# FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANOTHER v. AMRUTA GARG AND OTHERS ETC

- **Citation:** [2021] 5 S.C.R. 559
- **Court:** Supreme Court of India
- **Decided:** 2021-07-14
- **Case number:** Civil Appeal No. 498-501 of 2021
- **Bench:** S Abdul Nazeer, Sanjiv Khanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/franklin-templeton-trustee-services-private-limited-and-another-v-amruta-garg-35004
- **Pages:** 54

## Headnote

Securities and Exchange Board of India (Mutual Funds)
Regulation, 1996:
Regns. 18(15)(c) and 39 to 42 - Interpretation of - Winding
up of six mutual fund schemes - High Court interpreting Regn
18(15)(c) and Regn 39(2)(a) held that the decision of the trustees
to wind up a scheme under clause (a) to Regn 39(2) must muster the
consent of the majority of the unitholders as per Regn 18(15)(c) -
Case of SEBI, the trustees and the Asset Management Company
that prior consent of the unitholders is not envisaged when the
trustees, or SEBI directs winding up of a scheme in the interest of
the unitholders; and that the decision of the trustees and SEBI to
wind up a scheme is final and binding on the unitholders - Appeal
before this Court - This Court in its earlier order accepting the poll
results, directed winding up of six mutual fund schemes - As regards,
interpretation of Regns 39 to 42 and their interrelation with Regn
18(15)(c) and constitutional validity of Regns 39 to 42, held:
Regulations of 1996 do not suffer from the vice of manifest
arbitrariness, thus, Regulations of 1996 constitutionally valid -
Applying principle of harmonious construction to Regn 18(15)(c)
with Regns 39 to 42, would mean that the opinion of the trustees
would stand, but the consent of the unitholders is a pre-requisite
for winding up - Securities and Exchange Board of India Act, 1992.
Constitutional validity of 1996 Regulations - Held:
Regulations of 1996 do not suffer from the vice of manifest
arbitrariness - Since the Regulations are in the nature of economic
Regulations, while exercising the power of judicial review, restraint
would be exercised unless clear grounds justify interference - Views
would not be supplanted for that of the experts as this can put the
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marketplace into serious jeopardy and cause unintended
complications - Regs. 18(15)(c) and 39 to 42.
Regn 18(15)(c) with Regns 39 to 42 - Interpretation of Regns
39 to 42, their interplay and harmonious construction with Regn
18(5)(c) - Held: Under clause (a) of Regn 39(2) the power of
winding up of a scheme is vested with the trustees, under clause (b)
with the unitholders and under clause (c) with the SEBI, however,
under Regn 18(15)(c), the trustees are required to seek consent of
the unit holders, when they by majority decide to wind up a scheme
- Use of the word 'shall' in Regn 18(15)(c) is couched as a command
- Expression 'when the majority of the trustees decide to wind up'
in Regn 18(15)(c) manifestly refers to clause (a) to Regn 39(2) as
this is the only Regulation which entitles the trustees to wind up the
scheme - Regn 18(15)(c), when it refers to trustees' decision to wind
up, it implies the trustees' opinion to wind up the scheme - Applying
principle of harmonious construction in the context of the
Regulations of 1996, would mean that the opinion of the trustees
would stand, but the consent of the unitholders is a pre-requisite
for winding up - This interpretation does not in any way dilute or
render clause (b) to Regn 39(2) meaningless or redundant - This
clause applies where the winding up process is initiated at the
instance of 75% of the unitholders - Clause (b) does not in any
manner reflect that clause (c) to Regn 18(15) should not be read as
it ordains in simple words - Regn 41 refers to and relates to the
procedure and manner of winding up which cannot be equated with
the requirement of consent as postulated by Regn 18(15)(c) - Regn
41(1) applies even in cases where 75% unitholders have passed
the resolution for winding up of the scheme under Regn 39(2)(b) or
where SEBI directs the scheme to be wound up in the interest of the
unitholders under Regn 39(2)(c) - On the other hand Regn 18(15)(c)
applies only when majority of the trustees form an opinion and
decide to wind up or prematurely redeem the units in entirety, a
situation covered by Regn 39(2)(a) - To ignore the mandate of Regn
18(15)(c) would nullify the legis

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 [2021] 5 S.C.R. 559
559
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE
LIMITED AND ANOTHER
v.
AMRUTA GARG AND OTHERS ETC.
(Civil Appeal No. 498-501 of 2021)
JULY 14, 2021
[S ABDUL NAZEER AND SANJIV KHANNA, JJ.]
Securities and Exchange Board of India (Mutual Funds)
Regulation, 1996:
Regns. 18(15)(c) and 39 to 42 - Interpretation of - Winding
up of six mutual fund schemes - High Court interpreting Regn
18(15)(c) and Regn 39(2)(a) held that the decision of the trustees
to wind up a scheme under clause (a) to Regn 39(2) must muster the
consent of the majority of the unitholders as per Regn 18(15)(c) -
Case of SEBI, the trustees and the Asset Management Company
that prior consent of the unitholders is not envisaged when the
trustees, or SEBI directs winding up of a scheme in the interest of
the unitholders; and that the decision of the trustees and SEBI to
wind up a scheme is final and binding on the unitholders - Appeal
before this Court - This Court in its earlier order accepting the poll
results, directed winding up of six mutual fund schemes - As regards,
interpretation of Regns 39 to 42 and their interrelation with Regn
18(15)(c) and constitutional validity of Regns 39 to 42, held:
Regulations of 1996 do not suffer from the vice of manifest
arbitrariness, thus, Regulations of 1996 constitutionally valid -
Applying principle of harmonious construction to Regn 18(15)(c)
with Regns 39 to 42, would mean that the opinion of the trustees
would stand, but the consent of the unitholders is a pre-requisite
for winding up - Securities and Exchange Board of India Act, 1992.
Constitutional validity of 1996 Regulations - Held:
Regulations of 1996 do not suffer from the vice of manifest
arbitrariness - Since the Regulations are in the nature of economic
Regulations, while exercising the power of judicial review, restraint
would be exercised unless clear grounds justify interference - Views
would not be supplanted for that of the experts as this can put the
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marketplace into serious jeopardy and cause unintended
complications - Regs. 18(15)(c) and 39 to 42.
Regn 18(15)(c) with Regns 39 to 42 - Interpretation of Regns
39 to 42, their interplay and harmonious construction with Regn
18(5)(c) - Held: Under clause (a) of Regn 39(2) the power of
winding up of a scheme is vested with the trustees, under clause (b)
with the unitholders and under clause (c) with the SEBI, however,
under Regn 18(15)(c), the trustees are required to seek consent of
the unit holders, when they by majority decide to wind up a scheme
- Use of the word 'shall' in Regn 18(15)(c) is couched as a command
- Expression 'when the majority of the trustees decide to wind up'
in Regn 18(15)(c) manifestly refers to clause (a) to Regn 39(2) as
this is the only Regulation which entitles the trustees to wind up the
scheme - Regn 18(15)(c), when it refers to trustees' decision to wind
up, it implies the trustees' opinion to wind up the scheme - Applying
principle of harmonious construction in the context of the
Regulations of 1996, would mean that the opinion of the trustees
would stand, but the consent of the unitholders is a pre-requisite
for winding up - This interpretation does not in any way dilute or
render clause (b) to Regn 39(2) meaningless or redundant - This
clause applies where the winding up process is initiated at the
instance of 75% of the unitholders - Clause (b) does not in any
manner reflect that clause (c) to Regn 18(15) should not be read as
it ordains in simple words - Regn 41 refers to and relates to the
procedure and manner of winding up which cannot be equated with
the requirement of consent as postulated by Regn 18(15)(c) - Regn
41(1) applies even in cases where 75% unitholders have passed
the resolution for winding up of the scheme under Regn 39(2)(b) or
where SEBI directs the scheme to be wound up in the interest of the
unitholders under Regn 39(2)(c) - On the other hand Regn 18(15)(c)
applies only when majority of the trustees form an opinion and
decide to wind up or prematurely redeem the units in entirety, a
situation covered by Regn 39(2)(a) - To ignore the mandate of Regn
18(15)(c) would nullify the legislative intent - Need to obtain consent
of the unitholders is mandated under clause (c) to sub-Regn 15 to
Regn 18 when the trustees under clause (a) to Regn 39(2) decide to
wind up a scheme - To deny the unitholders a say, when Regn
18(15)(c) requires their consent, debilitates their role and right to
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participate - 'Consent' for the purpose of Regn 18(15)(c) refers to
the consent of the majority of the unitholders present and voting -
Harmoniously interpreting Regns 39 to 42, it is held that the consent
of the unitholders, is not required before publication of the notices
under Regn 39(3) - Consent of the unitholders should be sought
post publication of the notice and disclosure of the reasons for
winding up under Regn 39(3) - Thus, the High Court rightly held
that the consent of unitholders of the scheme would be necessary if
the majority of the directors of the trustee company decide to wind
up a scheme.
Regn 39(2)(a), 39(3) - Trustees - Power of - Held: There are
sufficient guidance and safeguards in the Regulations itself on the
power of the trustees to decide on winding up of the fund - It cannot
be accepted that the trustees under clause (a) to Regn 39(2) have
been given absolute and unbridled power to wind up a scheme -
Language of clause (a) to Regn 39(2) states that the trustees must
form an opinion on the happening of any event which requires the
scheme to be wound up - Further, as per Regn 39(3), the trustees
are bound to give notice disclosing the circumstances leading to
the winding up of the scheme - Trustees are, thus, required to come
to a conclusion that due to specific circumstances articulated in
writing, the scheme is required to be wound up - Trustees hold the
assets of the scheme in fiduciary capacity on behalf of the investors
- They are experts in the field and, thus, conferred the power under
Regn 39(2)(a) to decide whether or not a scheme should be wound
up - Expression 'occurrence of any event' is not to be read in
isolation but with the words 'requires the scheme to be wound up' -
Read in this manner, there is no vagueness which can be described
as transcending into realm of arbitrariness, on the other hand, the
prerequisite statutory mandate is clear - This is not a case of
excessive delegation wherein the legislative function has been
abdicated and passed on to the trustees who can act as per their
whims and fancies - Thus, the High Court's holding that the opinion
of the trustees under clause (a) to Regn 39(2) must be consented to
by the unitholders in terms of the mandate of Regn 18(15)(c) is
accepted.
Unitholders and creditors - Difference between - Held:
Regulations rightly draw the distinction between creditors and the
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v.
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unitholders - Unit holders are investors who take the risk and,
thus, entitled to profits and gains and they must also bear the losses,
if any - Unitholders are not entitled to fixed return or protection of
the principal amount whereas creditors are entitled to fixed return
as per mutually agreed contracts - Their rate of return is in the
nature of interest and not profit or loss - Creditors are not risk
takers as is the case with the unitholders - To equate the unitholders
with either the creditors or the home buyers will be unsound and
incongruous.
Regn 53 - Provision regarding despatch of dividend warrents
or proceeds by mutual fund and asset management company-AMC
- Interpretation of - Clause (b) to Regn 53 requires that the AMC to
despatch the redemption or repurchase proceeds within ten working
days from the date of redemption or repurchase - Issue as regards
whether the AMC or the trustees are bound to honour and pay the
redemption or repurchase proceeds for requests received before the
date of publication of notice in terms of Regn 39(3) - High Court
held the expression 'business' in clause (a) of Regn 40 refers to
business activity and, thus, would include payment of redemption
proceeds to the unit holders, which would include the request for
redemption received prior to the date of publication under Regn
39(3) - On appeal, held: There is a need for greater clarity on the
factual matrix, which would be possible once the pending
proceedings are concluded - In view thereof, several issues left
open at this stage - Observations in the instant Order and the earlier
Order not to be read as binding factual findings or conclusions on
any disputed facts, which could be a subject matter of a showcause notice and consequent decision, though legal interpretation
of Regn 18(15)(c) and Regns 39 to 42 are conclusive and binding.
Securities and Exchange Board of India Act, 1992: s. 11, 11B
- Functions of Securities and Exchange Board of India-SEBI -
Power to issue directions and levy penalty - Explained.
Interpretation of statutes: Process of interpretation - Three
stage, literal interpretation, propositional interpretation and
purposive interpretation - Held: Interpretation is sometimes a threestage process - At first, the words being interpreted should be
understood according to their grammatical meaning in their literal
and popular sense - In the second stage, it is considered whether
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in the given context the plain meaning is obscure as the text gives
rise to choice of more than one interpretation, or the propositional
interpretation fails to achieve the manifest purpose of the legislation
- In such cases at the third stage, the court applying interpretative
tools selects an interpretation advancing the legislative intent without
rewriting the provision - Legislative intent is gathered from the object
and purpose of the provision and the legislation - Courts do lean
towards a pragmatic and purposive interpretation as there is an
assumption that the draftsmen legislate to bring about a functional
and working result.
Alka Synthetics and Trading v. SEBI (1999) 95 Comp
Cas 663; Nikhil T. Parikh v. Union of India (2014) 2
GLH 582 - approved.
State of Tamil Nadu and Another v. T. Krishnamurthy
and Others (2006) 4 SCC 517 : [2006] 3 SCR 396;
Shayara Bano v. Union of India and Others (2017) 9
SCC 1 : [2017] 9 SCR 797; Senior Superintendent of
Post Offices, Allahabad and Others v. Izhar Hussain
(1989) 4 SCC 318 : [1989] 3 SCR 796; Director
General, Central Reserve Police Force and Others v.
Janardan Singh and Others. (2018) 7 SCC 656 : [2018]
5 SCR 81; Pioneer Urban Land and Infrastructure
Limited and Another v. Union of India and Others
(2019) 8 SCC 416 : [2019] 10 SCR 381; Sterlite
Industries (India) Ltd. v. SEBI 2001 SCC OnLine SAT
28; Nisha Priya Bhatia v. Union of India and Another
(2020) 13 SCC 56; B.K. Educational Services Private
Limited v. Parag Gupta and Associates, (2019) 11 SCC
633 : [2018] 12 SCR 794; Union of India v. Raman
Iron Foundry (1974) 2 SCC 231 : [1974] 3 SCR 556 -
referred to.
Case Law Reference
[2006] 3 SCR 396
referred to
Para 49 (f)
[2017] 9 SCR 797
referred to
Para 49 (f)
[1989] 3 SCR 796
referred to
Para 49 (f)
[2018] 5 SCR 81
referred to
Para 49 (f)
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v.
AMRUTA GARG
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[2019] 10 SCR 381
referred to
Para 49 (h)
(1999) 95 Comp Cas 663
approved
Para 55
(2014) 2 GLH 582
approved
Para 55
(2020) 13 SCC 56
referred to
Para 58
[2018] 12 SCR 794
referred to
Para 62
[1974] 3 SCR 556
referred to
Para 62
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 498501 of 2021.
From the Judgment and Order dated 24.10.2020 of the High Court
of Karnataka, at Bengaluru in Writ Petition Nos. 8545, 8644, 8748 of
2020 and Writ Appeal No. 399 of 2020.
With
Civil Appeal Nos.502, 503, 504-507, 508, 509 of 2021, Special
Leave Petition (Civil) No. 1486 Of 2021 And Special Leave Petition
(Civil) (D) No.1563 of 2021.
Tushar Mehta, SG., Harish Salve, Dr. Abhishek Manu Singhvi,
Arvind P. Datar, Ms. Meenakshi Arora, Ravindra Shrivastava, V. Giri,
Sr. Advs., Ashish Bhan, Mohit Rohatgi, Jasmeet Singh, Asim Sood,
Rajendra Dangwal, Saif Ali, Ms. Madhavi Khanna, Pratap Venugopal,
Ms. Surekha Raman, Akhil Abraham, Vijay Valsan, For M/S. K J John
and Co., Nithyaesh Natraj, Vaibhav R. Venkatesh, Gopal Singh, Puneet
Jain, Harshit Khanduja, Harsh Jain, Akshat Maheshwari, Harshvardhan
Sharma, Neeraj Sharma, Ms. Christi Jain, Arjun Garg, Abhinav
Shrivastava, Abhijeet Shrivastava, Ms. Garima Tiwari, Arpit Jain, Karan
Kohli, Nirmal Prasad, Ms. Aditi Shrivastava, Shivam Singh, Sahil Raveen,
Jaideep Khanna, Manish Kumar, Paritosh Gupta, Ms. Supriya Juneja,
Aditya Singla, Ms. Aishwarya Reddy, Ms. Cheshta Jetly, Ms. Madhumita
Bhattacharjee, Ms. Arti Jain, Ms. Srija Choudhury, Rajat Nair, Ms. Garima
Prasad, Ms. Priyanka Das, Arvind Kumar Sharma, Anirudh Sriram,
Dheeraj Nair, Kumar Kislay, Angad Baxi, Sanjay Kapur, Ms. Megha
Karnwal, V. M. Kannan, Sambit Panja, Arjun Bhatia, Advs. for the
appearing Parties.
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The Order of the Court was passed by
SANJIV KHANNA, J.
1. 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
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v.
AMRUTA GARG
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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 acting as a trustee of any mutual fund.
7. Chapter III relates to the constitution and management of
mutual funds and operation of trustees etc. Regulation 14 stipulates that
a mutual fund shall be constituted in the form of a trust and the instrument
of the trust shall be in the form of a deed, registered under the provisions
of the Indian Registration Act, 1908, executed by the sponsor in favour
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of the trustees. Regulation 15(1) requires that the trust deed shall
incorporate such clauses as are mentioned in the Third Schedule of the
Regulations, and such other clauses as are necessary for safeguarding
the interests of the unitholders. Regulation 15(2) mandates that no trust
deed shall contain a clause which has the effect of - (a) limiting or
extinguishing the obligations and liabilities of the trust in relation to any
mutual fund or the unitholders; or (b) indemnifying the trustees or the
AMC for loss or damage caused to the unitholders by acts of negligence
or acts of commission or omission on part of the trustees or the AMC.
Regulation 16 itemises the criteria for disqualification from appointment
as a trustee. In effect, it stipulates the eligibility requirements for
appointment of the trustees. In particular, it states that two-thirds of the
trustees shall be independent persons, not associated with the sponsors
in any manner. Further, a person appointed as a trustee of a mutual fund
is not eligible to be appointed as a trustee of another mutual fund. An
AMC and its directors (including independent director), officers or
employees are ineligible to be appointed as a trustee of any mutual fund.
Regulation 17 requires prior approval of SEBI before a person is appointed
as a trustee. In the case of existing trustees of any mutual fund, they
may form a trustee company to act as a trustee, albeit with prior approval
of SEBI. The trustees are bound by the Code of Conduct specified in
the Fifth Schedule, as well as general and specific due diligence mandates.
8. Regulation 18 is critical as it elaborately enlists the rights and
obligations of the trustees, in as many as 29 sub-regulations. The trustees
and the AMC, as per Regulation 18(1), can enter into an investment
management agreement with the prior approval of SEBI. Such an
agreement must contain clauses mentioned in the Fourth Schedule and
other clauses as are necessary for the purpose of making investments.
The sub-regulations enumerate the requirements to be satisfied before a
scheme is launched by the AMC. They obligate that the trustee shall
ensure that the AMC has been diligent in empanelling the brokers, and in
monitoring securities transactions with the brokers and in avoiding undue
concentration of business with any broker. The trustees have to also
ensure and check that the AMC has not given any undue or unfair
advantage to any associates or dealt with any of its associates in any
manner detrimental to the interest of the unitholders and that the
transactions entered into by the AMC are in accordance with the
regulations and the scheme. The trustees are entitled to call for details
of transactions in securities by the key personnel of the AMC in their
FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v.
AMRUTA GARG [SANJIV KHANNA, J.]
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own name or on behalf of the AMC and report the same to SEBI, as and
when required. The sub-regulations require the trustees to carry out
quarterly reviews of all transactions between the mutual funds, the AMC
and its associates. The trustees are to also review the net worth of the
AMC on a quarterly basis. In case of any shortfall in net worth, the
trustees were to ensure that the AMC makes up for the shortfall in
terms of Regulation 21(1)(f).1 The trustees are to furnish to SEBI, on a
half-yearly basis, a report on the activities of the mutual fund with
certificates that there have been no instances of self-dealing or front
running by any of the trustees, directors or key personnel of the AMC,
and that the AMC has been managing the schemes independently of
any other activities, and in case any activities of the nature referred to in
Regulation 24(b) have been undertaken by the AMC, that it has taken
adequate steps to ensure that the interests of the unitholders are
protected.2
9. Chapter IV of the Regulations relates to the constitution and
management of the AMC and the custodian. The AMC is appointed by
the sponsor, or by the trustee, if so authorised by the trust deed. However,
the appointment needs approval by SEBI under Regulation 21(2). As
per Regulation 20(2), the appointment of the AMC can be terminated by
majority of the trustees or by 75% of the unitholders of the scheme.
Regulation 20(3) states that any change in the appointment of the AMC
is subject to the approval of SEBI and the unitholders. Regulation 21
enumerates the eligibility criteria for appointment as an AMC. The
directors of the AMC should be persons having adequate professional
experience in finance and financial services related fields and should not
be found guilty of moral turpitude or convicted of any economic offence
or violation of any securities laws. The key personnel of the AMC should
not have been found to be guilty of the above, nor should they have
worked for any AMC/mutual fund/intermediary during the period when
its registration was suspended or cancelled by SEBI. The board of
directors of the AMC must have at least 50% of directors who are not
associates, or associated in any manner with the sponsor or any of its
subsidiaries or the trustee. The net worth of the AMC should not be less
than Rs.50 crores. Regulation 24 specifies the restrictions on the business
activities of the AMC. Regulation 25 specifies the obligations and the
1 The position post the SEBI (Mutual Funds) (Amendment) Regulations, 2021 with
effect from 5th March 2021 has not been examined.
2 Legal effect of Regulation 24 has not been examined.
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responsibilities of the AMC, which include taking reasonable steps and
exercising due diligence to ensure that the investment of funds pertaining
to any scheme is not contrary to the provisions of the regulations and the
trust deed. The AMC is responsible for the acts of commission or omission
by its employees, or persons whose services have been procured by the
AMC. Sub-regulation (6) states that the AMC and its directors,
notwithstanding any contract or agreement, shall not be absolved of the
liability to the mutual fund for their acts of omission and commission,
while holding such position or office.
10. There are a number of stipulations and restrictions to ensure
objectivity, fidelity and transparency in business transactions by the AMC
and compliance with the Regulations. A system of regulation involving
checks, responsibility and power of free decision is envisaged. The Chief
Executive Officer, by whatever name called, is mandated by sub-regulation
(6A)3 to Regulation 25 to ensure that the mutual fund complies with all
the provisions of the Regulations, guidelines and circulars issued in relation
thereto from time to time and that the investments made by the fund
managers are in the interest of the unitholders. This officer is responsible
for the overall risk management function of the mutual fund. Subregulation (6B)4 to Regulation 25 states that the fund managers, whatever
be the designation, shall ensure that the funds are invested to achieve
the objectives of the scheme and in the interest of the unitholders.
11. Chapter V deals with schemes of mutual funds and Regulation
28(1) thereunder states that no scheme shall be launched by the AMC
unless it is approved by the trustees and a copy of the offer document
has been filed with SEBI. Regulations 32 and 33 pertain to the listing
and repurchase respectively of units in close-ended schemes, while
Regulation 35 deals with the allotment of units and refunds of moneys.
In terms of Regulation 38, guaranteed return is not to be provided in a
scheme, unless such returns are fully guaranteed by the sponsor or the
AMC, and a statement to that effect is made in the offer document,
indicating the name of the person who will guarantee the return and the
manner in which the guarantee is to be met. Regulation 38A permits
launching of a capital protection-oriented scheme subject to: (a) the units
of the scheme being rated by a registered credit rating agency from the
viewpoint of the ability of its portfolio structure to attain the protection
3 SEBI (Mutual Funds) (Second Amendment) Regulations, 2020, w.e.f. 29.10.2020
4 Ibid.
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of the capital invested therein; (b) the scheme being close-ended; and
(c) compliance with other requirements as may be specified by SEBI.
Regulation 48 requires that every mutual fund shall compute the Net
Asset Value of each scheme as specified and the same shall be calculated
on daily basis and disclosed in the manner as stated by SEBI.
12. Regulation 49 is titled 'pricing of units' and states that the
price at which the units may be subscribed / sold / repurchased by the
mutual fund shall be made available to the investors in the manner
specified by SEBI. The methodology for calculating the sale and
repurchase price of the units is to be provided by the mutual fund in the
manner specified by SEBI. Sub-regulation (3) states that in determining
the price of the units, the mutual fund shall ensure that the repurchase
price is not lower than 93% of the Net Asset Value and the sale price is
not higher than 107% of the Net Asset Value. As per the second proviso
to sub-regulation (3), difference between the repurchase price and the
sale price of the unit shall not exceed 7% calculated on the sale price.5
13. Regulations 54 and 55 relate to the annual report and the
auditor's report respectively. Regulation 56 requires providing a copy of
the annual report and the summary thereof to the unitholders. Regulation
58 mandates periodic and continual disclosures by the AMC, the trustee,
the sponsors, and the custodians, requiring them to make such disclosures
and submit such documents as may be provided by SEBI and comply
with sub-regulations (2) and (3). Regulation 59 deals with half-yearly
disclosures. Regulation 60 imposes a general obligation to disclose
information and, being of some importance, is reproduced below:
"Disclosures to the investors
60. The trustee shall be bound to make such disclosures as are
essential in order to keep them informed about any information
which may have an adverse bearing on their investments."
The trustees are mandated and bound to make such disclosures
to the unitholders as are essential to keep them informed about any
information that may have adverse bearing on their investments.
14. Chapter VIII relates to and empowers SEBI to authorise and
conduct inspection and audit. SEBI, under Regulation 61(1), may appoint
5 Post amendment w.e.f. 5.3.2021 Regulation 49(3) states that the repurchase price of
units of an open-ended scheme shall not be lower than 95 % of the NAV. There is no
stipulation in the Regulations regarding the sale price.
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one or more persons as the inspecting officers to undertake inspection
of the books of accounts, records, documents, and infrastructure, systems,
and procedures or to investigate the affairs of the mutual fund, the trustees,
and the AMC for the purposes stipulated therein. Regulation 62 requires
that SEBI shall issue not less than ten days' notice to the mutual fund,
trustees, or AMC, as the case may be, before ordering an inspection or
investigation. However, under sub-regulation (2), notwithstanding subregulation (1), SEBI can direct such inspection or investigation without
any notice when it is satisfied that in the interest of the investors no such
notice should be given. Regulation 63 prescribes the duties and obligations
of the mutual fund/ trustees/ AMC whose affairs are being inspected or
investigated. The investigating officer can, during the course of the
investigation, examine or record the statements of any director, officer,
or employee of the mutual fund/ trustee/ AMC and every such mutual
fund/ trustee/ AMC is duty-bound to give to the investigating officer all
assistance in connection with the inspection or investigation. The
inspecting officer is to submit, as soon as possible, a report to SEBI on
completion of the investigation. Regulation 65 states that SEBI or the
Chairman shall after consideration of inspection or investigation report
take such action as SEBI or the Chairman may deem fit and appropriate
under Chapter V of the Securities and Exchange Board (Intermediaries)
Regulations, 2008.
Regulations 39 to 42 and 18(15) of the Securities and
Exchange Board of India (Mutual Funds) Regulations, 1996.
15. Regulations 39 to 42 read as under:
"Winding Up
39. (1) A close-ended scheme shall be wound up on the expiry of
duration fixed in the scheme on the redemption of the units unless
it is rolled over for a further period under sub-regulation (4) of
regulation 33.
(2) A scheme of a mutual fund may be wound up, after repaying
the amount due to the unit holders, -
"(a) on the happening of any event which, in the opinion of the
trustees, requires the scheme to be wound up; or
(b) if seventy-five per cent of the unit holders of a scheme
pass a resolution that the scheme be wound up; or
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(c) if the Board so directs in the interest of the unitholders.
(3) Where a scheme is to be wound up under sub-regulation (2),
the trustees shall give notice disclosing the circumstances leading
to the winding up of the scheme:
"(a) to the Board; and
(b) in two daily newspapers having circulation all over India, a
vernacular newspaper circulating at the place where the mutual
fund is formed.
Effect of winding up
40. On and from the date of the publication of notice under clause
(b) of sub-regulation (3) of regulation 39, the trustee or the asset
management company as the case may be, shall-
"(a) cease to carry on any business activities in respect of the
scheme so wound up;
(b) cease to create or cancel units in the scheme;
(c) cease to issue or redeem units in the scheme.
Procedure and manner of winding up
41. (1) The trustee shall call a meeting of the unitholders to approve
by simple majority of the unitholders present and voting at the
meeting resolution for authorising the trustees or any other person
to take steps for winding up of the scheme:
Provided that a meeting of the unitholders shall not be necessary
if the scheme is wound up at the end of maturity period of the
scheme.
(2)(a) The trustee or the person authorised under sub-regulation (1)
shall dispose of the assets of the scheme concerned in the best
interest of the unitholders of that scheme.
(b) The proceeds of sale realised under clause (a), shall be first
utilised towards discharge of such liabilities as are due and payable
under the scheme and after making appropriate provision for
meeting the expenses connected with such winding up, the balance
shall be paid to the unitholders in proportion to their respective
interest in the assets of the scheme as on the date when the
decision for winding up was taken.
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(3) On the completion of the winding up, the trustee shall forward
to the Board and the unitholders a report on the winding up
containing particulars such as circumstances leading to the winding
up, the steps taken for disposal of assets of the fund before winding
up, expenses of the fund for winding up, net assets available for
distribution to the unit holders and a certificate from the auditors
of the fund.
(4) Notwithstanding anything contained in this regulation, the
provisions of these regulations in respect of disclosures of halfyearly reports and annual reports shall continue to be applicable
until winding up is completed or the scheme ceases to exist.
Winding up of the scheme
42. After the receipt of the report under sub-regulation (3) of
regulation 41, if the Board is satisfied that all measures for winding
up of the scheme have been complied with, the scheme shall cease
to exist."
16. Regulation 18(15)(c) reads as under:
"Rights and obligations of the trustees.
18.
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(15) The trustees shall obtain the consent of the unitholders -
(a) whenever required to do so by the Board in the interest of
the unitholders; or
(b) whenever required to do so on the requisition made by
three-fourths of the unitholders of any scheme; or
(c) when the majority of the trustees decide to wind up or
prematurely redeem the units."
Interpretation of Regulations 39 to 42, their interplay and
harmonious construction with Regulation 18(15) (c) of the
Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996.
17. Regulation 39, as the heading states, relates to 'winding up' of
a scheme of a mutual fund. Sub-regulation (1) to Regulation 39 applies
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to close-ended schemes and is accordingly not relevant as the six
schemes in question are open-ended schemes.6
18. Sub-regulation (2) to Regulation 39 uses the expression 'a
scheme of a mutual fund,' and accordingly applies to both open-ended
and close-ended schemes.7 It is an undisputed position that sub-regulation
(2) to Regulation 39 applies to the six schemes. In terms of sub-regulation
(2) to Regulation 39, a scheme of a mutual fund can be wound up: (a) on
the happening of any event, which, in the opinion of the trustees, requires
the scheme to be wound up; (b) if 75% of its unitholders8 pass a resolution
for winding up of the scheme; or (c) SEBI directs winding up of the
scheme in the interest of the unitholders. Under each clause the initiator
is different, and the condition to be satisfied is stipulated. Clause (a)
empowers the trustees, while clauses (b) and (c) empower the unitholders
and SEBI respectively.
19. When a scheme "is to be wound up" under sub-regulation (2),
the trustees are required by sub-regulation (3) of Regulation 39 to issue
a public notice in two daily newspapers having all India circulation and in
a vernacular paper having circulation where the mutual fund is located.
The public notice should state the circumstances leading to winding up
of the scheme. The trustees are also required to write to SEBI and
disclose the circumstances leading to winding up of the scheme.
20. On and from the date of publication, the cease and freeze
mandate of Regulation 40 triggers. Regulation 40, which is in the nature
of statutory injunction, states that on and from the date of publication of
notice under Regulation 39(3), the trustees and the AMC shall cease to
(a) carry on any business in respect of the scheme to be wound up; (b)
create or cancel units of the scheme; and (c) issue or redeem units of
the scheme.
21. Regulation 41, as per the heading, relates to the procedure
and manner of winding up. The trustees, in terms of sub-regulation (1)
to Regulation 41, are required to call a meeting of the unitholders for
authorising either the trustees or any other person to take steps for winding
6 Regulation 2(f) - "close-ended scheme" means any scheme of a mutual fund in which
the period of maturity of the scheme is specified.
7 Regulation 2(s) - "open-ended scheme" means a scheme of a mutual fund which offers
units for sale without specifying any duration for redemption.
8 2(z)(i) of SEBI (Mutual Fund) Regulation 1996, "unit holder" means a person holding
unit in a scheme of mutual fund.
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up of the scheme. Voting at the meeting is by simple majority of the
unitholders present and voting. In this meeting the unitholders do not
examine, affirm or reject the decision to wind up the scheme. The voting
is restricted to selection of the person - either the trustee or a third
person - who would take 'steps for winding up of the scheme'.
22. Regulation 41(2)(a), requires that the person or the trustee
authorised under Regulation 41(1) must dispose of the assets of the
scheme in the best interest of the unitholders. Clause (b) to sub-regulation
(2) to Regulation 41, states that the sale proceeds shall be first utilised
towards discharge of liabilities due and payable under the scheme.
Secondly, appropriate provision is to be made for meeting the expenses
connected with the winding up. The balance amount shall be paid to the
unitholders in proportion to their respective interests in the scheme as on
the date when the decision for winding up was taken. The clause
differentiates between the creditors whose liability is due and payable,
and the unitholders. Payment of the amount due and payable to the
creditors is prioritised and takes precedent. Thereafter, appropriate
provision is required to be made for expenses connected with the winding
up. The balance amount is payable to the unitholders.
23. In terms of Regulation 42(2), the unitholders are to be paid in
proportion to their respective interest in the assets of the scheme. The
interest of the unitholders in the assets of the scheme as mentioned in
Regulation 42(2) is computed on the basis of the date when the decision
for winding up of the scheme was taken. As per Regulation 41(3), on
completion of winding up, the trustees have to forward to SEBI and to
the unitholders a report on the winding up containing particulars such as
circumstances leading to the winding up, the steps taken for disposal of
the assets for winding up, expenses for winding up, net assets available
for distribution to the unitholders and a certificate from the auditors.
Sub-regulation (4), a non-obstante provision, states that the requirement
in respect of disclosures in the form of half-yearly report and annual
report shall continue until winding up is completed or the scheme ceases
to exist. Regulation 42 states that after receipt of the report under
Regulation 41(3), if SEBI is satisfied that all measures relating to winding
up have been complied with, the scheme would cease to exist.
24. Regulation 42A stipulates that the units of the mutual funds
scheme shall be delisted from the recognised stock exchange in
accordance with the guidelines as may be specified by SEBI.
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