Thread by @barandbench

#SupremeCourt Bench led by Justice Abdul Nazeer hears plea by #FranklinTempleton challenging Karnataka High Court order which restrained winding up of six of its debt schemes without obtaining the consent of its investors by a simple majority #FranklinTempleton

Senior Advocate Ravindra Srivastava: The winding up decision is being challenged for being mala fide.

#SupremeCourt

Senior Advocate Srivastava: If there is a division problem it does not justify the restriction on redemption. Shares the below note with the bench.

Srivastava: There’s a serious of questions regarding winding up which was a camouflage by the trustees. #COVID19 was used as an excuse

SC: We will not bifurcate.

Srivastava: This is the first instance of winding up a Mutual Fund house. Despite all problems of Covid19, no Mutual funds houses took drastic measure of winding up. Only #FranklinTempleton did this

#SupremeCourt

Shrivastava: The GOI was shaken by this decision as we all saw in the reports... RBI announced Rs 50k crore...as special liquidity facility for mutual funds.

Shrivastava recounts that on 6th of May 2020, Jenny Johnson, President and CEO of #FranklinTempleton at US issued a statement condemning SEBI's role, stating that it was because of SEBI's decision that led to this liquidity situation/messy situation that led to the winding-up

Shrivastava continues to read out submissions, refers to circulars issued by SEBI, litigation moved in Delhi High Court by #FranklinTempleton, order passed by the Guj HC in the matter

Shrivastava continues reading submissions on how ultimately the matter travelled to Supreme Court, when the Gujarat High Court order was challenged, and how Karnataka High Court was later directed to hear the matter, eventually passing orders after lengthy hearing.

It is a contention that as far as the trustees are concerned, they are the sole repository pf power to take the extreme decision of winding up. There are absolutely no safeguards, checks on power, Shrivastava observes.

The High Court says that the consent is a requirement, Shrivastava

The COVID-19 situation was just a smokescreen for malfeasance of the AMC...: Shrivastava

Court: Can you segregate your arguments on each question separately? Otherwise, if you mix up arguments regarding malfeasance, regulations misfeasance, it becomes very difficult.

Shrivastava says he will make submissions to show that this was nothing but a COVID-19 exploitation by the mutual fund

Shrivastava reads the objects and reasons of the SEBI Act, 1992.

He goes on to refer to Chapter IV, Section 11 on the "functions of the Board."

Shrivastava refers to Sec 11(2)(e), SEBI Act, whereby SEBI's function includes "prohibiting fraudulent and unfair trade practices relating to securities markets"

Shrivastava: We haven't seen the forensic audit report, but from what we have seen till date, all this has happened

Shrivastava reads out provisions empowering SEBI to "direct any intermediary ('AMC is an intermediary') or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation."

Shrivastava reads out Section 11B

I am assuming, for arguments, that the decision of winding was in the interest of investors. If that is so, then 11B is statutory provision because it contemplates an enquiry. Winding up is not an overnight or whimsical decision: Shrivastava

Shrivastava: The inquiry is contemplated. The reason is this, both trustees and AMCs have their vested interests in winding up...

...so the SEBI is required to look into it as a regulator. It can be a summary enquiry, need not be a trial...

Shrivastava: SEBI is the custodian, SEBI is the guard here. ... They (AMC) cannot be the judge of their own cause in winding up...

Shrivastava refers to provisions on the registration of mutual funds, operation of trustees, disqualification to be trustees, rights and obligations of trustees.

Shrivastava: There is a fiduciary relationship created under the regulations... it is not strictly a contractual relationship between the investors and the mutual fund. The relationship is entirely fiduciary, which has its own responsibilities and connotations

Shrivastava reads out a regulation which says the trustees "shall" obtain the consent

Shrivastava: I surprised when the SEBI says it (taking consent) does not apply. It cannot apply only when it is written out of the statute book. To say consent is not required is totally incorrect.

Court: What is the reason for taking consent of unit holders when 3/4th of unitholders make a requisition?

Shrivastava: That is how the SEBI has framed the regulation...

Shrivastava makes submissions on open-ended schemes and close-ended schemes.

Court seeks clarification: In case of close-ended scheme, you cannot redeem the scheme before the closure of the scheme?

Shrivastava answers in the affirmative.

A close-ended scheme can be wound up only on the expiry of the duration, Shrivastava submits.

He refers to Regulation 39 of SEBI's mutual fund regulations dealing with when a close-ended scheme can be wound up

Shrivastava refers to Reg 39 (2) (a): It is so sweeping milord.

Court notes: It's hinged with the condition that trustees should have an opinion... with regard to winding up of the scheme

Shrivastava reads out Regulation 40 on the "effect of winding up."

Court: We will continue at 2, Mr Shrivastava.

Arguments in #FranklinTempleton matter to continue after lunch break in #SupremeCourt.

Hearing resumes. Shrivastava continues making submissions.

#FranklinTempleton
#SupremeCourt

Shrivastava: SEBI says trustees are final, SEBI has no role as far as winding-up is concerned...If that is the case, virtually the safeguards for investors would be completely missing. Trustees would have a complete free-hand.

#FranklinTempleton
#SupremeCourt

SEBI must get in as a regulator, otherwise, there is no other for the interest of the investors, Shrivastava.

The situation is not comparable with the shareholder of a company. Unitholders gave their money in trust. It is not contract, Shrivastava adds.

Why should unitholders pay for some foul play? That is why it is due and payable. Somebody should look into it. What is being made is the investors' money: Shrivastava

If we take that SEBI is just a silent spectator, that it does not have a role... if that is so, the purpose of the SEBI Act of protecting the interest of the unitholders is completely lost, Shrivastava says.

Shrivastava refers to regulation 42, says it clearly assigns a role to SEBI.

Shrivastava: There is no appeal provided against the decision of trustee.. Article 226 jurisdiction is limited.. SEBI is therefore the authority. The whole thing has gone completely unchecked... without any scrutiny... High Court has said that SEBI has failed to perform its role.

Shrivastava: High Court says that SEBI has not acted diligently in this matter in paras 271 and 272.

Shrivastava says he wants to place one judgment before the Court, Harakchand Ratanchand Banthia vs Union Of India.

He reads from the judgment.

Every event cannot justify winding up: Shrivastava

Shrivastava: COVID is not selective in treatment. none other mutual funds had to go through this kind of... on April 23 a notice comes that on account of COVID it has become necessary to wind up this scheme.

#FranklinTempleton

Could they not wait? Shrivastava says, adding that someone could have approached SEBI for guidance.

Without waiting for SEBI's response, they decided to wind up, Shrivastava adds.

Senior Advocate Ravindra Shrivastava concludes submissions. Court permits him to file written submission.

Advocate Puneet Jain begins his submissions.

Advocate Puneet Jain makes submissions on open-ended schemes and redemption of the scheme on NAV (net asset value) declaration.

He goes on to make submissions on the difference between debt-based funds and equity-based mutual funds.