SEBI Has Power To Regulate Winding-Up Of Mutual Fund Schemes To Protect Investors : Supreme Court

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The Supreme Court has held that that the Securities and Exchange Board of India has the power to intervene in case of violations and incorrect decisions taken by trustees to wind-up schemes, as well as to prevent any intermediary from behaving in a manner that may be detrimental to investors.

A bench comprising Justices S Abdul Nazeer and Sanjiv Khanna held so in the case relating to the winding up of Franklin Templeton schemes.

Citing Section 11 of the SEBI Act, the judgement authored by Justice Sanjiv Khanna, states that the functions prescribed for SEBI allow the market regulator to protect the interests of investors in securities, and to promote the development of the securities market. Therefore, SEBI is empowered to take measures in this regard as it thinks fit.

While Section 11(2) specifies 17 specific clauses pertaining to measures that SEBI is entitled to provide, it is Clauses (b), (i), (ia), (ib) and (la) that relate to registering and working of the trustees or trust deeds, investments 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.

Furthermore, 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. It can only issue directions and levy penalty under Section 11B of the Act.

The Court has rejected the claim that Regulations 39(2), 39(3), 40, 41 or 42 closes SEBI to act against the trustees or AMC as Sections 11 and 11B of the Act allow the regulator to do so.

“It would, therefore, be incorrect to state that the decision of the trustees under clause(a) to the Regulation 39(2) cannot be made subject matter of inquiry or investigation and therefore no directions or orders under Section 11 or 11B of the Act can be passed”.

It was further held despite the existence of Regulation 39(2)(a) which gave primacy to the opinion of the trustees, SEBI was entitled to conduct an inquiry and investigation when justified and necessary to ascertain whether the trustees have acted in accordance with their fiduciary duty and also for reasons under the said Regulation.

Referring to decisions such as Alka Synthetics and Trading v. SEBI, Nikhil T. Parikh v. Union of India and Sterlite Industries (India) Ltd. v. SEBI, the Court has therefore held that if the trustees act for extraneous and irrelevant reasons and considerations, the action would be in violation of Regulation 39(2)(a), and thus would be amenable to action under the SEBI Act, including directions under Section 11B.

“Under Section 11Bof the SEBI Act,SEBI has broad powers to issue appropriate directions if it is satisfied after inquiry that such directions are necessary in the interest of investors or for orderly development of securities market or to prevent the affairs of any intermediary being conducted in a manner detrimental to the interest of investors or the securities market or to secure proper management of any intermediary or other person. 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 unitholders”,

the judgment observed.

“The power to regulate mutual funds, once accepted, would include the power to make regulations for winding up of a scheme of the mutual fund.Not framing any regulation in this regard would have amounted to dereliction of duty on the part of SEBI and subjected it to adverse comments”, the Court added.

Case: Franklin Templeton Trustee Services Private Limited vs. Amruta Garg
Coram: Justices S. Abdul Nazeer and Sanjiv Khanna,
Citation: LL 2021 SC 295

Click here to Read/Download Judgment

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