Thread by @barandbench

#SupremeCourt continues hearing plea by #FranklinTempleton challenging Karnataka HC restraining winding up of 6 of its schemes without obtaining the consent of its investors by a simple majority. Matter before Bench headed by Justice Abdul Nazeer.

Advocate Puneet Jain to continue submissions today.

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Before my learned colleague, starts may make a submission: Senior Adv Meenakshi Arora for Chennai Financial Management Society

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Sr Adv Arora seeks a copy of the final audit report or show cause notice. She adds that unless it is given "how can I make submissions on misfeasance and malfeasance?"

Court: They have claimed privilege... you'll have to argue for that...

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Arora: Very well.

Arora adds that they were only hoping for a copy so they can argue on misfeasance, malfeasance aspects

Court: You will argue after Puneet Jain, yes?

Arora: Yes milord.

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Adv Puneet Jain resumes submissions. Recounts that the hearing yesterday was disrupted owing to technical issues. Says he has submitted a note on his submissions.

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Jain: The depth of the market is sufficiently robust. It is not going to get problematic because of a sale of 17k crores spread over a period of nine months.

Court: What are you saying? They should have sold the assets, whatever price they are getting?

Jain: Why should they take a call and stop a contractual obligation agreed to me. The doomsday argument raised by the other side is being raised by SEBI also. You may ask SEBI what is the market debt, the daily turnover.. my instructions is that it is 1 lakh crore a day...

Jain: I can understand till the matter was decided by HC... their argument was that Regulation 39 notice, therefore 40 has kicked in...The HC decided in... favour. so the 39 notice goes out the window.

Court: Regulation 40 says immediately thereafter, business has to stop.

Jain: Please come to 40, when does 40 kick in?

Court: What we make out is first trustees decide (that there is a need for winding up), they issue public notice... regulation 40 becomes operational... that is the finding of the HC. What is your contention?

Jain disagrees, says that consent of trustees is subject to the consent of the unitholders. He relies on Section 18(15)(c) of the SEBI Mutual Fund Regulations. This provision kicks in after Regulation 39 (2)(a) and before Regulation 40 (effect of winding up), he contends.

Court: It may take place after your units maybe... because we're at the process of winding up, not redemption - winding up will only take place after trustees say no other recovery possible....there may be cases where no recovery is possible...

Court recounts a case from the 90s where a mutual fund that promised double the returns in 5 years failed.

Court: I am talking about 90s

Jain: My father appeared in that matter

*All laugh*

Jain: Ultimately a criminal case was filed, SLP was dismissed.

Court: I still remember, some of the persons, after about 5 years, they got some payment

Jain: They got full payment, that was because of the order of the Supreme Court...he (lawyer) advised them to make entire payment, and entire payment was made.

Jain: Because of Nirav Modi scams, banks were very reluctant in giving loans. But companies still needed funds. Only other way to access funds was that they came to these debt-based funds, which started extending loans.. could be a violation of regulations 44(3) plain and simple

Jain points out that someone is sharing his screen, asks if screen sharing can be stopped

Court, in a lighter vein: All your Whatsapp calls, we are getting information

*All laugh*

Jain: I don't use WhatsApp. I always say it is more a problem... I have only used SMS & emails

Jain: When securities are issued in a public offer in an open market, SEBI regulates. But securities which are private, that is not regulated by SEBI.

Court, referring to certain written documents: Mr Jain, can you speed up a little. We see that your pages are going quite a lot...

Jain: There are 2-3 issues, after that, I will... these are substantial issues

Jain: Because of the ILFS issue, they set up a committee which makes recommendations to the board...in 2019, an amendment is brought to SEBI Mutual Fund Regulations (to its 7th schedule).

Jain refers to para 1 (a), which was inserted in 2019.

Court says that the contention that unitholders for the segregated portfolios was not given notices and that notice was only given post segregation may not be correct.

Jain: It is factually correct, you may ask them.

Jain: Segregated portfolios is dealt with separately, even though they are part of the same scheme they are not made part of the winding up process, is what I'm saying

Jain refers to a letter: SEBI is telling #FranklinTempleton, you don't put your house in order and you are blaming us.. but after this letter was issued, SEBI has maintained complete silence.

Jain: The second thing SEBI did is issue a May 20, 2020 circular by which they allowed listing of this winding up portfolios... now we are in February 2021, not one scheme has been listed.

Jain: What happens to SEBI circular - who needs to comply, or ensure compliance? SEBI keeps on issuing circulars, but not to enforce them. There are several circulars, SEBI has not ensured compliance of those circulars...that is the unfortunate aspect... it is not COVID...

Court: Puneet, how long will you take?

Jain: Today, I could be good for 1.5 hrs.

Jain adds he wants to make submissions on certain areas

Court: That's been already highlighted by Mr Shrivastava Please confine yourself to 1 hour now.

Jain: Yes, that's why I gave that written submission, it becomes easier.

Bench rises. #FranklinTempleton hearing to continue post-lunch in #SupremeCourt

Bench reassembles.

Puneet Jain: Every different investment has a different investment objective.

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Jain: when it says three to six months scheme then the time is stated. If nothing is stated then it's six to twelve months. This is for informed understanding. Liquidity will be high

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Jain: SBI capital should atleast take into account the securities. If the scheme has to be wound up there needs to be a positive decision in force.

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Justice Khanna: You also know the drawbacks of your argument. Don't respond. We are not here to convince you.

Jain: What is the difference between this scheme and a close ended scheme?

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Jain reads out certain provisions in a circular on restrictions on redemption and procedure to be followed, including when there are liquidity issues, market failure etc.

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Court: Let's be clear, is it your contention that conditions for suspension of redemption was satisfied? Please answer that first.

Not satisfied, Jain responds

Then don't rely on it: Court

Come to the next argument Mr Jain: Court adds

We have to now ration time a little bit. We understand your argument that if redemption, all these provisions would come in or suspension of redemption is allowed, all these provisions would come in: Court

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This is a contractual obligation which they had, which has not been honoured. My ... liquidity has been denied, they should be put to terms for it - for the loss of liquidity that I have suffered: Jain

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Para 7, I have said something about SEBI. I have already mentioned they have not enforced any of their circulars. I have made several complaints to them, beginning from 13 May 2020. Neither there is reply, nor disposal of those complaints by SEBI: Jain

If SEBI had decided (on those complaints), I could have gone to SAT. Or they could have taken care of #FranklinTempleton on their own. But they have not done it: Jain

At pre-41 stage (reference is to Regulation 41 of Mutual Fund regulations), the borrowings and unitholders are at par. Primacy to borrowings will come after 41 stage: Jain

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What they did is that they stopped my redemptions and paid the borrowings...That was a violation of the regulations: Jain

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I am a depositor. I have deposited funds with them, which is evident by units issued to me, funds they invest... I am not a shareholder. Borrowing money cannot be paid to the shareholders, look at the Companies Act: Jain

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The unitholders cannot be treated as Shareholders. The liability to pay redemptions to me was coextensive with the borrowings. They could not have repaid borrowings before paying it back to me: Jain

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They took borrowings from the AMC also... if AMC can extend money to pay to them, why AMC cannot do the same to me? Why am I left out and my money paid to others and not to me?: Jain

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The forensic audit, that is now final. The investigation is final. In compliance with High Court order, that should be given to us: Jain

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The stay granted was on redemption. There was no stay against giving this forensic report to us...this should be given to us now that is finalised. The action by SEBI may not be taken, may be taken... but I should be given the report: Jain

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This (forensic audit report) is not a document on which privilege can be claimed...I am entitled to it, it was on my complaint, regulation 60 mandates, there is no justification for #FranklinTempleton or SEBI to withhold that information: Jain

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Puneet Jain concludes.

Jain: I am grateful for your Lordships patience with me

Court: Alright, thank you Mr Puneet Jain

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Senior Advocate Meenakshi Arora commences submissions for Chennai Financial Management Society.

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Arora says that Gujarat High Court has said that forensic audit report can be shared. The Karnataka HC said that a copy of the report can be shared once the investigation is over, she adds.

We have succeeded in being entitled to a copy of the forensic audit report: Arora

Privilege is being claimed by them. We are the investors. They are trustees... there is a fiduciary relationship, which is broken: Arora

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That argument of privilege has to be made good by them, not by me: Meenakshi Arora

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Arora adds that when the argument sought to be made is on malfeasance and misfeasance, the forensic audit report "becomes the singularly most important doc for me."

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On privilege, can we hear the other side before we hear you? Because they'll have to argue on that. You rightly said they have to argue on that: Court

Arora agrees

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Court: Any other thing?

Arora says she wants to argue on SEBI's role since HC said that SEBI has no role to play

Court: That you can argue

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Arora: In that, the High Court is not correct... I would want to take your Lordships through the SEBI Act very briefly. Give me 10 minutes, I should be done with that.

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Arora points out that the SEBI Act begins with its object of "investor protection."

She goes on to the functions of the Board under Section 11 of the SEBI Act.

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Arora recounts various events.

Adds: On May 8, #FranklinTempleton apologises and SEBI goes completely slow in the entire process, tells Karnataka High Court that even court must not look at the interim auditor report by Choksi and Choksi.

Arora: If SEBI has been given the primary role of investor protection, SEBI has completely failed in discharging its obligation.

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Arora points out that SEBI would have powers even pending an inquiry or investigation under Section 11, SEBI Act.

While in the month of March, they may take a point of COVID. But we have to remember that India felt the impact of COVID only mid-March went into lockdown in the third week of March. Prior to that, everything in this country was functioning normally: Arora

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There are about 40 odd mutual funds in the country, maybe more than that. Why is it that we have only one mutual fund that claims impact on COVID and winding up? : Arora

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Arora asserts that #FranklinTempleton had recklessly and contrary to guidelines and the agreement with investors, invested in illiquid securities.

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Why would RBI step in give Rs 50 crore special liquidity facility unless there was a fraud that was committed at that point in time?: Arora reads out certain submissions

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Arora says that even the SEBI's letter shows that #FranklinTempleton was the sole entity where no other fund had ventured.

They just recklessly put the money... 7,000 odd crores in one particular thing... 90-100% investment was made in certain issues that came: Arora

Arora says that there was redemption pressure even before COVID

The redemptions started even before the COVID happened, either because of insider trading or... therefore, the report becomes very significant: Arora

COVID started in China, then went to Europe. India we had little gap... (but) world economy was changed immediately after China, Europe, America (was affected by covid).. so we can't go by the dates as such: Court

Senior Adv Arora: This is a case of misreason and fraud and not where COVID19 was the cause. Blatant violation was so obvious in this case. AMC could have intervened early to mend the ways of the fund manager

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Arora: There is a point of concern in my submissions relating to #InsiderTrading. What they have disinvested is the high rate securities.

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Arora: we have filed a FIR in Chennai and registered a conplaint WITH SEBI too. Here was a case which was not much above the board and has more than what meets the eye.

Matter adjourned to Tuesday

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