Thread by @GSLChambers

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

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

On Friday, Sr. Adv. Mr. Aditya Sondhi appearing on behalf of the Petitioner in the writ transferred from Gujarat submitted that the trustees did not conduct any meeting of the unit holders thereby violating the provisions of their own scheme information document.

#gslupdates

Mr. Sondhi: Regulation 18 (15A) contemplates a written communication to the unit holders when there is a change proposed in the fundamental attributes of a scheme.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The unitholders are given an option to exit at the prevailing NAV.

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Bench: the trustees come into picture because there is an agreement between the sponsor and the trustee.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Mr. Sondhi: there are judgements which say that even funds within a trust can be regarded to as separate trusts.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Under the Indian Trust Act, 1882 a trust is an obligation annexed to the ownership of property and arising out of confidence reposed in and accepted by the owner.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

There is no doubt that a MF is a trust. The schemes within a MF also partakes the character of a separate trust.

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The definition of unit under the Regulation consists of each unit representing one undivided share in the assets of a scheme and a unitholder is a person holding unit in a scheme of a MF.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In a judicial precedent it was observed that there is no denying that it is open to a settlor to constitute two or more distinct trusts by a single document.

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It was also observed that the different manner of disposal of the corpus of the two funds evidences the creation of two distinct trusts.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Regulation 18(8) states that the trustees shall ensure that the AMC has been managing fund schemes independently of other activities and ensure that the interest of investors of one scheme are not being compromised.

@LiveLawIndia @barandbench #gslupdates #franklintempleton

In another judicial precedent it was observed that it is not disputed that by a single document more than one trust may be created.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Under the same trust document it is possible to create more than one trust.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The provisions of SEBI Act do not bar the application of other laws. Therefore SEBI Act and The Indian Trust Act must be read together.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The two Acts have to be read together to provide the statutory protection to the interest of the unit holders as has been prescribed by the object of the SEBI Act.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Once a unit holder is found to be a beneficiary in a scheme then all the necessary consequences of the trust deed will follow in accordance with the Indian Trust Act.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

A trustee is liable to make good the loss which the trust property or the beneficiary has sustained by the breach of trust committed by the trustee.

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The conduct of the trustees in the given case is in the nature of a discharge.

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The trustees have been given to choose the liquidator. Whatever obligation the trustees had the trustees have sought to indemnify themselves from those obligations.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustee cannot denude himself from the character of a trustee till he has fulfilled his obligations as a trustee.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

A trustee cannot unilaterally extinguish his liabilities to unitholders. Either consent must be taken or it should be done in manner known to law.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustees shall ensure that no change in the fundamental attribute of any scheme which affects the interest of the unit holders unless a written communication regarding such change is sent to each unitholder and an option to exit without any exit load.

#gslupdates

Any change which affects the unit holders requires the consent of the unit holders. The winding up the scheme the MF cannot preclude the unit holders' interest.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Winding up of a scheme changes an open ended scheme into a close ended scheme.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In a judicial precedent it was held that the trustees cannot change the fundamental attributes of any scheme or any other change affecting the interest of the unitholders unless a written communication is sent to each unitholder regarding such change.

#gslupdates

It was also held that if the nature of the investments were to change the fundamental attributes of a scheme would get altered.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Liquidity provisions such as repurchase or redemption are a fundamental attribute of the scheme and due to winding up it has been significantly altered.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Bench: Regulation 18 (15A) comes into picture when the scheme continues but the fundamental attributes undergoes change. Winding up of a scheme extinguishes the scheme.

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Mr. Sondhi: It is all the more reason to obtain the consent of the unitholders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The rights of the unit holders are to be protected either by obtaining their consent or by giving them an option to exit without any exit load.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

There have been instances where the funds which have been wound up have been given the benefit of Regulation 18 (15A).

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

There are other regulations where the requirement of 18(15A) has been prescribed such as Regulation 22 (e).

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

There are such instances in the regulations which give the unitholders the option to exit at a prevailing NAV without any exit load.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Winding up postpones the redemption at the current date by a period of 5 years.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The unit holders are put in a much worse situation than they would have been had they been provided with the option to exit without any exit load.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It is a well settled law that what cannot be done directly cannot be done indirectly. The provisions of a law cannot be evaded by shift or contrivance.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Under the master circular of MF, the type of a scheme, term of issue and right to redemption are a fundamental attribute of the scheme.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

A notice issued by DHFL America for winding up of a MF scheme contemplated the redemption of the units of the unitholders at the applicable NAV.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The decision to wind up is always a measure of last resort. It is a proceeding conducted in rem. It cannot be conducted at the back of the unitholders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

A decision could not be taken and then presented to the unit holders. Rather the proposal of the decision should be approved from the unit holders and should be acted upon thereafter.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In a judicial precedent it was observed that it is only as a last resort that winding up of the corporate debtor is resorted to.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The borrowing limit enhanced one day before the winding up took place should have been utilised to for redemption of units.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

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

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate