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

Yesterday, Sr. Adv. Dr. Aditya Sondhi pointed out the fact to the court that the enhanced borrowing limit should have been utilised for the purpose of redemption of units.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Dr. Sondhi: The October- December quarter witnessed an unprecedented rise in the redemption requests. This was due to the circular of SEBI of October 2019.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

About 20% of investments in value terms are invested in unlisted debt securities. FT had invested about 32%.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Investing in unlisted debt securities increases the risk for the investors.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

By 30.09.2020, the maximum investment in unlisted NCDs should have been 0%.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The emphasis on redemption, illiquidity has nothing to do with Covid but the genesis of the problem is much prior to Covid.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

When SEBI has stipulated that liquidity issue should be of such a nature affecting the market at large and not to a specific security in the portfolio then the act of winding up of 6 specific MF schemes is patently illegal.

@LiveLawIndia @barandbench #gslupdates

As of today 4 out of 6 schemes are cash positive. There's no embargo to release this money to the creditors.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Bench: Once the winding up begins, the redemption completely ceases. So the money cannot be paid to the investors except in terms of 41(3).

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Dr. Sondhi: Since the language of 41 confines itself to the proceed of sales other money received would not be subject to the embargo of the regulation.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

An article published in an e-paper on 23.08.2020 states that 4 out of 6 schemes are cash positive.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

These schemes have the ability to start paying back the investors and the reasons highlighted stating the inability to pay is the stay order of the Gujarat High Court.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Bench: Does it mean that if the stay order is vacated they will pay back the investors immediately?

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Dr. Sondhi: The counsel for Respondents may reply suitably to this question.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The Macaulay duration of the investment was supposed to be 3-6 months according to the Key Information Memorandum of FT.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

However, according to the maturity profile of schemes dated 23.04.2020 it was stated that even after 2 years 100% of the money would not be returned and hence they have overshot the Macaulay duration.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In a letter by the trustee to SEBI dated 20.04.2020 it was stated that high levels of borrowing may be difficult to unwind in an illiquid market.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

As on 15.07.2020 the outstanding borrowing in percentage of AUM is as high as 29% and 36% in two cases.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The payout have taken place even after the embargo on redemption was there after the decision of winding up was taken.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Money has been invested to the extent of 100% in non tradeable instruments of certain private entities which is in effect a private loan to such entities.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The report of the forensic audit will disclose the falsity of the justification of the winding up order. It will enable the unit holders to make an informed consent.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

#SEBI states that the audit report is an internal document which is independent of the winding up proceeding. It is not a public document.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

SEBI almost wants to push winding up to its conclusion and then in due course issue a show cause notice and some belated action may be taken.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

SEBI be directed to place the report of the forensic audit on record.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

They may in fact issue a show cause notice based on the forensic audit report.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The language of Art. 226 contemplates the power to issue directions in nature of a writ to any person or authority even for purposes other than violation of Fundamental Rights.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The powers of a trust squarely fall into the definition of public purpose.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In a judicial precedent it was observed that the term authority used under Art. 226 must receive a liberal meaning and it should cover any other person or body performing public function.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It was also observed that Mandamus is a very wide remedy which must be easily available to reach injustice wherever it is found.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In another judicial precedent it was observed that where the issue of maintainability of a writ petition is raised, the key is ultimately found in the nature of the grievance and the legal right canvassed.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The action of trustees to wind up is admittedly for the protection of the interest of the unit holders and hence it is in the nature of a public function.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The order of Gujarat High Court has made a prima facie finding regarding the maintainability of the writ.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Franklin Templeton is bound by this view of the Gujarat High Court.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

In a judicial precedent it was observed that different stages of the same proceeding the principle of Res Judicata will apply.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The bench will now hear the writ petition transferred from Chennai.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Adv. Nithyaesh Natraj is advancing arguments on behalf of the Petitioner.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Mr. Natraj: the main prayer is a direction the nature of mandamus to initiate proceeding against respondent 1 and further direction for repayment to the unit holders.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Bench: the prayer for repayment is not maintainable if the validity of Regulations is not challenged.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Bench: under which statutory provision should SEBI be directed to perform its duty?

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Mr. Natraj: Section 11 of the SEBI Act.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Bench: whether under section 11 can SEBI direct FT not to wind up the schemes?

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Mr. Natraj: SEBI can do so because such action is not in consonance with the SEBI Act. Under section 11(4) r/w 11B gives SEBI the power to issue such direction against FT.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Section 12 would cover the AMC as an intermediary.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

SEBI has maintained a stoic silence since October 2019 till the filing of the writ petitions.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The stance of the respondents is contrary to the communication of their own Representative Ms. Jennifer Johnson who stated that the winding up of the schemes has been brought about due to the change of regulatory regime in India and not due to Covid.

#gslupdates #franklinupdate

The AMC stated on 08.05.2020 that the statements of Ms. Jennifer Johnson is factually incorrect. The primary reason for winding up was stated to be the heightened redemption.

@LiveLawIndia @barandbench #gslupdates #franklinupdate

No other AMC has decided to wind up any of its MF schemes.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Almost 30% of the funds have been invested in illiquid securities.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

An AMC is the custodian of public money. When 30% of these investment is done in unlisted papers the investors have no way of knowing the performance of their funds.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

It doesn't seem to be a prudent decision whereby indirectly private companies are getting access to public funds.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

There was a request to SEBI to extend borrowing limit and RBI had provided FT with a stimulus package but even then FT went ahead with the decision of winding up.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The trustee acts in the best interest of the unit holders and they should be at an arm's length distance from the AMC however the fact that their counter affidavit was filed jointly shows a contrary position.

@LiveLawIndia @barandbench #gslupdates #franklintempleton

The deliberations which prompted the AMC to recommend the trustee to wind up the schemes have not been placed on record. An adverse inference must be drawn against the respondent in this regard.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

On 16.04.2020 one of the scheme was marketed as a scheme which will fetch higher returns. Why was it decided to be wound up one week later?

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

One cannot approbate and reprobate at the same time.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The investors are not even sure whether they will get their principal amount which was invested back or not.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

Investors ultimately want their money back. There is no concrete information forthcoming from the respondents regarding either the time frame or the amount of money to be returned to the investors.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The only forum is the High Court under Art. 226 as the other alternative remedies are not as effective.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate

The bench has risen. The hearing to continue on 27th August at 2:30 PM.

@LiveLawIndia @barandbench #gslupdates #franklintempleton #franklinupdate