New Delhi: Consent of the unit holders is a prerequisite for winding up any mutual fund scheme, ruled the Supreme Court on Wednesday as it interpreted the mutual fund regulations in India while examining the Franklin Templeton case.
The court also held that the Securities and Exchange Board of India (Sebi) can conduct an inquiry into the decision of the trustees of a mutual fund company to wind up the schemes “to ascertain whether the trustees have acted in accordance with their fiduciary duty”.
The bench of justices SA Nazeer and Sanjiv Khanna was called upon to analyse the interplay between clause (a) to Regulation 39(2) and Regulation 18(15)(c) of the Sebi (Mutual Fund) Regulations, after Franklin Templeton and Sebi argued that there was no requirement for obtaining consent of the unit holders after the trustees decided to wind up the six mutual fund schemes.
Under clause (a) to Regulation 39(2), trustees are authorised to propose winding up of a scheme while Regulation 18(15)(c) talks about obtaining the consent of the unit holders when the majority of the trustees decide to wind up or prematurely redeem the units.
It was argued by Sebi, Franklin Templeton and the trustees that consent of unit holders is required only when the unit holders propose to wind up a debt scheme and not when trustees or Sebi proceed to do so on any adverse event or in the interest of the unit holders. They added that the decision of winding up is final and binding on the unit holders and that their mandate is required only for authorising the trustees or any other person to take steps for winding up of the scheme.
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But the bench shot down these contentions, saying not taking consent of the unit holders after the trustees decide to wind up the debt schemes “debilitates their role and right to participate.”
“Investments by the unit holders constitute the corpus of the scheme…Regulations envision the unit holders not as domain experts, albeit as discerning investors who are perceptive and prudent. The trustees are therefore commanded to inform and be transparent,” said the bench as it gave harmonious interpretation to clause (a) to Regulation 39(2) and Regulation 18(15) (c).
The Supreme Court added: “The unit holders, 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 unit holders can co-exist with the expertise of the trustees and should not be diluted because the trustees owe a fiduciary duty to them.”
The top court clarified that ‘consent’ refers to the consent of the majority of the unit holders present and voting, and in case of a poll, the computation would be with reference to the number of units held by the unitholder.
The bench further held that the consent of the unit holders should be sought post publication of the notice and disclosure of the reasons for winding and not before that. It highlighted that publication of notices “should be instantaneous” with the decision of winding up.
The Supreme Court also interpreted pertinent provisions in the SEBI Act to reject an argument that decisions of the trustees on having sufficient cause for winding up mutual fund schemes is beyond the remit of any investigation or inquiry by Sebi.
“No doubt, clause (a) to Regulation 39(2) gives primacy to the opinion of the trustees and does not require prior approval of SEBI, yet SEBI is entitled to conduct an inquiry and investigation when justified and necessary to ascertain whether the trustees have acted in accordance with their fiduciary duty…The power of SEBI extends to regulating and monitoring the functioning and decisions taken by mutual funds, the trustees and the AMC. SEBI has the power to pass any direction if it deems fit in the interest of unit holders,” it said.
In February, by an interim order, the court directed Franklin Templeton to disburse ₹9,122 crore to unit holders of the six schemes shut in April within 20 days. Five out of the six wound-up schemes collectively held ₹9,770 crore as of January 29. The sixth was not cash-positive. SBI Mutual Fund was given the responsibility of the distribution in proportion to the units held by the unit holders in these schemes.
The court later heard the case on the legal issues relating to the Sebi (Mutual Fund) Regulations and the Sebi Act in view of the appeal filed by Franklin Templeton against the Karnataka high court order which had also asked the company to take consent of unit holders. The Supreme Court, after having delivered the judgment on the legal issues, will continue to hear the case on merits and on payment of dividends and redemption.