1. Winding up of mutual fund schemes — Interpretation of Regulation 18(15)(c) and Regulations 39 to 42 of the SEBI (Mutual Funds) Regulations, 1996. (Para 1 , 15 , 16 )
Back
Next 
2021 Supreme(SC) 319
SUPREME COURT OF INDIA
S. ABDUL NAZEER, SANJIV KHANNA, JJ.
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANOTHER – APPELLANTS
VERSUS
AMRUTA GARG AND OTHERS ETC. – RESPONDENT
CIVIL APPEAL NOS. 498-501 OF 2021 WITH CIVIL APPEAL NO. 502 TO 509 OF 2021, SPECIAL LEAVE PETITION (CIVIL) NO. 1486 OF 2021 AND SPECIAL LEAVE PETITION (CIVIL) NO. ______ OF 2021) (ARISING OUT OF DIARY NO. 1563 OF 2021)
Decided on : 14-07-2021
Advocates appeared:
For the parties:Dr. Abhishek Manu Singhvi, Ashish Bhan, Mohit Rohatgi, Jasmeet Singh, Ketan Gaur, Ashim Sood, Rajendra Dangwal, Saif Ali, R.S.Saluja, Ravindra Shrivastava, Arjun Garg, Abhinav Shrivastava, Nirmal Prasad, Ms. Meenakshi Arora, Nithyaesh Natraj, Vaibhav R.Venkatesh, Gopal Singh, Ms. Meenakshi Arora, Nithyaesh Natraj, Vaibhav R.Venkatesh, Anirudh Sriram, Gopal Singh, Ms. Meenakshi Arora, Manish Kumar, Ms. Madhumita Bhattacharjee, Ms. Srija Chowdhury, Anant, Pratap Venugopal, Ms. Surekha Raman, Akhil Abraham Roy, Vijay Valsan, M/S. K J John And Co, Paritosh Gupta, Ms. Supriya Juneja, Aditya Singla, Ms. Aishwarya Reddy, Ms. Cheshta Jetly, Shivam Singh, Sahil Raveen, Jaideep Khanna, Vidur Diwedi, Manish Kumar, Puneet Jain, Harshit Khanduja, Harsh Jain, Akshat Maheshwari, Harshvardhan Sharma, Neeraj Sharma, Ms. Christi Jain, Dheeraj Nair, Kumar Kislay, Angad Baxi, Rajat Nair, Ms. Priyanka Das, Arvind Kumar Sharma, Sanjay Kapur, V.M.Kannan, Ms. Megha Karnwal, Arjun Bhatia, Mrs.Shubhra Kapur, Lalit Rajput, Advocates
.
For the parties:Dr. Abhishek Manu Singhvi, Ashish Bhan, Mohit Rohatgi, Jasmeet Singh, Ketan Gaur, Ashim Sood, Rajendra Dangwal, Saif Ali, R.S.Saluja, Ravindra Shrivastava, Arjun Garg, Abhinav Shrivastava, Nirmal Prasad, Ms. Meenakshi Arora, Nithyaesh Natraj, Vaibhav R.Venkatesh, Gopal Singh, Ms. Meenakshi Arora, Nithyaesh Natraj, Vaibhav R.Venkatesh, Anirudh Sriram, Gopal Singh, Ms. Meenakshi Arora, Manish Kumar, Ms. Madhumita Bhattacharjee, Ms. Srija Chowdhury, Anant, Pratap Venugopal, Ms. Surekha Raman, Akhil Abraham Roy, Vijay Valsan, M/S. K J John And Co, Paritosh Gupta, Ms. Supriya Juneja, Aditya Singla, Ms. Aishwarya Reddy, Ms. Cheshta Jetly, Shivam Singh, Sahil Raveen, Jaideep Khanna, Vidur Diwedi, Manish Kumar, Puneet Jain, Harshit Khanduja, Harsh Jain, Akshat Maheshwari, Harshvardhan Sharma, Neeraj Sharma, Ms. Christi Jain, Dheeraj Nair, Kumar Kislay, Angad Baxi, Rajat Nair, Ms. Priyanka Das, Arvind Kumar Sharma, Sanjay Kapur, V.M.Kannan, Ms. Megha Karnwal, Arjun Bhatia, Mrs.Shubhra Kapur, Lalit Rajput, Advocates
.
The Court held that unitholder consent under Regulation 18(15)(c) for winding up a mutual fund scheme is not required before publishing the notice under Regulation 39(3). Consent must be sought post-publication to ensure the immediate 'cease and freeze' effect of Regulation 40, preventing commercial chaos.
Headnote:
Companies Act, 2013 - Section 48 - Companies Act, 2013 - Sub-section (3) to Section 55, 103 - SEBI Act - Sections 11, Sub-section (2A) to Section 11 , sub-section (1), (2), (2A) and (3) and Section 11B - Securities Contracts (Regulation) Act, 1956 - Section 11B,12A, sub-sections (1), (2), (2A), (3) and (4), , 15A, 15B, 15C, 15D, 15E, 15EA, 15F, 15G, 15H, 15HA and 15HB - Disclosures to the investors - Rights and obligations of the trustees - Power to issue directions and levy penalty - Regulations envisage a three-tier structure for mutual funds in the form of the sponsor, board of trustees or the trustee company, and asset management company sponsor, as defined by Regulation 2(x), means a person who, acting alone or in combination with another body corporate, establishes a mutual fund - Sponsor is required to make an application to Securities and Exchange Board of India prescribed form for registration of mutual fund - Chapter II of the Regulations spells out eligibility criteria and requirements for registration of a mutual fund - Term ‘trustees’ has been defined in Regulation 2(y) to mean board of trustees or trustee company who hold property of mutual fund in trust for the benefit of unitholders - Expression ‘unit’ has been defined in Regulation 2(z) to mean the interest of unitholders in scheme – Held, Appellants have not addressed us on this aspect, their grievance being that the Forensic Audit Report has not been made available to them - They did refer to news reports or articles to suggest irregularities and illegalities of different kinds, including preferential payments, breach of trust and mis-management in deployment of funds of scheme, violation of investment objectives stated in offer document or scheme information document and breach of trust by withholding price sensitive information – Court would be able to appreciate and understand practical impact of respective interpretations, i.e. interpretation placed by the High Court and interpretation sought to be placed and preferred by SEBI, appellants - several issues open at this stage – Court clarify that our observations in this Order and earlier Order should not be read as binding factual findings or conclusions on any disputed facts, which could be a subject matter of a show-cause notice and consequent decision - Legal interpretation of Regulation 18(15)(c) and Regulations 39 to 42 to extent indicated above are conclusive and binding - High Court on facts or even on legal issues not subject matter of this Order or our earlier – Ordered Accordingly.
Legal Category Hierarchy
- securities law
- constitutional law
Table of Contents
2. Whether prior consent of unitholders under Regulation 18(15)(c) is required before publishing winding-up notices under Regulation 39(3) and triggering the cease-and-freeze mandate of Regulation 40. (Para 26 , 27 )
3. Harmonious construction requires that while unitholder consent is mandatory for winding up, it must be sought after publishing notices to prevent market chaos and ensure immediate asset freezing. (Para 28 , 29 , 30 , 31 , 32 , 33 , 34 , 35 , 36 , 37 , 39 , 40 , 41 , 42 , 43 , 44 )
4. Consent under Regulation 18(15)(c) is a prerequisite for winding up but is not required prior to the publication of notices under Regulation 39(3). (Para 42 , 43 )
5. Held that unitholder consent under Regulation 18(15)(c) should be sought post-publication of the notice and disclosure of reasons for winding up under Regulation 39(3). (Para 42 )
6. What constitutes consent of the unitholders under Regulation 18(15)(c) for winding up a mutual fund scheme?
Consent refers to the affirmative consent of a simple majority of the unitholders who exercise their right and vote in support of the proposal, rather than a majority of all unitholders, as requiring the latter would be a practical impossibility. (Para 28 )
7. When must the consent of unitholders be obtained relative to the publication of winding-up notices under Regulation 39(3)?
Consent is not required before the publication of notices. To avoid commercial chaos and ensure the immediate cease-and-freeze effect of Regulation 40, consent should be sought after the notice is published and reasons for winding up are disclosed. (Para 39 , 41 , 42 , 43 )
8. Is the power granted to trustees to wind up a scheme upon the happening of any event under Regulation 39(2)(a) unconstitutionally vague?
No, the expression is qualified by the requirement that the event must necessitate winding up. The process is further safeguarded by mandatory disclosures to SEBI and unitholders and the requirement for unitholder consent. (Para 58 , 60 )
9. What is the priority of payment regarding liabilities and unitholders during the winding up of a mutual fund scheme?
Sale proceeds are first utilized to discharge liabilities that are due and payable, then to meet expenses connected with the winding up, with the balance paid to unitholders in proportion to their respective interests. (Para 22 , 61 , 62 )
10. Does SEBI have the power to investigate or issue directions regarding a trustee's decision to wind up a scheme under Regulation 39(2)(a)?
Yes, SEBI can conduct inquiries and issue directions under Sections 11 and 11B of the SEBI Act to ensure trustees act in accordance with their fiduciary duties and not for extraneous reasons. (Para 54 , 55 , 56 )
ORDER :
SANJIV KHANNA, J.
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:
(i) Franklin India Low Duration Fund (Number of Segregated portfolios – 2),
(ii) Franklin India Ultra Short Bond Fund (Number of Segregated portfolios – 1),
(iii) Franklin India Short Term Income Plan (Number of Segregated portfolios – 3),
(iv) Franklin India Credit Risk Fund (Number of Segregated portfolios – 3),
(v) Franklin India Dynamic Accrual Fund (Number of Segregated portfolios – 3), and
(vi) Franklin India Income Opportunities Fund (Number of Segregated portfolios – 2).
2. We would now proceed to interpret Regulations 39 to 42 and 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 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 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 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
3. 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.
4. The Regulations envisage a three-tier structure for mutual funds 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 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.
5. 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.
6. 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 Regulations from acti
