Letters patent appeal is an appeal by a petitioner against a decision of a single judge, to shift the case to another bench of the same court.
In its petition, Sebi said the court had erred in staying the crucial e-voting process. This will ultimately delay the entire winding-up process and cause loss to unit holders, it said. Sebi added that the court in its 8 June ruling has erred in interpreting that the consent of unit holders is needed before the winding-up decision. Mint has reviewed a copy of the petition.
The high court had ruled in favour of continuing a stay on the e-voting process till Sebi’s forensic report on alleged lapses in managing these schemes is made public. This comes even as Franklin Templeton Trustee Services Pvt. Ltd moved a resolution to offer legal indemnity to its directors from liabilities arising out of the step to wind up the six debt schemes on 23 April.
Typically, trustees are already indemnified against acts of omission - this notice seeks to provide additional indemnity against default, negligence, breach of trust and breach of duty.
It is unclear how much indemnity such a resolution can offer if the regulator or the court passes any order against the directors. This comes in the wake of lawsuits filed in various high courts and the Supreme Court on winding up decision and Sebi’s forensic audit.
Sebi, in its petition to the Gujarat high court, said obtaining the consent of investors will not be in their interest as it would not only delay implementing the decision but also erode the value of the securities.
“Trustees will have to redeem the units, may have to sell assets at a distressed value which would adversely affect the interest of unit-holders. Further, in the scenario when decision of the trustees was needed immediately on happening of an event and they were made to redeem units while waiting for unit-holder approval, the informed and big investor will immediately exit while small and ignorant investor will be left with illiquid underling securities," said Sebi.
Also, if the unitholders do not give their consent, then it would force trustees to reopen schemes for transactions and all unit holders will put redemption requests.
“To meet the redemption requests, the Mutual Fund has to distress-sell securities at deep discount. Any distress sale of assets of a scheme in an illiquid bond market will reduce the NAV (Net Asset Value) which will be detrimental to the unit holders," said Sebi.
As per Sebi, delaying the liquidation process will increase the monetary loss for unit holders. Sebi, in its plea, reiterated that its forensic report is an internal document and not a public document.
“Decision for winding up of a scheme cannot be dependent on forensic report obtained by the Appellant," said Sebi. Rajeev Agarwal, former wholetime member, Sebi, said trustees have a key supervisory role.
“Trustees off course cannot go into operational aspects of investment calls or day-to-day functioning of an AMC, but they have an important supervisory role. They have to ensure that the systems are in place and the management is functioning within the regulatory framework and the policies laid down by board of trustees," Agarwal said.
“We confirm that a notice has been issued to conduct an Extra-Ordinary General Meeting of the members of Franklin Templeton Trustee Services Private Limited with regard to indemnification of the Directors of the Company. It is standard practice to offer Directors and Officers indemnification in the performance of their duties. The notice is publicly available on our website," a Franklin Templeton spokesperson said.