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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
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