC as well as the trustee whereas under the Indian Trust Act trustee cannot delegate its function to any other person.

@LiveLawIndia @barandbench #gslupdates #franklintempleton

It cannot delegate the function of forming an opinion on the winding up of the scheme to the AMC.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

On 22.04.2020 SEBI had acceded to the request of enhancing the borrowing limit by FT.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The condition precedent was that the incremental borrowing limit shall be utilised for the purpose of redemption of units only.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

When the decision of winding up was made the priority of payment was given to the creditors thereby circumventing the condition mentioned in the letter.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Regulation 15(2) states that no trust deed shall contain a clause which has the effect of limiting or extinguishing the liabilities of the trust in relation to any MF or unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

An indemnity was sought to be introduced in the face of this regulation to indemnify the directors of the respondent company qua the decision of winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

There is no reference to regulation 15 in that resolution which precludes them to have any indemnification qua the unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The AMC has de facto acted as the trustee though not as de jure.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The appointment of trustee is subject to prior approval by SEBI.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustee shall ensure that the AMC has not given any undue or unfair advantage to any associates or dealt with any of the associates of the AMC in a manner detrimental to the trustees.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustees have been given a power to regulate the affairs of the AMC and not the other way around.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The bench has risen for lunch and will reassemble at 2:30.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The bench has reassembled. Mr. Sondhi is resuming with his submissions.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustee shall ensure that there is no conflict of interest between the manner of deployment of its networth by the AMC and the interest of the unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustee shall exercise due diligence in the nature of general due diligence.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The sponsor or trustee shall appoint an AMC which can be terminated by the majority of trustees or by 75% of unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

For grant of approval of the AMC the board of directors of such AMC should have at least 50% directors not associated with the sponsor or the trustees.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The AMC shall exercise due diligence in all its investment decisions and it shall not utilise the services of the sponsor for any securities transaction.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trust deed must specifically provide that the unit holders would have beneficial interest in the trust property to the extent of individual holding.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trust deed shall provide that the auditor of MF shall be different from the auditor of the AMC.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The AMC shall ensure that no offer document of a scheme. Key information memorandum, abridged half yearly results is issued without the approval of the trustees.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustee and AMC shall carry out the business and invest in accordance with the investment objectives stated in the offer document.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Trustee and AMC shall render at all times high standards of service and exercise independent professional judgement.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The regulations provide for ethical conduct and segregation of interest.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

There is a close nexus of facts between the 3 entities which should have been kept apart i.e. the trustee, the AMC and the sponsor.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

According to the scheme information document the sponsor is represented by the board of directors of the trustee company and the AMC.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustee and AMC are wholly owned subsidiary of the same company which in turn is the subsidiary of the sponsor.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Both of these entities are commercially related to the sponsor. It is not problematic as long as there is no violation of the regulations.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The registered offices of the AMC and trustee are one and the same which is situated in Mumbai. There's an uncomfortable proximity between the two.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It almost seems that across the table a decision has been taken disregarding the distinction between the two entities.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Even after the winding up there has been communications from AMC to the investors disregarding the fact that the role of AMC had ended.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

FT have devalued the investments and the money of investors is stuck.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The unitholders have given the choice of only selecting the entity for winding up but they are not given a veto power on the winding up of the schemes itself.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In a judicial precedent it was observed that no trustee can delegate his power and duties to another trustee. An agreement to do so will be illegal and void.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In another judgement it was held that trustees cannot transfer their duties, functions and powers to some other body of men and creat them trustees in their own place.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Regulation 18(15) stipulates the taking of consent of the unit holders by the trustees when the trustees decide to wind up the scheme.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The opinion referred to in regulation 39(2)(a) shall be read in the light of regulation 18(15) and only after obtaining consent of the unit holders should a notice of winding up be published.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The initiation of the winding up could be done either by the trustees, unit holders or SEBI.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Bench: Regulation 18(15) states that consent of the unit holders is to be obtained. How is this to be interpreted? Is it the consent of all the unit holders or only a simple majority?

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Mr. Sondhi: The regulations are silent on this aspect although an analogy with the companies act may be drawn to equate it with the majority of unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The onus to obtain the consent is cast upon the trustee when the decision of winding up is to be made.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The opinion of the trustee is made subject to consent. Regulation 39 should be harmoniously interpreted with Regulation 18(15) in order to achieve the object of both the provisions.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In a judicial precedent it was held that an interpretation which leads to the conclusion that a word used by legislature is redundant, should be avoided. as the presumption is that the legislature has deliberately used the words

@LiveLawIndia @barandbench #gslupdates

The requirement of 18(15) cannot be held to be unnecessary or superfluous.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In another judgement it was observed that when an expression is capable of more than one meaning, the court would attempt to resolve that ambiguity in a manner consistent with the purpose of the provisions.

@LiveLawIndia @barandbench #gslupdates #franklintempleton

The public notice under Regulation 39(3)(b) is not a notice to the unit holders but it is a notice to the public at large.

@LiveLawIndia @barandbench #gslupdates #franklintempleton

Regulation 18(15) contemplates prior consent of the unit holders whereas the approval contemplated under regulation 41 is subsequent to the taking of the decision of winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

According to the scheme information document, the trustee will call for a meeting of the unit holders of the scheme or adopt postal ballot whenever it is required to do is in the interest of the unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton

The trustees did not conduct any meeting and violated the provisions of their own scheme information document.

@LiveLawIndia @barandbench #gslupdates #franklintempleton

The bench has risen. The hearing will continue on Monday at 2:30.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate