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