14 Jul 2121

It is the duty on the part of SEBI to make regulations for winding up of a scheme of the mutual funds and they can conduct an inquiry of there is any violation of any Regulations - Supreme Court of India

Case : Franklin Templeton Trustee Services Private Limited and Another v. Amruta Garg and Others Etc. Civil Appeal Nos. 498-501 of 2021

Court : Supreme Court of India

Bench : Justice Abdul Nazeer and Justice Sanjiv Khanna

Decided on : 14 Jul 2121

Relevant Statutes

Regulation 18(15) (c) and Regulations 39 to 42 of the Securities and Exchange Board of India (Mutual Funds) Regulation 1996

Brief Facts and Procedural History

1. The order passed dated 12th February 2021 which interprets Regulation 18 (15) (c) with the interrelation of Regulations 39 to 42 of the Securities and Exchange Board of India (Mutual Funds) Regulation 1996 as a principle of harmonious construction shall be applied means opinion of the trustees would stand but the consent of the unitholders is prerequisite for winding up. It was held that Regulation 18(15)(c) of the Securities and Exchange Board of India (Mutual Funds) Regulation 1996 is a directory.  The word “Consent” means the consent of the majority of the unitholders present and voting where the trustees form an opinion to wind up a scheme then they must disclose the reasons. The unitholders shall be informed about the winding up by the trustees or Securities and Exchange Board of India by way of  public notice under Regulation 39(3) of the Securities and Exchange Board of India (Mutual Funds) Regulation 1996 

2. The unitholders can also decide by simple majority whether the trustees should take steps for winding up of the scheme. The responsibilities and duties of the trustees require the trustees to obtain the 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. Restriction on redemption may be imposed for a  specified period of time not exceeding 10 working days in any 90 days period. The appellant challenged the constitutional validity of the Securities and Exchange Board of India (Mutual Funds) Regulation 1996. 

The Issue of the Case

Whether Regulations under the Securities and Exchange Board of India (Mutual Funds) Regulations 1996 are constitutionally valid?

The Observations of the Court:

1. The Honourable Supreme Court referred the Section 11 and 11 A and 11 B of Securities and Exchange Board of India (Mutual Funds) Regulation 1996  and held that if there is a violation of regulation i.e. Clause (A) to Regulations 39(2) 39(3), 40, 41 or 42 by the trustees or the AMC then the Securities and Exchange Board of India can proceed according to the provisions of Section 11 and 11 B of the Securities and Exchange Board of India (Mutual Funds) Regulation 1996. The Honourable Supreme Court referred to one of the judgments i.e. Alka Synthetics and Trading vs. SEBI (1995), 95 Comp Cas 663, It was held that Section 11 B of Securities and Exchange Board of India (Mutual Funds) Regulation 1996 empowers the SEBI to issue directions only after it is satisfied the condition mentioned in the provision.

2. The Honourable Supreme Court agreed with the High Court the Regulations which were framed is in the exercise of the power conferred by Section 30 of Securities and Exchange Board of India (Mutual Funds) Regulation 1996 which authorizes them to make regulations that are consistent with the purpose of Securities and Exchange Board of India (Mutual Funds) Regulation 1996.It was observed that there is no regulation framed regarding power to make regulations for winding up of a scheme of the mutual funds and this is a dereliction of the duty on the part of the Securities and Exchange Board of India.

3. The Honourable Supreme Court observed that trustees have not been given absolute power to wind up a scheme under Regulation 39(2) of Securities and Exchange Board of India (Mutual Funds) Regulation 1996. They are required to come to a conclusion that due to special circumstances which are articulated in writing that the scheme is required to wound up. It was observed by the Honourable Supreme Court that the trustees are experts in their field and hold assets of the scheme in a fiduciary capacity on behalf of the investors, therefore power can be conferred on them under Regulation 39(2) (a) of Securities and Exchange Board of India (Mutual Funds) Regulation 1996.

4. The words “occurrence of any event” is to be read with the words ``requires the scheme to be wound up”. The Honourable Supreme Court observed that the opinion of the trustees under Clause (a) to Regulation 39(2) of Securities and Exchange Board of India (Mutual Funds) Regulation 1996 must be consented by the unitholders in terms of the Regulation 18(15) (c) of Securities and Exchange Board of India (Mutual Funds) Regulation 1996. The Honourable Supreme Court held that the Regulations do not suffer from the vice of manifest arbitrariness. The Honourable Supreme Court observed that the facts are not clear for the interpretation or appreciation of the findings by the High Court.

The Decision Held by the Court

The Honourable Supreme Court held that the impugned order dated 12th February 2021 will not be treated as conclusive or binding as the findings are sub-judice.

Click here to view/download the judgement >