FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANOTHER v. AMRUTA GARG AND OTHERS ETC.
vidhipandit.com/case/sc-2021-5-559-612
Machine-read from a scanned report. Check the printed page before citing. Report an error.
Headnote — Supreme Court Reports (editorial summary, not part of the judgment)
Catchwords
Securities and Exchange Board of India (Mutual Funds) Regulation, 1996: C Regns. 18(15)(c) and 39 to 42 – Interpretation of – Winding up of six mutual fund schemes – High Court interpreting Regn 18(15)(c) and Regn 39(2)(a) held that the decision of the trustees to wind up a scheme under clause (a) to Regn 39(2) must muster the consent of the majority of the unitholders as per Regn 18(15)(c) – D Case of SEBI, the trustees and the Asset Management Company that prior consent of the unitholders is not envisaged when the trustees, or SEBI directs winding up of a scheme in the interest of the unitholders; and that the decision of the trustees and SEBI to wind up a scheme is final and binding on the unitholders – Appeal before this Court – This Court in its earlier order accepting the poll results, directed winding up of six mutual fund schemes – As regards, interpretation of Regns 39 to 42 and their interrelation with Regn 18(15)(c) and constitutional validity of Regns 39 to 42,
Held
Regulations of 1996 do not suffer from the vice of manifest arbitrariness, thus, Regulations of 1996 constitutionally valid – F Applying principle of harmonious construction to Regn 18(15)(c) with Regns 39 to 42, would mean that the opinion of the trustees would stand, but the consent of the unitholders is a pre-requisite for winding up – Securities and Exchange Board of India Act, 1992. Constitutional validity of 1996 Regulations – Held: Regulations of 1996 do not suffer from the vice of manifest arbitrariness – Since the Regulations are in the nature of economic Regulations, while exercising the power of judicial review, restraint would be exercised unless clear grounds justify interference – Views would not be supplanted for that of the experts as this can put the H 559
A marketplace into serious jeopardy and cause unintended complications – Regs. 18(15)(c) and 39 to 42. Regn 18(15)(c) with Regns 39 to 42 – Interpretation of Regns 39 to 42, their interplay and harmonious construction with Regn 18(5)(c) –
Held
Under clause (a) of Regn 39(2) the power of winding up of a scheme is vested with the trustees, under clause (b) with the unitholders and under clause (c) with the SEBI, however, under Regn 18(15)(c), the trustees are required to seek consent of the unit holders, when they by majority decide to wind up a scheme – Use of the word ‘shall’ in Regn 18(15)(c) is couched as a command – Expression ‘when the majority of the trustees decide to wind up’ C in Regn 18(15)(c) manifestly refers to clause (a) to Regn 39(2) as this is the only Regulation which entitles the trustees to wind up the scheme – Regn 18(15)(c), when it refers to trustees’ decision to wind up, it implies the trustees’ opinion to wind up the scheme – Applying principle of harmonious construction in the context of the D Regulations of 1996, would mean that the opinion of the trustees would stand, but the consent of the unitholders is a pre-requisite for winding up – This interpretation does not in any way dilute or render clause (b) to Regn 39(2) meaningless or redundant – This clause applies where the winding up process is initiated at the instance of 75% of the unitholders – Clause (b) does not in any manner reflect that clause (c) to Regn 18(15) should not be read as it ordains in simple words – Regn 41 refers to and relates to the procedure and manner of winding up which cannot be equated with the requirement of consent as postulated by Regn 18(15)(c) – Regn 41(1) applies even in cases where 75% unitholders have passed the resolution for winding up of the scheme under Regn 39(2)(b) or where SEBI directs the scheme to be wound up in the interest of the unitholders under Regn 39(2)(c) – On the other hand Regn 18(15)(c) applies only when majority of the trustees form an opinion and decide to wind up or prematurely redeem the units in entirety, a situation covered by Regn 39(2)(a) – To ignore the mandate of Regn G 18(15)(c) would nullify the legislative intent – Need to obtain consent of the unitholders is mandated under clause (c) to sub-Regn 15 to Regn 18 when the trustees under clause (a) to Regn 39(2) decide to wind up a scheme – To deny the unitholders a say, when Regn 18(15)(c) requires their consent, debilitates their role and right to
Catchwords
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 561 AMRUTA GARG participate – ‘Consent’ for the purpose of Regn 18(15)(c) refers to the consent of the majority of the unitholders present and voting – Harmoniously interpreting Regns 39 to 42, it is held that the consent of the unitholders, is not required before publication of the notices under Regn 39(3) – Consent of the unitholders should be sought post publication of the notice and disclosure of the reasons for winding up under Regn 39(3) – Thus, the High Court rightly held that the consent of unitholders of the scheme would be necessary if the majority of the directors of the trustee company decide to wind up a scheme. Regn 39(2)(a), 39(3) – Trustees – Power of –
Held
There are sufficient guidance and safeguards in the Regulations itself on the power of the trustees to decide on winding up of the fund – It cannot be accepted that the trustees under clause (a) to Regn 39(2) have been given absolute and unbridled power to wind up a scheme – Language of clause (a) to Regn 39(2) states that the trustees must form an opinion on the happening of any event which requires the scheme to be wound up – Further, as per Regn 39(3), the trustees are bound to give notice disclosing the circumstances leading to the winding up of the scheme – Trustees are, thus, required to come to a conclusion that due to specific circumstances articulated in writing, the scheme is required to be wound up – Trustees hold the assets of the scheme in fiduciary capacity on behalf of the investors E – They are experts in the field and, thus, conferred the power under Regn 39(2)(a) to decide whether or not a scheme should be wound up – Expression ‘occurrence of any event’ is not to be read in isolation but with the words ‘requires the scheme to be wound up’ – Read in this manner, there is no vagueness which can be described as transcending into realm of arbitrariness, on the other hand, the prerequisite statutory mandate is clear – This is not a case of excessive delegation wherein the legislative function has been abdicated and passed on to the trustees who can act as per their whims and fancies – Thus, the High Court’s holding that the opinion of the trustees under clause (a) to Regn 39(2) must be consented to by the unitholders in terms of the mandate of Regn 18(15)(c) is accepted.
Catchwords
Unitholders and creditors – Difference between –
Held
Regulations rightly draw the distinction between creditors and the
A unitholders – Unit holders are investors who take the risk and, thus, entitled to profits and gains and they must also bear the losses, if any – Unitholders are not entitled to fixed return or protection of the principal amount whereas creditors are entitled to fixed return as per mutually agreed contracts – Their rate of return is in the nature of interest and not profit or loss – Creditors are not risk takers as is the case with the unitholders – To equate the unitholders with either the creditors or the home buyers will be unsound and incongruous. Regn 53 – Provision regarding despatch of dividend warrents or proceeds by mutual fund and asset management company-AMC C – Interpretation of – Clause (b) to Regn 53 requires that the AMC to despatch the redemption or repurchase proceeds within ten working days from the date of redemption or repurchase – Issue as regards whether the AMC or the trustees are bound to honour and pay the redemption or repurchase proceeds for requests received before the date of publication of notice in terms of Regn 39(3) – High Court held the expression ‘business’ in clause (a) of Regn 40 refers to business activity and, thus, would include payment of redemption proceeds to the unit holders, which would include the request for redemption received prior to the date of publication under Regn 39(3) – On appeal,
Held
There is a need for greater clarity on the factual matrix, which would be possible once the pending proceedings are concluded – In view thereof, several issues left open at this stage – Observations in the instant Order and the earlier Order not to be read as binding factual findings or conclusions on any disputed facts, which could be a subject matter of a show- F cause notice and consequent decision, though legal interpretation of Regn 18(15)(c) and Regns 39 to 42 are conclusive and binding. Securities and Exchange Board of India Act, 1992: s. 11, 11B – Functions of Securities and Exchange Board of India-SEBI – Power to issue directions and levy penalty – Explained.
Catchwords
Interpretation of statutes: Process of interpretation – Three stage, literal interpretation, propositional interpretation and purposive interpretation –
Held
Interpretation is sometimes a three- stage process – At first, the words being interpreted should be understood according to their grammatical meaning in their literal and popular sense – In the second stage, it is considered whether
Reporter's headnote (continued) and case details
559
(Civil Appeal No. 498-501 of 2021)
p. 560
p. 562
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 563 AMRUTA GARG in the given context the plain meaning is obscure as the text gives rise to choice of more than one interpretation, or the propositional interpretation fails to achieve the manifest purpose of the legislation – In such cases at the third stage, the court applying interpretative tools selects an interpretation advancing the legislative intent without rewriting the provision – Legislative intent is gathered from the object and purpose of the provision and the legislation – Courts do lean towards a pragmatic and purposive interpretation as there is an assumption that the draftsmen legislate to bring about a functional and working result. Alka Synthetics and Trading v. SEBI (1999) 95 Comp Cas 663; Nikhil T. Parikh v. Union of India (2014) 2 C GLH 582 – approved. State of Tamil Nadu and Another v. T. Krishnamurthy and Others (2006) 4 SCC 517 : [2006] 3 SCR 396; Shayara Bano v. Union of India and Others (2017) 9 SCC 1 : [2017] 9 SCR 797; Senior Superintendent of D Post Offices, Allahabad and Others v. Izhar Hussain (1989) 4 SCC 318 : [1989] 3 SCR 796; Director General, Central Reserve Police Force and Others v. Janardan Singh and Others. (2018) 7 SCC 656 : [2018] 5 SCR 81; Pioneer Urban Land and Infrastructure E Limited and Another v. Union of India and Others (2019) 8 SCC 416 : [2019] 10 SCR 381; Sterlite Industries (India) Ltd. v. SEBI 2001 SCC OnLine SAT 28; Nisha Priya Bhatia v. Union of India and Another (2020) 13 SCC 56; B.K. Educational Services Private Limited v. Parag Gupta and Associates, (2019) 11 SCC F 633 : [2018] 12 SCR 794; Union of India v. Raman Iron Foundry (1974) 2 SCC 231 : [1974] 3 SCR 556 – referred to. Case Law Reference G [2006] 3 SCR 396 referred to Para 49 (f) [2017] 9 SCR 797 referred to Para 49 (f) [1989] 3 SCR 796 referred to Para 49 (f) [2018] 5 SCR 81 referred to Para 49 (f) H
p. 564
A [2019] 10 SCR 381 referred to Para 49 (h) (1999) 95 Comp Cas 663 approved Para 55 (2014) 2 GLH 582 approved Para 55 (2020) 13 SCC 56 referred to Para 58 B [2018] 12 SCR 794 referred to Para 62 [1974] 3 SCR 556 referred to Para 62 CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 498- 501 of 2021. C From the Judgment and Order dated 24.10.2020 of the High Court of Karnataka, at Bengaluru in Writ Petition Nos. 8545, 8644, 8748 of 2020 and Writ Appeal No. 399 of 2020. With D Civil Appeal Nos.502, 503, 504-507, 508, 509 of 2021, Special Leave Petition (Civil) No. 1486 Of 2021 And Special Leave Petition (Civil) (D) No.1563 of 2021. Tushar Mehta, SG., Harish Salve, Dr. Abhishek Manu Singhvi, Arvind P. Datar, Ms. Meenakshi Arora, Ravindra Shrivastava, V. Giri, E Sr. Advs., Ashish Bhan, Mohit Rohatgi, Jasmeet Singh, Asim Sood, Rajendra Dangwal, Saif Ali, Ms. Madhavi Khanna, Pratap Venugopal, Ms. Surekha Raman, Akhil Abraham, Vijay Valsan, For M/S. K J John and Co., Nithyaesh Natraj, Vaibhav R. Venkatesh, Gopal Singh, Puneet Jain, Harshit Khanduja, Harsh Jain, Akshat Maheshwari, Harshvardhan F Sharma, Neeraj Sharma, Ms. Christi Jain, Arjun Garg, Abhinav Shrivastava, Abhijeet Shrivastava, Ms. Garima Tiwari, Arpit Jain, Karan Kohli, Nirmal Prasad, Ms. Aditi Shrivastava, Shivam Singh, Sahil Raveen, Jaideep Khanna, Manish Kumar, Paritosh Gupta, Ms. Supriya Juneja, Aditya Singla, Ms. Aishwarya Reddy, Ms. Cheshta Jetly, Ms. Madhumita G Bhattacharjee, Ms. Arti Jain, Ms. Srija Choudhury, Rajat Nair, Ms. Garima Prasad, Ms. Priyanka Das, Arvind Kumar Sharma, Anirudh Sriram, Dheeraj Nair, Kumar Kislay, Angad Baxi, Sanjay Kapur, Ms. Megha Karnwal, V. M. Kannan, Sambit Panja, Arjun Bhatia, Advs. for the appearing Parties. H
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 565 AMRUTA GARG
Judgment
The Order of the Court was passed by A SANJIV KHANNA, J.
11. By the order dated 12th February 2021, interpreting Regulation 18(15)(c) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (hereafter referred to as ‘Regulations’) and accepting the poll results, we have directed winding up of six mutual fund schemes: B
(i) Franklin India Low Duration Fund (Number of Segregated portfolios – 2), (ii) Franklin India Ultra Short Bond Fund (Number of Segregated portfolios – 1), C (iii) Franklin India Short Term Income Plan (Number of Segregated portfolios – 3), (iv) Franklin India Credit Risk Fund (Number of Segregated portfolios – 3), D (v) Franklin India Dynamic Accrual Fund (Number of Segregated portfolios – 3), and (vi) Franklin India Income Opportunities Fund (Number of Segregated portfolios – 2).
22. We would now proceed to interpret Regulations 39 to 42 and E their interrelation with Regulation 18(15)(c). We shall also examine and decide the challenge to the constitutional validity of Regulations 39 to
42. As elucidated in the course of hearings and reflected in the order dated 12th February 2021, it would be inopportune to decide and dispose of these appeals, as facts remain disputed and are sub-judice along with other substantive issues in the adjudication proceedings under the F Securities and Exchange Board of India Act, 1992 (hereafter referred to as the ‘SEBI Act’). The forensic report of the auditors, possibly the foundation of the show cause notice(s), is a subject matter of consideration before the statutory authorities that are bestowed with wide powers. It is not anyone’s case that the statutory adjudication G proceedings should be eschewed or nullified. At the same time, we are not inclined to dispose of these appeals as this would not be in the interest of the unitholders, who are hopeful, yet concerned and apprehensive. Final and conclusive adjudication, on contested factual and related issues, post the statutory adjudication would be in the interest of the parties. No H
p. 566
A prejudice should be caused. Directions to await the orders in the adjudication proceeding have been incorporated in the order dated 12th February 2021. We hope and trust that the proceedings under the SEBI Act would conclude expeditiously. General overview of the Regulations
33. We shall begin with an overview of the Regulations as they would aid us in deciding the two issues; though, to avoid prolixity, we are not reproducing the Regulations. We would subsequently selectively quote the Regulations requiring interpretation.
44. The Regulations envisage a three-tier structure for mutual funds C in the form of the sponsor, the board of trustees or the trustee company, and the asset management company (the AMC). The sponsor, as defined by Regulation 2(x), means a person who, acting alone or in combination with another body corporate, establishes a mutual fund. For this purpose, the sponsor is required to make an application to the Securities and D Exchange Board of India (hereinafter referred to as the ‘SEBI’) in the prescribed form for registration of the mutual fund. Chapter II of the Regulations spells out the eligibility criteria and requirements for registration of a mutual fund.
55. The term ‘trustees’ has been defined in Regulation 2(y) to mean the board of trustees or the trustee company who hold the property of the mutual fund in trust for the benefit of the unitholders. The expression ‘unit’ has been defined in Regulation 2(z) to mean the interest of the unitholders in the scheme, which consists of each unit representing one undivided share in the assets of the scheme, and the term ‘unitholder’ has been defined in Regulation 2(z)(i) to mean a person holding a unit in the scheme of a mutual fund.
66. The AMC is a company, approved by SEBI under Regulation 21(2), which undertakes business activities in the nature of management and advisory services provided to the pooled assets. The services may be specified by SEBI from time to time. The AMC is forbidden by the G Regulations from acting as a trustee of any mutual fund.
77. Chapter III relates to the constitution and management of mutual funds and operation of trustees etc. Regulation 14 stipulates that a mutual fund shall be constituted in the form of a trust and the instrument of the trust shall be in the form of a deed, registered under the provisions of the Indian Registration Act, 1908, executed by the sponsor in favour
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 567 AMRUTA GARG [SANJIV KHANNA, J.]
of the trustees. Regulation 15(1) requires that the trust deed shall incorporate such clauses as are mentioned in the Third Schedule of the Regulations, and such other clauses as are necessary for safeguarding the interests of the unitholders. Regulation 15(2) mandates that no trust deed shall contain a clause which has the effect of – (a) limiting or extinguishing the obligations and liabilities of the trust in relation to any mutual fund or the unitholders; or (b) indemnifying the trustees or the AMC for loss or damage caused to the unitholders by acts of negligence or acts of commission or omission on part of the trustees or the AMC. Regulation 16 itemises the criteria for disqualification from appointment as a trustee. In effect, it stipulates the eligibility requirements for appointment of the trustees. In particular, it states that two-thirds of the trustees shall be independent persons, not associated with the sponsors in any manner. Further, a person appointed as a trustee of a mutual fund is not eligible to be appointed as a trustee of another mutual fund. An AMC and its directors (including independent director), officers or employees are ineligible to be appointed as a trustee of any mutual fund. D Regulation 17 requires prior approval of SEBI before a person is appointed as a trustee. In the case of existing trustees of any mutual fund, they may form a trustee company to act as a trustee, albeit with prior approval of SEBI. The trustees are bound by the Code of Conduct specified in the Fifth Schedule, as well as general and specific due diligence mandates.
88. Regulation 18 is critical as it elaborately enlists the rights and E obligations of the trustees, in as many as 29 sub-regulations. The trustees and the AMC, as per Regulation 18(1), can enter into an investment management agreement with the prior approval of SEBI. Such an agreement must contain clauses mentioned in the Fourth Schedule and other clauses as are necessary for the purpose of making investments. F The sub-regulations enumerate the requirements to be satisfied before a scheme is launched by the AMC. They obligate that the trustee shall ensure that the AMC has been diligent in empanelling the brokers, and in monitoring securities transactions with the brokers and in avoiding undue concentration of business with any broker. The trustees have to also ensure and check that the AMC has not given any undue or unfair G advantage to any associates or dealt with any of its associates in any manner detrimental to the interest of the unitholders and that the transactions entered into by the AMC are in accordance with the regulations and the scheme. The trustees are entitled to call for details of transactions in securities by the key personnel of the AMC in their H
p. 568
A own name or on behalf of the AMC and report the same to SEBI, as and when required. The sub-regulations require the trustees to carry out quarterly reviews of all transactions between the mutual funds, the AMC and its associates. The trustees are to also review the net worth of the AMC on a quarterly basis. In case of any shortfall in net worth, the trustees were to ensure that the AMC makes up for the shortfall in terms of Regulation 21(1)(f).1 The trustees are to furnish to SEBI, on a half-yearly basis, a report on the activities of the mutual fund with certificates that there have been no instances of self-dealing or front running by any of the trustees, directors or key personnel of the AMC, and that the AMC has been managing the schemes independently of any other activities, and in case any activities of the nature referred to in Regulation 24(b) have been undertaken by the AMC, that it has taken adequate steps to ensure that the interests of the unitholders are protected.2
99. Chapter IV of the Regulations relates to the constitution and management of the AMC and the custodian. The AMC is appointed by the sponsor, or by the trustee, if so authorised by the trust deed. However, the appointment needs approval by SEBI under Regulation 21(2). As per Regulation 20(2), the appointment of the AMC can be terminated by majority of the trustees or by 75% of the unitholders of the scheme. Regulation 20(3) states that any change in the appointment of the AMC E is subject to the approval of SEBI and the unitholders. Regulation 21 enumerates the eligibility criteria for appointment as an AMC. The directors of the AMC should be persons having adequate professional experience in finance and financial services related fields and should not be found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws. The key personnel of the AMC should not have been found to be guilty of the above, nor should they have worked for any AMC/mutual fund/intermediary during the period when its registration was suspended or cancelled by SEBI. The board of directors of the AMC must have at least 50% of directors who are not associates, or associated in any manner with the sponsor or any of its subsidiaries or the trustee. The net worth of the AMC should not be less than Rs.50 crores. Regulation 24 specifies the restrictions on the business activities of the AMC. Regulation 25 specifies the obligations and the 1 The position post the SEBI (Mutual Funds) (Amendment) Regulations, 2021 with effect from 5 th March 2021 has not been examined. 2 H Legal effect of Regulation 24 has not been examined.
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 569 AMRUTA GARG [SANJIV KHANNA, J.]
responsibilities of the AMC, which include taking reasonable steps and exercising due diligence to ensure that the investment of funds pertaining to any scheme is not contrary to the provisions of the regulations and the trust deed. The AMC is responsible for the acts of commission or omission by its employees, or persons whose services have been procured by the AMC. Sub-regulation (6) states that the AMC and its directors, notwithstanding any contract or agreement, shall not be absolved of the liability to the mutual fund for their acts of omission and commission, while holding such position or office.
1010. There are a number of stipulations and restrictions to ensure objectivity, fidelity and transparency in business transactions by the AMC and compliance with the Regulations. A system of regulation involving checks, responsibility and power of free decision is envisaged. The Chief Executive Officer, by whatever name called, is mandated by sub-regulation (6A)3 to Regulation 25 to ensure that the mutual fund complies with all the provisions of the Regulations, guidelines and circulars issued in relation thereto from time to time and that the investments made by the fund managers are in the interest of the unitholders. This officer is responsible for the overall risk management function of the mutual fund. Sub- regulation (6B)4 to Regulation 25 states that the fund managers, whatever be the designation, shall ensure that the funds are invested to achieve the objectives of the scheme and in the interest of the unitholders. E
1111. Chapter V deals with schemes of mutual funds and Regulation 28(1) thereunder states that no scheme shall be launched by the AMC unless it is approved by the trustees and a copy of the offer document has been filed with SEBI. Regulations 32 and 33 pertain to the listing and repurchase respectively of units in close-ended schemes, while Regulation 35 deals with the allotment of units and refunds of moneys. F In terms of Regulation 38, guaranteed return is not to be provided in a scheme, unless such returns are fully guaranteed by the sponsor or the AMC, and a statement to that effect is made in the offer document, indicating the name of the person who will guarantee the return and the manner in which the guarantee is to be met. Regulation 38A permits G launching of a capital protection-oriented scheme subject to: (a) the units of the scheme being rated by a registered credit rating agency from the viewpoint of the ability of its portfolio structure to attain the protection 3 SEBI (Mutual Funds) (Second Amendment) Regulations, 2020, w.e.f. 29.10.2020 4 Ibid. H
p. 570
A of the capital invested therein; (b) the scheme being close-ended; and (c) compliance with other requirements as may be specified by SEBI. Regulation 48 requires that every mutual fund shall compute the Net Asset Value of each scheme as specified and the same shall be calculated on daily basis and disclosed in the manner as stated by SEBI.
1212. Regulation 49 is titled ‘pricing of units’ and states that the price at which the units may be subscribed / sold / repurchased by the mutual fund shall be made available to the investors in the manner specified by SEBI. The methodology for calculating the sale and repurchase price of the units is to be provided by the mutual fund in the manner specified by SEBI. Sub-regulation (3) states that in determining C the price of the units, the mutual fund shall ensure that the repurchase price is not lower than 93% of the Net Asset Value and the sale price is not higher than 107% of the Net Asset Value. As per the second proviso to sub-regulation (3), difference between the repurchase price and the sale price of the unit shall not exceed 7% calculated on the sale price.5
1313. Regulations 54 and 55 relate to the annual report and the auditor’s report respectively. Regulation 56 requires providing a copy of the annual report and the summary thereof to the unitholders. Regulation 58 mandates periodic and continual disclosures by the AMC, the trustee, the sponsors, and the custodians, requiring them to make such disclosures E and submit such documents as may be provided by SEBI and comply with sub-regulations (2) and (3). Regulation 59 deals with half-yearly disclosures. Regulation 60 imposes a general obligation to disclose information and, being of some importance, is reproduced below: “Disclosures to the investors
F 60. The trustee shall be bound to make such disclosures as are essential in order to keep them informed about any information which may have an adverse bearing on their investments.” The trustees are mandated and bound to make such disclosures to the unitholders as are essential to keep them informed about any information that may have adverse bearing on their investments.
1414. Chapter VIII relates to and empowers SEBI to authorise and conduct inspection and audit. SEBI, under Regulation 61(1), may appoint 5 Post amendment w.e.f. 5.3.2021 Regulation 49(3) states that the repurchase price of units of an open-ended scheme shall not be lower than 95 % of the NAV. There is no stipulation in the Regulations regarding the sale price.
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 571 AMRUTA GARG [SANJIV KHANNA, J.]
one or more persons as the inspecting officers to undertake inspection of the books of accounts, records, documents, and infrastructure, systems, and procedures or to investigate the affairs of the mutual fund, the trustees, and the AMC for the purposes stipulated therein. Regulation 62 requires that SEBI shall issue not less than ten days’ notice to the mutual fund, trustees, or AMC, as the case may be, before ordering an inspection or investigation. However, under sub-regulation (2), notwithstanding sub- regulation (1), SEBI can direct such inspection or investigation without any notice when it is satisfied that in the interest of the investors no such notice should be given. Regulation 63 prescribes the duties and obligations of the mutual fund/ trustees/ AMC whose affairs are being inspected or investigated. The investigating officer can, during the course of the investigation, examine or record the statements of any director, officer, or employee of the mutual fund/ trustee/ AMC and every such mutual fund/ trustee/ AMC is duty-bound to give to the investigating officer all assistance in connection with the inspection or investigation. The inspecting officer is to submit, as soon as possible, a report to SEBI on completion of the investigation. Regulation 65 states that SEBI or the Chairman shall after consideration of inspection or investigation report take such action as SEBI or the Chairman may deem fit and appropriate under Chapter V of the Securities and Exchange Board (Intermediaries) Regulations, 2008. Regulations 39 to 42 and 18(15) of the Securities and E Exchange Board of India (Mutual Funds) Regulations, 1996.
1515. Regulations 39 to 42 read as under: “Winding Up
39. (1) A close-ended scheme shall be wound up on the expiry of F duration fixed in the scheme on the redemption of the units unless it is rolled over for a further period under sub-regulation (4) of regulation 33. (2) A scheme of a mutual fund may be wound up, after repaying the amount due to the unit holders, — G “(a) on the happening of any event which, in the opinion of the trustees, requires the scheme to be wound up; or (b) if seventy-five per cent of the unit holders of a scheme pass a resolution that the scheme be wound up; or H
p. 572
A (c) if the Board so directs in the interest of the unitholders. (3) Where a scheme is to be wound up under sub-regulation (2), the trustees shall give notice disclosing the circumstances leading to the winding up of the scheme: “(a) to the Board; and B (b) in two daily newspapers having circulation all over India, a vernacular newspaper circulating at the place where the mutual fund is formed. Effect of winding up
C 40. On and from the date of the publication of notice under clause (b) of sub-regulation (3) of regulation 39, the trustee or the asset management company as the case may be, shall— “(a) cease to carry on any business activities in respect of the scheme so wound up; D (b) cease to create or cancel units in the scheme; (c) cease to issue or redeem units in the scheme. Procedure and manner of winding up
41. (1) The trustee shall call a meeting of the unitholders to approve by simple majority of the unitholders present and voting at the meeting resolution for authorising the trustees or any other person to take steps for winding up of the scheme: Provided that a meeting of the unitholders shall not be necessary if the scheme is wound up at the end of maturity period of the scheme. (2)(a) The trustee or the person authorised under sub-regulation (1) shall dispose of the assets of the scheme concerned in the best interest of the unitholders of that scheme. (b) The proceeds of sale realised under clause (a), shall be first utilised towards discharge of such liabilities as are due and payable under the scheme and after making appropriate provision for meeting the expenses connected with such winding up, the balance shall be paid to the unitholders in proportion to their respective interest in the assets of the scheme as on the date when the decision for winding up was taken.
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 573 AMRUTA GARG [SANJIV KHANNA, J.]
(3) On the completion of the winding up, the trustee shall forward to the Board and the unitholders a report on the winding up containing particulars such as circumstances leading to the winding up, the steps taken for disposal of assets of the fund before winding up, expenses of the fund for winding up, net assets available for distribution to the unit holders and a certificate from the auditors of the fund. (4) Notwithstanding anything contained in this regulation, the provisions of these regulations in respect of disclosures of half- yearly reports and annual reports shall continue to be applicable until winding up is completed or the scheme ceases to exist. C Winding up of the scheme
42. After the receipt of the report under sub-regulation (3) of regulation 41, if the Board is satisfied that all measures for winding up of the scheme have been complied with, the scheme shall cease to exist.” D
1616. Regulation 18(15)(c) reads as under: “Rights and obligations of the trustees. 18. xx xx xx E (15) The trustees shall obtain the consent of the unitholders – (a) whenever required to do so by the Board in the interest of the unitholders; or (b) whenever required to do so on the requisition made by F three-fourths of the unitholders of any scheme; or (c) when the majority of the trustees decide to wind up or prematurely redeem the units.” Interpretation of Regulations 39 to 42, their interplay and harmonious construction with Regulation 18(15) (c) of the G Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.
1717. Regulation 39, as the heading states, relates to ‘winding up’ of a scheme of a mutual fund. Sub-regulation (1) to Regulation 39 applies H
p. 574
A to close-ended schemes and is accordingly not relevant as the six schemes in question are open-ended schemes.6
1818. Sub-regulation (2) to Regulation 39 uses the expression ‘a scheme of a mutual fund,’ and accordingly applies to both open-ended and close-ended schemes.7 It is an undisputed position that sub-regulation B (2) to Regulation 39 applies to the six schemes. In terms of sub-regulation (2) to Regulation 39, a scheme of a mutual fund can be wound up: (a) on the happening of any event, which, in the opinion of the trustees, requires the scheme to be wound up; (b) if 75% of its unitholders8 pass a resolution for winding up of the scheme; or (c) SEBI directs winding up of the scheme in the interest of the unitholders. Under each clause the initiator C is different, and the condition to be satisfied is stipulated. Clause (a) empowers the trustees, while clauses (b) and (c) empower the unitholders and SEBI respectively.
1919. When a scheme “is to be wound up” under sub-regulation (2), the trustees are required by sub-regulation (3) of Regulation 39 to issue D a public notice in two daily newspapers having all India circulation and in a vernacular paper having circulation where the mutual fund is located. The public notice should state the circumstances leading to winding up of the scheme. The trustees are also required to write to SEBI and disclose the circumstances leading to winding up of the scheme.
2020. On and from the date of publication, the cease and freeze mandate of Regulation 40 triggers. Regulation 40, which is in the nature of statutory injunction, states that on and from the date of publication of notice under Regulation 39(3), the trustees and the AMC shall cease to (a) carry on any business in respect of the scheme to be wound up; (b) F create or cancel units of the scheme; and (c) issue or redeem units of the scheme.
2121. Regulation 41, as per the heading, relates to the procedure and manner of winding up. The trustees, in terms of sub-regulation (1) to Regulation 41, are required to call a meeting of the unitholders for authorising either the trustees or any other person to take steps for winding 6 Regulation 2(f) – “close-ended scheme” means any scheme of a mutual fund in which the period of maturity of the scheme is specified. 7 Regulation 2(s) – “open-ended scheme” means a scheme of a mutual fund which offers units for sale without specifying any duration for redemption. 8 2(z)(i) of SEBI (Mutual Fund) Regulation 1996, “unit holder” means a person holding unit in a scheme of mutual fund.
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 575 AMRUTA GARG [SANJIV KHANNA, J.]
up of the scheme. Voting at the meeting is by simple majority of the unitholders present and voting. In this meeting the unitholders do not examine, affirm or reject the decision to wind up the scheme. The voting is restricted to selection of the person – either the trustee or a third person – who would take ‘steps for winding up of the scheme’.
2222. Regulation 41(2)(a), requires that the person or the trustee authorised under Regulation 41(1) must dispose of the assets of the scheme in the best interest of the unitholders. Clause (b) to sub-regulation (2) to Regulation 41, states that the sale proceeds shall be first utilised towards discharge of liabilities due and payable under the scheme. Secondly, appropriate provision is to be made for meeting the expenses connected with the winding up. The balance amount shall be paid to the unitholders in proportion to their respective interests in the scheme as on the date when the decision for winding up was taken. The clause differentiates between the creditors whose liability is due and payable, and the unitholders. Payment of the amount due and payable to the creditors is prioritised and takes precedent. Thereafter, appropriate provision is required to be made for expenses connected with the winding up. The balance amount is payable to the unitholders.
2323. In terms of Regulation 42(2), the unitholders are to be paid in proportion to their respective interest in the assets of the scheme. The interest of the unitholders in the assets of the scheme as mentioned in E Regulation 42(2) is computed on the basis of the date when the decision for winding up of the scheme was taken. As per Regulation 41(3), on completion of winding up, the trustees have to forward to SEBI and to the unitholders a report on the winding up containing particulars such as circumstances leading to the winding up, the steps taken for disposal of the assets for winding up, expenses for winding up, net assets available F for distribution to the unitholders and a certificate from the auditors. Sub-regulation (4), a non-obstante provision, states that the requirement in respect of disclosures in the form of half-yearly report and annual report shall continue until winding up is completed or the scheme ceases to exist. Regulation 42 states that after receipt of the report under G Regulation 41(3), if SEBI is satisfied that all measures relating to winding up have been complied with, the scheme would cease to exist.
2424. Regulation 42A stipulates that the units of the mutual funds scheme shall be delisted from the recognised stock exchange in accordance with the guidelines as may be specified by SEBI. H
p. 576
2525. Regulation 18(15)(c), which relates to rights and obligations of the trustees, in simple words requires the trustees to take consent of the unitholders, when they, by majority, decide to wind up or prematurely redeem the units. Words “winding up” in Regulation 18(15)(c), ex-facie refers to the winding up of the open-ended scheme and the expression “prematurely redeem the units” refers to premature redemption of units B under the close-ended scheme. Decision of the High Court and contentions of SEBI, the trustees and the AMC.
2626. The judgment under challenge, interpreting Regulation C 18(15)(c) and Regulation 39(2)(a) holds that the decision of the trustees to wind up a scheme under clause (a) to Regulation 39(2) must muster the consent of the majority of the unitholders as per Regulation 18(15)(c).
2727. Contesting this finding and interpretation, the argument of SEBI, the trustees and the AMC is that Regulations 39 to 42 are a complete code dealing with winding up of a scheme of mutual funds. Initiators and conditions to be satisfied under clauses (a), (b), and (c) to Regulation 39(2) are different. It is argued that prior consent of the unitholders is not envisaged when the trustees, on the happening of any event in terms of clause (a), form an opinion that a scheme is required to be wound up, or when SEBI under clause (c) directs winding up of a scheme in the interest of the unitholders. Only when the unitholders want to windup a scheme, in terms of clause (b), a resolution by 75% of the unitholders is mandated. The need to obtain the consent of the unitholders vide Regulation 18(15)(c) refers to the procedure and the manner for winding up as mandated by Regulation 41(1). To put it differently, the unitholders do not come into the picture when the trustees and SEBI, under clauses (a) and (c) respectively of Regulation 39(2), decide to wind up a scheme. Their decision is final and binding on the unitholders. It is submitted: “a) Regulation 18(15)(c) requires Trustees to obtain consent of Unit holders “when the majority of the Trustees decide to wind up”. It is thus very clear that consent is required when Trustees decide to wind up the scheme(s) and when read together with Regulation 41, makes it amply clear that the consent is for the purpose of Regulation 41 i.e. to authorize the Trustee or any other person to dispose of the asset of scheme(s), in the interest of the unit holders. H
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 577 AMRUTA GARG [SANJIV KHANNA, J.]
(b) The consent envisaged under Regulation 18(15)(c) is a general A “rights and obligations” of the Trustees and that the said consent shall be read as approval required under Regulation 41(1). (c) It is submitted that in the event consent under Regulation 18(15)(c) is interpreted to mean that prior consent of unitholders is required before a scheme is wound up pursuant to a decision taken by the Trustees, the provisions of Regulation 39(2)(b) to be rendered otiose as under the said Regulation, a scheme may be wound up at the instance of Unit holders (upon 75% of the Unit holders of a scheme passing a Resolution for winding up). (d) Regulation 40 comes into effect “on and from the date of publication of notice” by Trustees under Regulation 39(3)(b) and not from the date of “consent of Unit holders”, which makes it abundantly clear that consent of Unit holders is not contemplated qua decision of Trustees to wind up a scheme(s). (e) Further, Regulation 40 (a) provides that on and from the date of publication of notice under 39(3)(b), the Trustees or Asset Management Company, as the case may be, shall cease to carry on any business activities in respect of the scheme so wound up. Therefore, when a decision by Trustee to wind up scheme is taken, in terms of 39(2)(a), the notice is issued and Regulation 40 comes into operation and the requirement of obtaining consent of Unit E holders at this stage cannot arise. (f) It is submitted that Regulation 41(1) casts an obligation on the Trustees to call a meeting of the unit holders to approve a resolution authorising the Trustees or any other person to take steps for winding up of the scheme. Regulation 18(15)(c) of the MF F Regulations cannot be erroneously interpreted so as to conclude that before implementing Regulation 41, prior approval of the unit holders has to be taken.” The submission accentuates, what is submitted would be the impractical and calamitous effect of reading Regulation 18(15)(c) into G Regulations 39 to 42. Prior-consent from the unitholders if necessary even when the trustees ‘decide to wind up’ a scheme under Regulation 39(2)(a), would inevitably delay the publication of public notices as envisaged by Regulation 39(3). Therefore the cease and freeze legal effect of Regulation 40 would get postponed resulting in chaos and H
p. 578
A confusion, as business activities such as buying and redemption of units etc., would continue despite the trustees having taken the decision to wind up the scheme. In panic, most unitholders would rush for redemptions, which achingly would be the reason for winding up. The result would be fire-sale of sound assets in a hasty and disorganised manner at discounted valuations in adverse market conditions. The B trustees who stand in a fiduciary capacity as domain experts, as mandated by clause (a) to Regulation 39(2), act for and in the interest of the unitholders. The unitholders, a large and disparate body of lay persons without domain expertise, have been erroneously conferred the right to veto and overrule the decision of the domain experts. Given the grave C consequences for the sponsor, trustees and AMC, a decision to wind up a scheme is taken after in-depth analysis with great care and caution. Thus, the findings of the High Court to the contrary should be reversed. Interpretation of the term ‘consent’ in Regulation 18(15)(c) vide order dated 12th February, 2021
2828. In our order dated 12th February 2021, we have interpreted Regulation 18(15)(c) and the word ‘consent’ therein in the following manner: “8. However, we begin by rejecting the argument raised by some of the objecting unitholders that consent would be binding only on those who have consented to winding up of the mutual fund schemes and cannot be imposed on others. The word ‘consent’, in the context of the clause, clearly refers to ‘consent of the majority of the unitholders’, and not consent given by individual unitholders who alone would be bound by their consent, that is, it excludes unitholders who are not agreeable. To accept the second or contra view, as pleaded by some of the objecting unitholders, would be to negate the very object and purpose of clause (c) to sub-regulation (15) of Regulation 18. In fact, the submission, if accepted, will make the Mutual Fund schemes and the winding up provisions in the Mutual Fund Regulations unworkable as there would be two different classes of unitholders – one bound by the consent, and others who are not bound by consent. Consequently, the scheme would not wind up. The intent behind the provision is to bind even those who do not consent.
9. Black’s Law Dictionary (10th Edition) defines the word H ‘consent’ as “a voluntary yielding to what another proposes
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 579 AMRUTA GARG [SANJIV KHANNA, J.]
or desires; agreement, approval, or permission regarding A some act or purpose, esp. given voluntarily by a competent person; legally effective assent.” The dictionary also defines ‘general consent’ to mean “adoption without objection, regardless of whether every voter affirmatively approves.” Shackleton on the Law and Practice of Meetings, 14th Edn., B while defining majority, and the binding effect of majority, has opined: “Definition 7-30. Majority is a term signifying the greater number. In legislative and deliberative assemblies, it is usual to decide C questions by a majority of those present and voting. This is sometimes expressed as a “simple” majority, which means that a motion is carried by the mere fact that more votes are cast for than against, as distinct from a “special” majority where the size of the majority is critical. D The principle has long been established that the will of a corporation or body can only be expressed by the whole or a majority of its members, and the act of a majority is regarded as the act of the whole. A majority vote binds the minority E 7-31. Unless there is some provision to the contrary in the instrument by which a corporation is formed, the resolution of the majority, upon any question, is binding on the majority and the corporation, but the rules must be followed.” The word/expression ‘consent’ in sub-regulation (15) to F Regulation 18 refers to affirmative consent to winding up by ‘the majority of the unitholders’. Conversely, consent is denied when ‘majority of the unitholders’ do not approve the proposal to wind up the scheme.
10. However, the question which still remains to be answered is G whether ‘consent’ would mean majority of the unitholders who exercise their right in the poll, or majority of all the unitholders of the scheme. Connected with the question is the concern of quorum, which means the minimum number of members of the entire body of members required to be present to legally transact business. H
p. 580
A 11. Shackleton in the above quotation has referred to distinction between simple and special majority. More appropriate for our discussion is William Paul White’s thesis ‘History and Philosophy of the Quorum as a Device of Parliamentary Procedure’ published in 1967, in which he elucidates: B “Much of the controversy that has been historically associated with the quorum can be traced to the problem of simply determining just what is meant by a quorum. “From the very earliest times it has been recognised as a general rule that a majority of a group is necessary to act for the entire group.” In the case of a public body, the power or authority which establishes the body may also determine what constitutes a quorum. Sturgis states that common parliamentary law fixes the quorum as a “majority of the members”. The constitution of the United States sets the quorum requirement in the House of Representatives at a majority of the membership. But to state that a quorum is a majority of the membership opens the way to potential conflict; which is precisely what has happened on numerous occasions.” After examining the various definitions of the term quorum, the author observes that the definitions by themselves give no key as to how to determine what is minimum number or what constitutes majority. The expression ‘majority’ can mean - (i) majority of total membership list; (ii) exclude or include delinquent members; (iii) members present and voting; or (iv) those present, voting and not voting. Different meanings, he observed, have added to the confusion around the concept of the quorum. Albeit referring to the position in 1967, the author observed: “As we have emerged into the modern era, it is not surprising that by now the method, which has been legally agreed upon by the courts, to determine minimum and majority, is well established.”
12. Clause (c) to sub-regulation (15) of Regulation 18 per se does not prescribe any quorum or specify the criterion for computing majority or ratio of unitholders required for valid consent for winding up. Clause (b) of Regulation 39(2), on the other hand, H
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 581 AMRUTA GARG [SANJIV KHANNA, J.]
specifies that seventy-five per cent of the unitholders of a scheme A can pass a resolution that the scheme be wound up. Similarly, Regulation 41(1) requires the trustees to call a meeting to approve, by simple majority of the unitholders present and voting, a resolution for authorising the trustees or any other person to take steps for winding up of the scheme. Section 48 of the Companies Act, 2013 B states that where share capital of a company is divided into different classes of shares, the rights attached to the shares of any class may be varied with the consent in writing of the shareholders of not less than three-fourths of the issued shares of that class. Sub-section (3) to Section 55 of the Companies Act, 2013 in case of failure to redeem or pay dividend refers to consent C of holders of three-fourths in value of the preference shares. Section 103 of the Companies Act, 2013 prescribes minimum quorum for shareholder meetings.
13. In Shri Ishwar Chandra v. Shri Satyanarain Sinha and Others, this Court on the question of quorum has held: D “If for one reason or the other one of them could not attend, that does not make the meeting of others illegal. In such circumstances, where there is no rule or regulation or any other provision for fixing the quorum, the presence of the majority of the members would constitute it a valid meeting and matters considered there at cannot be held to be invalid.” This decision had also relied on the exposition on the subject of quorum in the Halsbury’s Laws of England, Third Edition (Vol. IX, page 48, para 95), which reads: “95. Presence of quorum necessary. The acts of a corporation, other than a trading corporation, are those of the major part of the corporators, corporately assembled. In other words, in the absence of special custom or of special provision of the constitution, the major part must be present at the meeting, and of that major part there must be a majority in favour of the act or resolution contemplated. Where, therefore, a corporation consists of thirteen members, there ought to be at least seven present to form a valid meeting, and the act of the majority of these seven or greater number will bind the corporation. In considering whether the requisite number is present, only those H
p. 582
A members must be included who are competent to take part in the particular business before the meeting. The power of doing a corporate act may, however, be specially delegated to a particular number of members, in which case, in the absence of any other provision, the method of procedure applicable to the body at large will be applied to the select body. B If a corporate act is to be done by a definite body along, or by definite body coupled with an indefinite body, a majority of the definite body must be present. Where a corporation is composed of several select bodies, the C general rule is that a majority of each select body must be present at a corporate meeting; but this rule will not be applied in the absence of express direction in the constitution, if its application would lead to an absurdity or an impossibility. ...” (emphasis supplied)
D 14. The concept of ‘absurdity’ in the context of interpretation of statutes is construed to include any result which is unworkable, impracticable, illogical, futile or pointless, artificial, or productive of a disproportionate counter mischief. Logic referred to herein is not formal or syllogistic logic, but acceptance that enacted law would not set a standard which is palpably unjust, unfair, E unreasonable or does not make any sense. When an interpretation is beset with practical difficulties, the courts have not shied from turning sides to accept an interpretation that offers a pragmatic solution that will serve the needs of society. Therefore, when there is choice between two interpretations, we would avoid a F ‘construction’ which would reduce the legislation to futility, and should rather accept the ‘construction’ based on the view that draftsmen would legislate only for the purpose of bringing about an effective result. We must strive as far as possible to give meaningful life to enactment or rule and avoid cadaveric consequences. G
15. We would neither hesitate in stating the obvious, that modern regulatory enactments bear heavily on commercial matters and, therefore, must be precisely and clearly legislated as to avoid inconvenience, friction and confusion, which may, in addition, have adverse economic consequences. The legislator in the present H
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 583 AMRUTA GARG [SANJIV KHANNA, J.]
case must, therefore, reflect and take remedial steps to bring about clarity and certainty in the Mutual Fund Regulations.
16. Reading prescription of a quorum as majority of the unitholders or ‘consent’ as implying ‘consent by the majority of all unitholders’ in Regulation 18(15)(c) of the Mutual Fund Regulations will not only lead to an absurdity but also an impossibility given the fact that mutual funds have thousands or lakhs of unitholders. Many unitholders due to lack of expertise, commercial understanding, relatively small holding etc. may not like to participate. Consent of majority of all unitholders of the scheme with further prescription that ‘fifty percent of all unitholders’ shall constitute a quorum is clearly a practical impossibility and therefore would be a futile and foreclosed exercise.
17. Conscious of the problem of quorum and majority in indefinite electorate, 1st Edition of Halsbury’s Laws of England on the question of quorum and meetings, had referred to the following principles: D
“791. Where a corporation consists of a definite number of corporate electors, a majority of that number must be present in order to constitute a valid election. But where a corporation consists of an indefinite number of corporate electors, a majority only of those existing at the time of the election need be present. E
When an election is to be made by a definite body only, or the electoral assembly is to consist of a definite and an indefinite body, the majority of the definite body must, as a general rule, be present in order to render the election legal. It is not necessary that a majority of the indefinite body should be present so long as there is majority of the definite body. If a constituent part of a corporation refuses to be present at an election, it cannot be held, and an election by the remaining parts will be void. But electors present at an election and abstaining from voting are deemed to acquiesce in the election made by those who vote.” The aforesaid exposition, for the purpose of majority and quorum, draws distinction between an electorate consisting of definite number and an electorate composed of indefinite number. Justice Seshagiri Ayyar of the Madras High Court in H
p. 584
A his concurring judgment in Syed Hasan Raza Sahib Shamsul Ulama and two others v. Mir Hasan Ali Sahib and two others had drawn distinction between definite and indefinite numbers in the following manner: “…In the first class of cases, the number of the select body is fixed. In the second class of cases, the number is subject to variation every year or at stated periods. For example, the number of electors of a Temple Committee or the number for a Municipality is liable to fluctuation. Residence for a particular period, or the attaining of age of minors can bring in new electors. Whereas in the case of a Select Committee, the number is fixed…” In the case of unitholders, the number is fluctuating and ever changing and, therefore, indefinite. Numbers of unitholders can increase, decrease and change with purchase or redemption. Therefore, in the context of clause (c) of Regulation 18(15), D we would not, in the absence of any express stipulation, prescribe a minimum quorum and read the requirement of ‘consent by the majority of the unitholders’ as consent by majority of all the unitholders. On the other hand, it would mean majority of unitholders who exercise their right and vote in E support or to reject the proposal to wind up the mutual fund scheme. The unitholders who did not exercise their choice/ option cannot be counted as either negative or positive votes as either denying or giving consent to the proposal for winding up.
F 18. Investment in share market, though beneficial and attractive, requires expertise in portfolio construction, stock selection and market timing. In view of attendant risks, diversification of portfolio is preferred but this consequentially requires a larger investment. Mutual funds managed by professional fund managers with advantages of pooling of funds and operational efficiency are the G preferred mode of investment for ordinary and common persons. It would be wrong to expect that many amongst these unitholders would have definitive opinion required and necessary voting in a poll on winding up of a mutual fund scheme. Such unitholders, for varied reasons, like lack of understanding and expertise, small holding etc., would prefer to abstain, leaving it to others to decide. H
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 585 AMRUTA GARG [SANJIV KHANNA, J.]
Such abstention or refusal to express opinion cannot be construed as either accepting or rejecting the proposals. Keeping in view the object and purpose of the Regulation with the language used therein, we would not accept a ‘construction’ which would lead to commercial chaos and deadlock. Therefore, silence on the part of absentee unitholders can neither be taken as an acceptance nor rejection of the proposal. Regulation 18(15)(c), upon application in ground reality, must not be interpreted in a manner to frustrate the very law and objective/purpose for which it was enacted. We would rather accept a reasonable and pragmatic ‘construction’ which furthers the legislative purpose and objective. The underlying thrust behind Regulation 18(15)(c) is to inform the unitholders of the reason and cause for the winding up of the scheme and to give them an opportunity to accept and give their consent or reject the proposal. It is not to frustrate and make winding up an impossibility. Way back in 1943, Sutherland in Statutes and Statutory Construction, Volume 2, Third Edition at page no. 523, in Note 5109, had stated: D “Where a statue has received a contemporaneous and practical interpretation and the statute as interpreted is re-enacted, the practical interpretation is accorded greater weight than it ordinarily receives, and is regarded presumptively the correct interpretation of the law. The rule is based upon the theory that the legislature is acquainted with the contemporaneous interpretation of a statue, especially, when made by an administrative body or executive officers charged with the duty of administering or enforcing the law, and therefore impliedly adopts the interpretation upon re-enactment.” With some modifications, the principle can be applied in the present case. Practical interpretation should be accorded greater weight than it ordinarily receives, and can be regarded as presumptively correct interpretation as the draftsmen legislate to bring about a functional and working result.
19. We would not read into Regulation 18(15)(c) a need to have affirmative consent of majority of all or entire pool of unitholders. The words ‘all’ or ‘entire’ are not incorporated and found in the said Regulation. Thus, consent of the unitholders for the purpose of clause (c) to sub-regulation (15) of Regulation 18 would mean simple majority of the unitholders present and voting.” H
p. 586
A The above interpretation resolves several grey areas and would underpin the construction of Regulations 39 to 42 and their interplay with Regulation 18(15)(c).
2929. The quotation highlights that interpretation is sometimes a three- stage process. At first, the words being interpreted should be understood according to their grammatical meaning in their literal and popular sense. In the second stage, we consider whether in the given context the plain meaning is obscure as the text gives rise to choice of more than one interpretation, or the propositional interpretation fails to achieve the manifest purpose of the legislation, reduces it to futility, is practically unworkable or even illogical. In such cases at the third stage, the court applying interpretative tools selects or blue-pencils an interpretation advancing the legislative intent without rewriting the provision. The legislative intent is gathered not by restricting it to the language of the provision, rather in the light of the object and purpose of the provision and the legislation. The courts do lean towards a pragmatic and purposive interpretation as there is an assumption that the draftsmen legislate to bring about a functional and working result. Harmonious interpretation of Regulation 18(15)(c) with Regulations 39 to 42
3030. Regulation 39(2) under clause (a) vests the power of winding up of a scheme with the trustees, and with the unitholders under clause (b) and with the SEBI under clause (c), but under Regulation 18(15)(c), the trustees are required to seek consent of the unit holders, when they by majority decide to wind up a scheme. Regulation 18(15)(c) mirrored by use of the word ‘shall’ is couched as a command. Further, the expression ‘when the majority of the trustees decide to wind up’ in Regulation 18(15)(c) manifestly refers to clause (a) to Regulation 39(2) as this is the only Regulation which entitles the trustees to wind up the scheme. Regulation 18(15)(c), when it refers to trustees’ decision to wind up, it implies the trustees’ opinion to wind up the scheme. Rather than making the decision of the trustees otiose, as suggested by SEBI, G the trustees and the AMC, Regulation 18(15)(c) itself would become otiose in case their interpretation is accepted. Principle of harmonious construction should be applied which, in the context of the Regulations in question, would mean that the opinion of the trustees would stand, but the consent of the unitholders is a pre-requisite for winding up. H
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 587 AMRUTA GARG [SANJIV KHANNA, J.]
3131. We do not think that this interpretation in any way dilutes or renders clause (b) to Regulation 39(2) meaningless or redundant. This clause applies where the winding up process is initiated at the instance of the unitholders, i.e. upon 75% of unitholders of the scheme passing a resolution for winding up. Clause (b) does not in any manner reflect that clause (c) to Regulation 18(15) should not be read as it ordains in simple words.
3232. Regulation 41, as explained above, refers to and relates to the procedure and manner of winding up which cannot be equated with the requirement of consent as postulated by Regulation 18(15)(c). Argument to the contrary, equating Regulation 18(15) (c) with Regulation 41(1) overlooks the difference in language, and the object and purpose behind the two regulations. Regulation 41(1) applies even in cases where 75% unitholders have passed the resolution for winding up of the scheme under Regulation 39(2)(b) or where SEBI directs the scheme to be wound up in the interest of the unitholders under Regulation 39(2)(c). On the other hand Regulation 18(15)(c) applies only when majority of the trustees form an opinion and decide to wind up or prematurely redeem the units in entirety, a situation covered by Regulation 39(2)(a). To ignore the mandate of Regulation 18(15)(c) would nullify the legislative intent by resorting to a rather disordered and knotted argument that Regulations 18(15)(c) and 41(1) are identical and serve the same purpose. Clause (c) to Regulation 18(15) does not duplicate sub-regulation (1) to Regulation E 41.
3333. Similarly, omission of clause (d) to Regulation 18(15) and insertion of 18(15A) with effect from 22nd May 2000 by SEBI (Mutual Funds) (Second Amendment) Regulations, 2000 is inconsequential. Prior to its omission, clause (d) to Regulation 18(15) read: F
“(d) when any change in the fundamental attributes of any scheme or the trust or fees and expenses payable or any other change which would modify the scheme or affect the interest of the unitholders is proposed to be carried out unless the consent of not less than three-fourths of the unit holders is obtained: Provided G that no such change shall be carried out unless three fourths of the unit holders have given their consent and the unit holders who do not give their consent are allowed to redeem their holdings in the scheme. H
p. 588
A Provided further that in case of an open ended scheme, the consent of the unitholders shall not be necessary if: (i) the change in fundamental attribute is carried out after one year from the date of allotment of units. (ii) the unitholders are informed about the proposed change in B fundamental attribute by sending individual communication and an advertisement is given in English daily newspaper having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. (iii) the unitholders are given an option to exit at the prevailing Net C Asset Value without any exit load. Explanation: For the purposes of this clause “fundamental attributes” means the investment objective and terms of a scheme.”
D By the same amendment9, sub-regulation (15A) has been inserted and reads: “(15A) The trustees shall ensure that no change in the fundamental attributes of any scheme or the trust or fees and expenses payable or any other change which would modify the scheme and affects the interest of unitholders, shall be carried out, unless – E (i) a written communication about the proposed change Is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Office of the mutual fund is situated; and F (ii) the unitholders are given an option to exit at the prevailing Net Asset Value without any exit load.” The distinction between Regulation 18(15A) and Regulation 18(15)(c) is evident. The words ‘winding up or premature redemption of G units’ in Regulation 18(15)(c) refers to a situation covered by Regulation 39(2)(a), that is, when the scheme is being wound up pursuant to a decision of the trustees. On the other hand, Regulation 18(15A) does not apply when the scheme is being wound up, rather it applies when there is a proposal to change the fundamental attributes of the scheme, 9 H SEBI (Mutual Funds) (Second Amendment) Regulations, 2000.
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 589 AMRUTA GARG [SANJIV KHANNA, J.]
fee or expense or any other change that would modify the scheme and affect the interests of the unitholders. The effect should be not to wind up the scheme thereby bringing it to an end, but to continue with the scheme as modified. Therefore, for Regulation 18(15A) to apply, the scheme should not cease to exist.
3434. In cases under clause (a) to Regulation 39(2) the unitholders have no right or option to exit or not exit the scheme and are paid in terms of Regulation 41. Regulation 18(15A) gives the option to the unitholders to exit at the prevailing ‘Net Asset Value’ without any exit load or continue with the altered/modified scheme. Under the omitted clause (d) to Regulation 18(15), consent of three-fourths of the unitholders for fundamental changes to the scheme was sometimes necessary. This C is not necessary under Regulation 18(15A). Omission of clause (d) to sub-regulation 18(15) and insertion of sub-regulation (15A) to Regulation 18, as observed above is inconsequential and not relevant to the present dispute. If anything, the draftsmen having retained clause (c) to 18(15), re-enforces its link with clause (a) to Regulation 39(2). Accordingly, the need to obtain consent of the unitholders is mandated under clause (c) to sub-regulation 15 to Regulation 18 when the trustees under clause (a) to Regulation 39(2) decide to wind up a scheme.
3535. The argument that the unitholders are lay persons and not well-versed with the market conditions is to be rejected in light of the order dated 12th February 2021. Relevant portion of this order, at the risk of repetition, is being reproduced below: “18. Investment in share market, though beneficial and attractive, requires expertise in portfolio construction, stock selection and market timing. In view of attendant risks, diversification of portfolio is preferred but this consequentially requires a larger investment. Mutual funds managed by professional fund managers with advantages of pooling of funds and operational efficiency are the preferred mode of investment for ordinary and common persons. It would be wrong to expect that many amongst these unitholders would have definitive opinion required and necessary voting in a G poll on winding up of a mutual fund scheme. Such unitholders, for varied reasons, like lack of understanding and expertise, small holding etc., would prefer to abstain, leaving it to others to decide. Such abstention or refusal to express opinion cannot be construed as either accepting or rejecting the proposals. Keeping in view H
p. 590
A the object and purpose of the Regulation with the language used therein, we would not accept a ‘construction’ which would lead to commercial chaos and deadlock. Therefore, silence on the part of absentee unitholders can neither be taken as an acceptance nor rejection of the proposal. Regulation 18(15)(c), upon application in ground reality, must not be interpreted in a manner to frustrate the very law and objective/purpose for which it was enacted. We would rather accept a reasonable and pragmatic ‘construction’ which furthers the legislative purpose and objective. The underlying thrust behind Regulation 18(15)(c) is to inform the unitholders of the reason and cause for the winding up of the scheme and to give them an opportunity to accept and give their consent or reject the proposal. It is not to frustrate and make winding up an impossibility….” Investments by the unitholders constitute the corpus of the scheme. To deny the unitholders a say, when Regulation 18(15)(c) requires their consent, debilitates their role and right to participate. It is an in-contestable position that the unitholders exercise informed choice and discretion when they invest or redeem the units. Regulations envision the unitholders not as domain experts, albeit as discerning investors who are perceptive and prudent. The trustees are therefore commanded to inform and be transparent. Summary reports, periodic and continual statements, annual reports, audit reports, etc., mentioned in paragraph 11 above are intended to reveal the current status of the investments, future prospects, risks and factors that may have bearing on the returns to enable the unitholders to take deliberative decisions, be it purchase, redemption or exercise of the right to vote. The unitholders, when in doubt, as prudent investors may be advised to abstain, but they are not placid onlookers, impuissant and helpless when the trustees decide to wind up the scheme in which they have invested. The stature and rights of the unitholders can co- exist with the expertise of the trustees and should not be diluted because the trustees owe a fiduciary duty to them. Thus, the contention that the trustees being specialists and experts in the field, their decision should be treated as binding and fait accompli has to be rejected not only in view of the specific language of Regulation 18(15)(c), but to be in concinnity with the objective and purpose of the Regulations.
3636. A hypothetical submission that the unitholders may reject a valid and well-considered opinion of the trustees for winding up, and H
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 591 AMRUTA GARG [SANJIV KHANNA, J.]
therefore Regulation 18(15)(c) is directory, should be rejected. A Assumptions cannot be a ground to wrongly interpret Regulation 18(15)(c). Situations could arise when the trustees may err in their opinion, in which event the unitholders may correct them. Money and investment of the unitholders being at stake, a wrong decision would obviously have inimical impact on the unitholders themselves. We would brace the argument that a good and intelligible decision of winding up would invariably be accepted by the unitholders.
3737. ‘Consent’ for the purpose of Regulation 18(15)(c) refers to the consent of the majority of the unitholders present and voting, and in case of a poll, the computation would be with reference to the number of units held by the unitholder. In fact, in the course of hearing, it was conceded that majority of the unitholders belong to provident fund trusts or pension funds. The voting pattern referred to in our earlier order reflects that voting under Regulation 18(15)(c) is possible and can work smoothly without much difficulty. The apprehensions expressed, therefore, do not carry much weight. It is obvious that where the unitholders vote against winding up, consequences would follow and accordingly the scheme would not be wound up. This is a natural and normal consequence which will have to be given effect to. It would, as stated above, happen rarely and that too would not happen without any genuine and good reason. E
3838. SEBI is a Member of International Organisation of Securities Commissions (IOSCO). IOSCO in a consultation report published in August, 2016 on good practices for the termination of investment funds, states that the termination plan should identify rationale for terminating the investment fund. Key steps to be taken as part of the termination process should be identified. Clauses (28), (29) and (30) of the good practices under the heading ‘Decision to terminate’ read as follows: “28. In the majority of cases, the decision to terminate is that of the responsible entity. However, in some jurisdictions national law or regulatory requirements will mandate that the decision of the responsible entity is approved by investors, or the custodian in some cases. The first step in preparing for the voluntary termination of an investment fund is to determine whether investor approval is required. This may depend on the legal structure of the investment fund and whether voting rights are attributed to shares / units. H
p. 592
A 29. Investment in an investment fund usually carries with it the right to vote on certain matters and the voting requirements for the approval of investors on, inter alia, liquidations and terminations are generally prescribed in the constitutional documents and the prospectus / offering document of the investment fund, or legal and regulatory regime of the national regulator, or both. The termination plan should set out the process for obtaining investor approval, where required.
30. Where investor approval is required and investors are asked to vote on the decision to terminate with the outcome achieving the minimum voting requirements for approval, the decision is binding on all, including those who do not vote. Where investor approval is required, the rights of investors should be clear from the termination plan. In particular, the termination plan should document how the interests of dissenting investors will be treated.” D Good practices, as recommended by IOSCO, commend the unitholders’ right to vote/approve on matters of termination and liquidation.
3939. On and from the date of publication of notices under Regulation 39(3), the cease and freeze effect of Regulation 40 applies. The words used in sub-regulation (3) to Regulation 39 are ‘where a scheme is to be wound up in sub-regulation (2)’, that is, a scheme is to be wound up in terms of clauses (a), (b) or (c) to Regulation 39(2). Sub-regulation (3) to Regulation 39 also mandates the trustees to disclose in the public notice the circumstances leading to winding up of the scheme. This obviously means that where the trustees form an opinion to wind up a scheme, they must disclose the reasons, and thereupon, the unitholders exercise their right to vote and give or deny consent. This is the true legal effect on harmonious reading of Regulation 18(15)(c) and Regulation 39(2)(a).
4040. The language of clauses (a) and (c) to sub-regulation (2), and sub-regulation (3) to Regulation 39 does not envisage involvement of the unitholders till the publication of notices in case of clauses (b) and (c) to sub-regulation (2) to Regulation 39. Therefore, when clauses (a) or (c) of Regulation 39(2) apply, the unitholders are to be informed about the winding up by the trustees or SEBI by way of public notice. Publication in terms of Regulation 39(3) is even required when the unitholders vote for winding up of a scheme under clause (b) of Regulation 39(2). H
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 593 AMRUTA GARG [SANJIV KHANNA, J.]
4141. It is manifest that publication of notices under Regulation 39(3) A should be instantaneous without any interstice between the decision of winding up by the trustees under clause (a), by the unitholders under clause (b) or by SEBI under clause (c). Delay would hold up the cease- and-freeze effect of Regulation 40 and consequently nullify the salutary purpose and object behind it. B
4242. In view of the above discussion and harmoniously interpreting Regulations 39 to 42, we hold that the consent of the unitholders, as envisaged under clause (c) to Regulation 18(15), is not required before publication of the notices under Regulation 39(3). Consent of the unitholders should be sought post publication of the notice and disclosure of the reasons for winding up under Regulation 39(3). C
4343. Read in this manner, we can interpret clause (c) to Regulation 18(15) and Regulations 39 to 42 without the disarray as suggested, while not displacing the legal effect of either Regulation 40 or Regulation 18(15)(c). This interpretation takes care of the apprehension expressed by SEBI, the trustees and AMC that delay or time gap between a decision of the trustees under clause (a) to sub-regulation (2) to Regulation 39 and publication of notice under sub-regulation (3) to Regulation 39 would postpone the cease-and-freeze effect of Regulation 40.
4444. We have referred to Regulation 41(1) and that it requires calling of a meeting of the unitholders for authorising the trustees or any other person to take steps for winding up of the scheme. In case where the scheme is being wound up under Regulation 39(2)(a), it is possible to hold a meeting of the unitholders under the said provision where if the resolution for winding up is passed, the unitholders can also decide by simple majority of the unitholders present and voting whether the trustees or any other person should take steps for winding up of the said scheme. One meeting in many a cases would suffice.
4545. To complete interpretation of Regulation 18(15), we have to record that clause (a) applies and requires the trustees to obtain consent of the unitholders whenever required by SEBI in the interest of the unitholders. Clause (b) states that the trustees would obtain consent of the unitholders whenever required to do so on the requisition made by three-fourths of the unitholders of any scheme. Accordingly, clause (a) would apply whenever SEBI mandates and clause (b) applies whenever three-fourths of the unitholders of the scheme make a requisition. H
p. 594
4646. The impugned judgment, from paragraph 211 onwards, specifically refers to the responsibilities and duties of the trustees incorporated in the statement of additional information published by the mutual fund, which reads: “(b) The Trustees shall obtain consent of the unit holders of the B Scheme(s): i) When the Trustee is required to do so by SEBI in the interests of the unit-holders; or ii) Upon the request of three-fourths of the unit holders of any Scheme(s) under the Mutual Fund; or iii) If a majority of the directors of the Trustee company decide to wind up the Scheme(s) or prematurely redeem the units.” Clause (iii) of the aforesaid quotation dealing with responsibilities and duties of the trustees, requires the trustees to obtain consent of the unitholders of the scheme if the majority of the directors of the trustee company decide to wind up the scheme or prematurely redeem the units. The language of clause (iii) of the aforesaid quotation is identical to clause (c) of sub-regulation (15) to Regulation 18. The High Court was, therefore, right in observing that the trustees and the AMC have understood and accepted that the consent of unitholders of the scheme would be necessary if the majority of the directors of the trustee company decide to wind up a scheme.
4747. The impugned judgment, in paragraph 221, observes that no material was placed on record to show compliance with sub-regulation (3) to Regulation 39. The trustees and AMC have disputed the said position by relying upon notice dated 23rd April 2020 enclosed at page 1262 and the newspaper publications in both English and vernacular languages made on 24th April 2020 enclosed at pages 3304-3313. In view of the aforesaid factual position, which was not seriously disputed by most of the unitholders, we would accept that there was compliance with clause (b) of sub-regulation (3) to Regulation 39 and accordingly the cease and freeze effect of Regulation 40 had become effective.
4848. Our attention was drawn to the Circular dated 31st May 2016 issued by SEBI as per which the trustees have the option to suspend redemption of units for a period of 10 days in a period of 90 days. The relevant portion of the said circular reads as under: H
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 595 AMRUTA GARG [SANJIV KHANNA, J.]
“b. Restriction on redemption may be imposed for a specified period of time not exceeding 10 working days in any 90 days period” SEBI has taken the stand that the benefit of this circular should not be taken when the question of winding up is pending consideration before the trustees. The position not being ironclad, SEBI may re-examine whether the trustees/AMC can be permitted to take similar benefit pending the decision on the question of winding up, when they face frightful redemption pressure. Challenge to the constitutional validity of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 C
4949. This challenge has been raised by one of the appellants, namely, Amruta Garg. The contentions forwarded can be summarised as under: (a) The expression ‘happening of any event’ in Regulation 39(2)(a) is unspecified and suffers from the vice of excessive delegation as it does not give any indication of D the type of events which would be relevant for winding up of the scheme. It gives unbridled power to the trustees to wind up a scheme which, in the opinion of the trustees, should be wound up. (b) In comparison, vide clause (c) to Regulation 39(2), SEBI E has been invested with the power to issue directions for winding up a mutual fund scheme only when it is in the interest of the unitholders. (c) Further, SEBI has not prescribed/issued guidelines or policy regarding formation of opinion by the trustees to wind up the scheme. (d) The opinion of the trustees is given paramountcy and is supreme. Even SEBI accepts that it has no role and cannot examine and set aside the decision of the trustees. Thus, SEBI, as per its own contention and submission, being bound by the opinion of the trustees, cannot interfere even when it is necessary to do so in the interest of unitholders or when the trustees have acted in their own vested interest. This is contrary to the scheme of the SEBI Act whereunder SEBI has been constituted primarily to act as a watchdog and to H
p. 596
A protect interests of the investors in the capital market, including the unitholders. (e) There is no provision for appeal or internal challenge against the decision of the trustees who may in a given case form a wrong opinion regarding winding up of the scheme. B (f) For the above reasons, clause (a) to Regulation 39(2) suffers from manifest arbitrariness in the absence of any prescription regulating the exercise of the power by the trustees. Reliance is placed upon State of Tamil Nadu and Another v. T. Krishnamurthy and Others;10 Shayara C Bano v. Union of India and Others; 11 Senior Superintendent of Post Offices, Allahabad and Others v. Izhar Hussain;12 Director General, Central Reserve Police Force and Others v. Janardan Singh and Others.13
D (g) Regulation 39(3) equally suffers from the vice of manifest arbitrariness as SEBI merely acts as a drop-box. Though the trustees are required to give notice disclosing circumstances leading to winding up of the scheme to SEBI, this requirement is meaningless and superficial as SEBI cannot go into the question and circumstances to be satisfied as to existence of an event warranting the extreme action of winding up. (h) Regulation 41(2)(b) is manifestly arbitrary as it states that the sale proceeds under clause (a) shall be first discharged for such liabilities as are due and payable under the scheme and only the balance amount shall be paid to the unitholders in proportion to their respective interests in the assets of the scheme as on the date of the decision for winding up was taken. Regulation 41 does not prescribe any mechanism or manner in which the authorised person or the AMC can ascertain the liabilities which are due and payable under the scheme. Secondly, the unitholders have been placed below the creditors of the scheme and would therefore 10 (2006) 4 SCC 517 11 (2017) 9 SCC 1 12 (1989) 4 SCC 318 13 H (2018) 7 SCC 656
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 597 AMRUTA GARG [SANJIV KHANNA, J.]
receive only the leftover. This undermines the paramount A place and position of the unitholders. Further, the SEBI has failed to protect the interest of the unitholders who are not only financial creditors but, as explicitly provided in Regulation 18(12), their money is held in the mutual fund in trust and for their benefit. Reliance is placed upon Pioneer B Urban Land and Infrastructure Limited and Another v. Union of India and Others14 where the home buyers have been held to be financial creditors under the Indian Bankruptcy Code. Principle of pari passu should be made applicable. (i) Regulation 42 is also manifestly arbitrary as SEBI is to C perform only ministerial functions, much less than the functions of a regulator. Conspicuously, during the winding up process, SEBI has been given a minimalistic role which is contrary to the paramount object of the Act.
5050. We would begin by referring to the provisions of the SEBI D Act and by elucidating the powers of SEBI. Section 11 of the SEBI Act prescribes the functions of SEBI. Sub-section (1), in general terms, states that it will be the duty of SEBI to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market. SEBI is empowered to take measures in this regard as it thinks fit. Sub-section (2), without prejudice to the generality of sub-section (1), lists out as many as 17 specific clauses and states that SEBI is entitled to provide for measures relating to those clauses. Thereunder, Clause (e) relates to prohibiting fraudulent and unfair trade practices relating to securities markets. Clause (g) concerns prohibition of insider trading in securities. Clauses (b), (i), (ia), (ib) and (la) relate to registering and working of the trustees or trust deeds, investment advisors and such other intermediaries who may be associated with the securities market in any manner and permits SEBI to call for information from, undertaking inspection, conducting inquiries and audits of mutual funds and other persons associated with the securities market, intermediaries and self-regulatory organisations. They can also ask for records from any persons, including any bank, any other authority or board or corporation established or constituted by or under a central or state Act relevant for investigation or inquiry by SEBI. It is also authorised to call 14 (2019) 8 SCC 416 H
p. 598
A for and require any agency to furnish information as may be considered necessary by SEBI for discharge of its functions. Clause (m) is a residuary clause which states that SEBI can perform such other functions as may be prescribed. Sub-section (2A) to Section 11 is a non-obstante provision which authorises SEBI to take measures to undertake inspection of any book or register or other document or record of any listed public company or a public company, etc. which intends to get its securities listed on a recognised stock exchange. Sub-section (3), again, is a non-obstante provision and states that SEBI shall exercise the same powers as are vested in a civil court under the Code of Civil Procedure while trying a suit in respect of discovery and production of books of account and other documents, summoning and enforcing attendance of persons and examining them on oath, inspection of any books, registers and documents of any person referred to in Section 12, inspection of any book, or register, or document, or record of a company, and issuing commissions for examination of witnesses or documents. Sub-section (4) states that without prejudice to the provisions contained in sub-section (1), (2), (2A) D and (3) and Section 11B, SEBI may, by an order in writing in the interest of the investors or securities market, take the measures stipulated thereunder either pending investigation or inquiry or upon completion of investigation or inquiry. These include suspension of trading of any security; restraining any person from accessing security markets; attaching, for a E period not exceeding 90 days subject to conditions and for a further period beyond 90 days subject to confirmation by the special court, bank accounts and other properties of any intermediary or any person associated with the securities market in any manner involved in violation of the provisions of the SEBI Act, or Rules or Regulations made thereunder; direct any intermediary associated with securities market in any manner not to dispose of or alienate any asset forming part of any transaction under investigation subject to the condition that before or after passing such orders an opportunity of hearing shall be given to such intermediaries or persons concerned. Sub-section (4A) authorises SEBI to conduct an inquiry in the prescribed manner notwithstanding the provisions of sub-sections (1), (2), (2A), (3) and (4), Section 11B and Section 15-I by an order and for reasons to be recorded in writing levy penalty under Sections 15A, 15B, etc. Under sub-section (5), the amount disgorged pursuant to the directions issued under Section 11B of the Act or 12A of the Securities Contracts (Regulation) Act, 1956 etc. is to be credited to the Investor Protection and Education Fund established by H
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 599 AMRUTA GARG [SANJIV KHANNA, J.]
SEBI and to be utilised in accordance with the regulations framed under A the Act.
5151. Section 11B of the Act reads as under: “Power to issue directions and levy penalty.– (1) Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary– B
(i) In the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental C to the interests of investors or securities market; or (iii) to secure the proper management of any such intermediary or person, it may issue such directions, – D (a) to any person or class of persons referred to in section 12, or associated with the securities market; or (b) to any company in respect of matters specified in section 11 A, as may be appropriate in the interests of investors in securities E and the securities market. (2) Without prejudice to the provisions contained in sub-section (1), subsection (4A) of section 11 and section 15-I, the Board may, by an order, for reasons to be recorded in writing, levy penalty under sections 15A, 15B, 15C, 15D, 15E, 15EA, 15F, 15G, 15H, F 15HA and 15HB after holding an inquiry in the prescribed manner. Explanation.– For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any G transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.”
p. 600
5252. As the heading of Section 11B states, the provision empowers SEBI to issue directions and levy penalty. It stipulates that such powers can be exercised if and after making or causing any inquiry SEBI is satisfied that it is necessary – (i) in the interest of the investors or orderly development of the securities market, (ii) to prevent affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the interest of the investors or securities market; or (iii) to secure proper management of such intermediary or person. SEBI may issue directions to – (a) any person or class of persons referred to in Section 12 or associated with the securities market, or (b) to a company in respect of the matters specified in Section 11A as may be appropriate, in the interest of the investors in securities and in the securities market. The explanation to the Section is important for it clarifies, by way of removal of doubt, that the directions under this Section shall include and shall always deem to include power to direct any person, who has made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of the Act, or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention. The provisions of Section 11B have been held to be procedural in nature and include not only an individual but also a company. Therefore, any person associated with the securities market who commits breach of the SEBI Act, Rules and Regulations, E can be subjected to such directions and measures as may be imposed and issued by SEBI. Sub-section (2) to Section 11B states that SEBI may after holding an inquiry pass an order in writing, and, without prejudice to the provisions of Section (11), levy penalty under Sections 15A, 15B, etc.
5353. Referring to the provisions, the Division Bench of the High Court in the impugned judgement has held as under: “291. Another question is about the powers of SEBI under Section 11B of the SEBI Act. We have already held that the power to issue directions under Section 11B(1) can be exercised to issue G directions to AMC and the Trustees. The said direction can be issued when SEBI, after making or causing to be made an enquiry, is satisfied that (a) it is necessary to issue directions in the interest of investors or orderly development of securities market; (b) to prevent the affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the H
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v. 601 AMRUTA GARG [SANJIV KHANNA, J.]
interests of investors of securities market; or (c) to secure the proper management of any such intermediary or person. The first question is whether SEBI has power to interfere with the decision taken by the Trustees under Regulation 39(2)(a). If SEBI is to test the correctness or validity of such decision of the Trustees, an adjudication is required. The Trustees and AMG will have to be heard in the adjudication process. Section 11B does not contemplate any such adjudication. If an entity to whom a direction under Section 11B has been issued commits any breach thereof or disobeys the same, it will attract penalty under Section 15HB. Before imposing penalty, adjudication as contemplated by Section 15-I is required to be made. There is no provision made in SEBI C Act for issuing a notice of the proposed direction under Section 11B and hearing the Trustees or AMC before issuing the direction. No adjudication is contemplated before issuing the directions. Therefore, it is not possible for this Court to accept the contention of the petitioners, AMC as well as the Trustees that by exercising D power under Section 11B, SEBI has power to adjudicate upon the correctness of the decision taken by the Trustees to wind up a Scheme. However, when SEBI finds that the Trustees or AMC are not abiding by the specific provisions of the Mutual Funds Regulations, the power to issue directions can be exercised by SEBI. By way of illustration, we refer to hypothetical cases. After E invoking the provisions of Regulation 39(2)(a), if the Trustees stop redemption the units by taking recourse to Regulation 40 without complying with the mandatory requirements of sub-clause (a) and (b) of clause (3) of Regulation 39, SEBI can always issue a direction under Section 11B not to stop redemptions, unless compliance is made with clause (3) of Regulation 39. If it is found that the Trustees continue to carry on business activities of the Schemes even after action under clause (3) of Regulation 39 is taken, a direction under Section 11-B can be issued by SEBI to stop all business activities.”
5454. We have reservations on the said observations for the simple reason that if there is a violation of the regulations, i.e. clause (a) to Regulation 39(2), 39(3), 40, 41 or 42 by the trustees or the AMC, it is open to SEBI to proceed in accordance with law and in terms of Section 11 and 11B of the Act. It would be, therefore, incorrect to state that the decision of the trustees under clause (a) to Regulation 39(2) cannot be H
Report an error in this judgment →
Contains information from the Indian High Court / Supreme Court Judgments dataset, licensed under CC-BY-4.0