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

- **Citation:** [2021] 14 S.C.R. 573
- **Court:** Supreme Court of India
- **Decided:** 2021-02-12
- **Case number:** Civil Appeal Nos. 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-35366
- **Pages:** 38

## Headnote

Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996 - Regulation 18(15)(c), 39(2)(a) - Winding up
of Mutual Fund Schemes - Consent of unitholders - Held: For the
purpose of clause (c) to Regulation 18(15), consent of the
unitholders would mean consent by majority of the unitholders who
have participated in the poll, and not consent of majority of all the
unitholders of the scheme - In the present case, the objections to
poll results rejected - Unitholders of the six schemes have given
their consent by majority to wind up the six schemes - With the
consent of the parties, M/s. SBI Funds Management Private Limited
appointed to undertake the exercise of winding up, which would
include liquidation of the holdings/assets/portfolio and distribution/
payment to the unitholders - Winding up and disbursements to be
in terms of the directions in earlier orders dtd. 2nd February, 2021
and 9th February, 2021 and paragraph 41 herein - Other aspects
and issues including the questions whether Regulation 18(15)(c)
would apply when the trustee's form an opinion that the scheme
should be wound up in accordance with Regulation 39(2)(a) and
the contention of the objecting unitholders regarding misfeasance,
malfeasances, fraud and the effect thereof, not examined.
Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996 - Regulation 18(15) (c) - Mutual Fund Schemes
- Winding up of - Consent of unitholders - Plea of the objecting
unitholders that consent would be binding only on those who have
consented to winding up of the mutual fund schemes and cannot be
imposed on others - Held: Rejected - 'consent', in the context of
the clause, clearly refers to 'consent of the majority of the
unitholders', and not consent given by individual unitholders who
[2021] 14 S.C.R.573
573
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alone would be bound by their consent, that is, it excludes unitholders
who are not agreeable.
Interpretation of Statutes - Principles of interpretation - Held:
When there is choice between two interpretations, the Court would
avoid a 'construction' which would reduce the legislation to futility,
and should rather accept the 'construction' based on the view that
draftsmen would legislate only for the purpose of bringing about
an effective result.
Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996 - Regulation 18(15) (c) - Winding up of Mutual
Fund Schemes - Consent of unitholders - Held: Regulation
18(15)(c) mandates and requires consent of the unitholders for
winding up, but does not prescribe any mode or manner for taking
consent - Therefore, by implication, the Regulation gives option of
holding a physical meeting, postal poll or e-poll.
Words & Phrases - "consent" - Securities and Exchange
Board of India (Mutual Funds) Regulations, 1996 - Regulation
18(15) (c) - Held: 'consent' in sub-regulation (15) to Regulation
18 refers to affirmative consent to winding up by 'the majority of
the unitholders'- Conversely, consent is denied when 'majority of
the unitholders' do not approve the proposal to wind up the scheme.
Directing winding up and disbursements, the Court
HELD: 1.1 In view of larger public interest, presently this
Court is only deciding the limited aspect of "unitholders' consent
to winding up" [assuming that Regulation 18(15)(c) would apply
even where the trustees form an opinion that a scheme should
be wound up under Regulation 39(2)(c)], and is persuaded to direct
winding up of the six schemes to ensure disbursement of funds
and liquidation of assets/securities. [Para 4][583-B-C]
1.2 The argument raised by some of the objecting
unitholders that consent would be binding only on those who have
consented to winding up of the mutual fund schemes and cannot
be imposed on others is rejected. The word 'consent', in the
context of the clause, clearly refers to 'consent of the majority of
the unitholders', and not consent given by individual unitholders
who alone

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FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE
LIMITED AND ANOTHER
v.
AMRUTA GARG AND OTHERS ETC.
(Civil Appeal Nos. 498-501 of 2021)
FEBRUARY 12, 2021
[S. ABDUL NAZEER AND SANJIV KHANNA, JJ.]
Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996 - Regulation 18(15)(c), 39(2)(a) - Winding up
of Mutual Fund Schemes - Consent of unitholders - Held: For the
purpose of clause (c) to Regulation 18(15), consent of the
unitholders would mean consent by majority of the unitholders who
have participated in the poll, and not consent of majority of all the
unitholders of the scheme - In the present case, the objections to
poll results rejected - Unitholders of the six schemes have given
their consent by majority to wind up the six schemes - With the
consent of the parties, M/s. SBI Funds Management Private Limited
appointed to undertake the exercise of winding up, which would
include liquidation of the holdings/assets/portfolio and distribution/
payment to the unitholders - Winding up and disbursements to be
in terms of the directions in earlier orders dtd. 2nd February, 2021
and 9th February, 2021 and paragraph 41 herein - Other aspects
and issues including the questions whether Regulation 18(15)(c)
would apply when the trustee's form an opinion that the scheme
should be wound up in accordance with Regulation 39(2)(a) and
the contention of the objecting unitholders regarding misfeasance,
malfeasances, fraud and the effect thereof, not examined.
Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996 - Regulation 18(15) (c) - Mutual Fund Schemes
- Winding up of - Consent of unitholders - Plea of the objecting
unitholders that consent would be binding only on those who have
consented to winding up of the mutual fund schemes and cannot be
imposed on others - Held: Rejected - 'consent', in the context of
the clause, clearly refers to 'consent of the majority of the
unitholders', and not consent given by individual unitholders who
[2021] 14 S.C.R.573
573
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alone would be bound by their consent, that is, it excludes unitholders
who are not agreeable.
Interpretation of Statutes - Principles of interpretation - Held:
When there is choice between two interpretations, the Court would
avoid a 'construction' which would reduce the legislation to futility,
and should rather accept the 'construction' based on the view that
draftsmen would legislate only for the purpose of bringing about
an effective result.
Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996 - Regulation 18(15) (c) - Winding up of Mutual
Fund Schemes - Consent of unitholders - Held: Regulation
18(15)(c) mandates and requires consent of the unitholders for
winding up, but does not prescribe any mode or manner for taking
consent - Therefore, by implication, the Regulation gives option of
holding a physical meeting, postal poll or e-poll.
Words & Phrases - "consent" - Securities and Exchange
Board of India (Mutual Funds) Regulations, 1996 - Regulation
18(15) (c) - Held: 'consent' in sub-regulation (15) to Regulation
18 refers to affirmative consent to winding up by 'the majority of
the unitholders'- Conversely, consent is denied when 'majority of
the unitholders' do not approve the proposal to wind up the scheme.
Directing winding up and disbursements, the Court
HELD: 1.1 In view of larger public interest, presently this
Court is only deciding the limited aspect of "unitholders' consent
to winding up" [assuming that Regulation 18(15)(c) would apply
even where the trustees form an opinion that a scheme should
be wound up under Regulation 39(2)(c)], and is persuaded to direct
winding up of the six schemes to ensure disbursement of funds
and liquidation of assets/securities. [Para 4][583-B-C]
1.2 The argument raised by some of the objecting
unitholders that consent would be binding only on those who have
consented to winding up of the mutual fund schemes and cannot
be imposed on others is rejected. The word 'consent', in the
context of the clause, clearly refers to 'consent of the majority of
the unitholders', and not consent given by individual unitholders
who alone would be bound by their consent, that is, it excludes
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unitholders who are not agreeable. To accept the second or contra
view, as pleaded by some of the objecting unitholders, would be
to negate the very object and purpose of clause (c) to subregulation (15) Regulation 18. In fact, the submission, if accepted,
will make the Mutual Fund schemes and the winding up provisions
in the Mutual Fund Regulations unworkable as there would be
two different classes of unitholders - one bound by the consent,
and others who are not bound by consent. Consequently, the
scheme would not wind up. The intent behind the provision is to
bind even those who do not consent. The word/expression
'consent' in sub-regulation (15) to Regulation 18 refers to
affirmative consent to winding up by 'the majority of the
unitholders'. Conversely, consent is denied when 'majority of
the unitholders' do not approve the proposal to wind up the
scheme. [Paras 8, 9][585-E-H; 586-F-G]
Black's Law Dictionary (10th Edition), Shackleton on
the Law and Practice of Meetings, 14th Edn. - referred
to.
 1.3 When there is choice between two interpretations, the
Court would avoid a 'construction' which would reduce the
legislation to futility, and should rather accept the 'construction'
based on the view that draftsmen would legislate only for the
purpose of bringing about an effective result. The Court must
strive as far as possible to give meaningful life to enactment or
rule and avoid cadaveric consequences. Reading prescription of
a quorum as majority of the unitholders or 'consent' as implying
'consent by the majority of all unitholders' in Regulation 18(15)(c)
of the Mutual Fund Regulations will not only lead to an absurdity
but also an impossibility given the fact that mutual funds have
thousands or lakhs of unitholders. Many unitholders due to lack
of expertise, commercial understanding, relatively small holding
etc. may not like to participate. Consent of majority of all
unitholders of the scheme with further prescription that 'fifty
percent of all unitholders' shall constitute a quorum is clearly a
practical impossibility and therefore would be a futile and
foreclosed exercise. In the case of unitholders, the number is
fluctuating and ever changing and, therefore, indefinite. Numbers
of unitholders can increase, decrease and change with purchase
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED
v. AMRUTA GARG
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or redemption. Therefore, in the context of clause (c) of
Regulation 18(15), this Court would not, in the absence of any
express stipulation, prescribe a minimum quorum and read the
requirement of 'consent by the majority of the unitholders' as
consent by majority of all the unitholders. On the other hand, it
would mean majority of unitholders who exercise their right and
vote in support or to reject the proposal to wind up the mutual
fund scheme. The unitholders who did not exercise their choice/
option cannot be counted as either negative or positive votes as
either denying or giving consent to the proposal for winding up.
Keeping in view the object and purpose of the Regulation with
the language used therein, a 'construction' which would lead to
commercial chaos and deadlock cannot be accepted. Therefore,
silence on the part of absentee unitholders can neither be taken
as an acceptance nor rejection of the proposal. Regulation
18(15)(c), upon application in ground reality, must not be
interpreted in a manner to frustrate the very law and objective/
purpose for which it was enacted. The underlying thrust behind
Regulation 18(15)(c) is to inform the unitholders of the reason
and cause for the winding up of the scheme and to give them an
opportunity to accept and give their consent or reject the proposal.
It is not to frustrate and make winding up an impossibility. [Paras
14-18][589-E-G; 590-A-C; 591-C, G-H; 592-A-B]
Principles of Statutory Interpretation by Justice G.P.
Singh, 14th Edition, at 50; Bennion on Statutory
Interpretation, 5th Edition; Halsbury's Laws of England
1st Edition; Sutherland in Statutes and Statutory
Construction, Volume 2, Third Edition at page no. 523,
in Note 5109 - referred to.
1.4 The Court would not read into Regulation 18(15)(c) a
need to have affirmative consent of majority of all or entire pool
of unitholders. The words 'all' or 'entire' are not incorporated
and found in the said Regulation. Thus, consent of the unitholders
for the purpose of clause (c) to sub-regulation (15) of Regulation
18 would mean simple majority of the unitholders present and
voting. Regulation 18(15)(c) mandates and requires consent of
the unitholders for winding up, but does not prescribe any mode
or manner for taking consent. Therefore, by implication, the
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Regulation gives option of holding a physical meeting, postal poll
or e-poll. In physical meetings, voting may be by show of hands
or by holding a poll. Show of hands is quick and an easy way to
administer option but would not reflect and take into account the
relative number of units held by the unitholders. Unitholders with
fewer units have the same say as those with a greater number of
units. It is not a good option when the proposal is contested.
Poll, whether in a physical meeting, by way of a postal ballot or
e-poll, has an advantage as each unitholder has one vote for every
unit/share held. Therefore, in cases where there is huge disparity
between the units held, or possibility of contest/dispute, poll is
the preferred method for ascertaining preference of the
unitholders. The value of poll lies in the fact that the weighted
voting strength based upon the number of units gives more
accurate and precise results. Majority consent of the investors/
unitholders should depend upon the number of units held by them.
Polls are akin to election. Poll results like the election results
are not to be lightly interfered with. More so, when it is fault of a
third party and not of the proposer/successful candidate. Poll
results like election results are not to be regarded as vitiated by
breach of rules or mistake, until and unless the breach or mistake,
it is proved has materially affected the result of the poll. This
general principle may be deviated from only when poll/election
is conducted so badly that it is not substantially in accordance
with law as to elections, in which case it would not matter whether
the result was affected or not. When the poll or voting is on issues
or choices of commercial nature, normally it is not a part of the
judicial process for the court to ferret out flaws by examining
merits or wisdom of the unitholders who have voted. The court
is not equipped and should refrain from entering into such
oversights as doctrine of internal management, institutional
sovereignty and right to opt and decide come into play. The
unitholders are the best judge and are more conversant with their
own interests. All that is to be seen is that broad parameters of
fairness in the administration, bona fide poll/election, and that
fundamental rules of reasonable management of public business
have not been breached. [Paras 19, 28][592-F; 595-F-H; 596-AF]
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED
v. AMRUTA GARG
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1.5 The unitholders were given a chance and option to vote
and about 38% of the unitholders in numerical terms and 54% in
value terms had exercised their right to give or reject consent to
the proposal for winding up. In the absence or need for minimum
quorum, which is not provided or stipulated in the Regulations
nor mandated under law, the e-voting result cannot be rejected
on the ground that 38% of the unitholders in numerical terms
and 54% in value terms, even if the rejected votes are not
accounted for, had participated. This cannot be a ground to reject
and ignore the affirmative result consenting to the proposal for
winding up of the six mutual fund schemes. [Para 31][597-E-F]
2. KFin Technologies has been providing e-voting platform
services to listed public limited companies ever since the Ministry
of Corporate Affairs mandated them to secure approval of the
resolutions by the shareholders through electronic voting. The
e-voting platform of KFin Technologies is certified by the Ministry
of Corporate Affairs approved certification agency, viz. STQC
Website Quality Certification Services. KFin Technologies has
conducted more than 4,500 e-voting events since 2013. To reject
the voting results on this rather specious submission would cast
doubts with serious repercussions on e-voting results of several
reputed companies. The objectors are unable to point out even a
single instance where KFin Technologies has been indicted. In
the present case, the e-voting exercise was also supervised by a
team of technical experts, including Assistant Directors, CFSL,
Hyderabad. The Court is satisfied with the explanation given by
the trustees/AMC and KFin Technologies with reference to the
observations in the report of the forensic experts from CFSL.
[Paras 33, 35][598-B-D; 602-C]
3. The notice for e-voting and meeting of the unitholders
has to be read in entirety. In the facts of the present case, the
notice for e-voting and the contents would not justify annulling
the consent given by the unitholders for the winding up of the six
schemes. [Para 37][603-B]
4. In the present case, the procedure prescribed by
Regulation 41 is not required to be followed as the trustees
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themselves have stated that the process of winding up, which
would include liquidation of the securities and distribution/
payment to the unitholders, should be undertaken by a third party.
The objectors had also made similar submissions. Accordingly,
with the consent of the parties, M/s. SBI Funds Management
Private Limited is appointed to undertake the exercise of winding
up, which would include liquidation of the holdings/assets/portfolio
and distribution/payment to the unitholders. [Para 40][609-B-C]
5. For the purpose of clause (c) to Regulation 18(15),
consent of the unitholders would mean consent by majority of
the unitholders who have participated in the poll, and not consent
of majority of all the unitholders of the scheme. In view of the
findings and reasons stated, the objections to poll results is
rejected and it is held that the unitholders of the six schemes
have given their consent by majority to windup the six schemes.
Winding up and disbursements would be in terms of directions in
earlier orders dated 2nd February, 2021 and 9th February, 2021
and paragraph 41 herein. However, this order does not examine
and decide other aspects and issues including the questions
whether Regulation 18(15)(c) would apply when the trustee's form
an opinion that the scheme should be wound up in accordance
with Regulation 39(2)(a) and the contention of the objecting
unitholders regarding misfeasance, malfeasances, fraud and the
effect thereof. [Para 42][610-C-E]
State of Madhya Pradesh and Another v. Mahendra
Gupta and Others, (2018) 3 SCC 635 : [2018] 1
SCR 443; Shri Ishwar Chandra v. Shri Satyanarain
Sinha and Others (1972) 3 SCC 383 : [1972] 3
SCR 796; Fertilizer Corpn. Kamgar Union (Regd.) v.
Union of India (1981) 1 SCC 568 : [1981] 2 SCR 52;
Syed Hasan Raza Sahib Shamsul Ulama and two others
v. Mir Hasan Ali Sahib and two others AIR 1918 Mad
1131 - referred to.
Morgan v. Simpson [1975] QB 151 - referred to.
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED
v. AMRUTA GARG
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Case Law Reference
[2018] 1 SCR 443
referred to
Para 9
[1972] 3 SCR 796
referred to
Para 13
[1981] 2 SCR 52
referred to
Para 28
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 498501 of 2021.
From the Judgment and Order dated 24.10.2020 of the High Court
of Karnataka at Bangaluru in WP Nos. 8644, 8748, 8545 of 2020 and
WA No. 399 of 2020.
With
C.A. Nos. 502, 503, 508, 504-507, 509 of 2021
Tushar Mehta, SG, Harish Salve, Dr. Abhishek Manu Singhvi,
Ms. Meenakshi Arora, Ravindra Shrivastava, Arvind P. Datar, Sr. Advs.,
Ashish Bhan, Mohit Rohatgi, Jasmeet Singh, Ashim Sood, Rajendra
Dangwal, Ms. Madhavi Khanna, Saif Ali, Nithyaesh Natraj, Vaibhav R.
Venkatesh, Gopal Singh, Arjun Garg, Abhinav Shrivastava, Karan Kohli,
Puneet Jain, Harshit Khanduja, Harsh Jain, Akshat Maheshwari,
Harshvardhan Sharma, Neeraj Sharma, Ms. Christi Jain, Pratap
Venugopal, Ms. Surekha Raman, Akhil Abraham Roy, Vijay Valsan, for
M/s. K J John and Co, Shivam Singh, Sahil Raveen, Jaideep Khanna,
Manish Kumar, Rajat Nair, Ms. Garima Prasad, Ms. Priyanka Das, Arvind
Kumar Sharma, Anirudh Sriram, Ms. Supriya Juneja, Dheeraj Nair, Kumar
Kislay, Angad Baxi, Ms. Madhumita Bhattacharjee, Ms. Arti Jain,
Ms. Srija Choudhury, Sanjay Kapur, Ms. Megha Karnwal, V.M.Kannan,
Sambit Panja, Arjun Bhatia, Advs. for the appearing parties.
The Judgment of the Court was delivered by
O R D E R
SANJIV KHANNA, J.
1. Leave is granted in the above captioned Special Leave Petitions
which emanate from the judgment dated 24th October, 2020 by a Division
Bench of the Karnataka High Court, deciding three writ petitions and a
writ appeal, wherein the challenge in substance was to the winding up,
as well as the procedure for winding up, of six schemes of the Franklin
Templeton Mutual Fund, namely:
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(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. The judgment under challenge inter alia interprets the Securities
and Exchange Board of India (Mutual Funds) Regulations, 1996 ('Mutual
Fund Regulations/ Regulations') framed by the Securities and Exchange
Board of India ('SEBI') to hold that clause (c) to sub-regulation (15) of
Regulation 181 mandates consent of the unitholders for winding up of
mutual fund schemes even when the trustees form an opinion that the
scheme is required to be wound up in terms of clause (a) to sub-regulation
(2) of Regulation 392 of the Mutual Fund Regulations. To this extent, the
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED
v. AMRUTA GARG [SANJIV KHANNA, J.]
1 Regulation 18: Rights and obligations of the trustees
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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.
2 Regulation 39: Winding up
(1) A close-ended scheme shall be wound up on the expiry of duration fixed in thescheme
on the redemption of the units unless it is rolled over for a further period under subregulation (4) of regulation 33.
(2) A scheme of a mutual fund may be wound up, after repaying the amount due to the
unit holders,-
(d) on the happening of any event which, in the opinion of the trustees, requires
the scheme to be wound up; or
(e) if seventy-five per cent of the unit holders of a scheme pass a
resolution that the scheme be wound up; or
(f) if the Board so directs in the interest of the unitholders.
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judgment under challenge substantially agrees with the unitholders, albeit
SEBI in its appeal before this Court contests this interpretation as
erroneous. In other words, SEBI propounds that clause (a) of subregulation (2) to Regulation 39 is a standalone provision and the
unitholders' consent is not required when the trustees upon happening of
an event form an opinion that the mutual fund scheme is to be wound up.
3. The objecting unitholders'3 (also referred to as objectors)
primary grievance relates to allegations of gross mismanagement, failure
and dereliction of duty by the Asset Management Company ('AMC')
and Franklin Templeton Trustee Services Private Limited ('trustees' or
'board of trustees'); violation of the Securities and Exchange Board of
India Act, 1992 ('SEBI Act'); Mutual Fund Regulations; SEBI
harmonization norms; investment horizon profiles; manipulation of Net
Asset Value (NAV); disgorgement of wrongful payments etc. In
particular, it is alleged that more than Rs. 15,000 crores were withdrawn
from the six schemes two weeks prior to the decision for winding up.
Objecting unitholders submit that a finding of fraud, on the part of the
trustees and AMC, would entitle them to restitution etc. Other issues
raised include the question of privilege regarding the forensic audit report.
4. While the objecting unitholders submit that the trustees' decision
to wind up the six schemes is a smokescreen to conceal misfeasance
and malfeasance, which issues along with the question of liability of the
trustees/AMC should be decided first or together; we have deliberately
decided to segregate and examine these issues subsequently. Pertinently,
after receipt of the forensic audit report, SEBI has issued show cause
notice which is pending adjudication. Common people invest in mutual
(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:-
(g) to the Board; and
(h) in two daily newspapers having circulation all over India, a vernacular
newspaper circulating at the place where the mutual fund is formed.
3 The term 'objecting unitholders' does not refer to all unitholders but only 15 unitholders,
namely, Ms. Amruta Garg, Mr. Areez Khambatta, Mr. Persis Khambatta, Khambatta
Family Trust, Ms. Sanyam Jain, M/s. KAJ Associates, Ms. Sarika Mittal, M/s. Ultra
Walls & Floors, Ms. Aakansha Maheshwari, Ms. Priya Menghnani, Ms. Varnika
Menghnani, Mr. Sriram Gantasala, Mr. Ratnajit Bhattacharjee, Ms. Aarti Jain and Ms.
Kiran Rama, who had filed writ petitions and are present before this Court and will also
include Chennai Financial Markets and Accountability, an association which is not a
unitholder.
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funds driven by factors such as simplicity in purchase and redemption of
units, flexibility of holding and tenure, and liquidity by conversion into
money. In the light of this, immediate directions are required as embargo
prohibiting redemption of the units, effected by Regulation 404 from the
date of publication of notice under Regulation 39(3)(b) on 23rd April
2020, for over ten months. Thereby the unitholders have suffered privation
and harassment. This, in same manner, also undermines public sentiments
and confidence vital for investments in mutual funds. Hence, in view of
larger public interest, presently we are only deciding the limited aspect
of "unitholders' consent to winding up" [assuming that Regulation
18(15)(c) would apply even where the trustees form an opinion that a
scheme should be wound up under Regulation 39(2)(c)], and are
persuaded to direct winding up of the six schemes to ensure disbursement
of funds and liquidation of assets/securities.
5. We have further taken note of the trustees' submissions that:
(i) as on 15th January, 2021, NAV of five of the six schemes was higher
than their respective NAVs on 23rd April, 2020 and in one scheme it was
marginally lower;5 (ii) five of the six schemes have turned cash positive;
(iii) accumulated distributable cash proceeds of Rs.9,122 crores [(as on
15th January 2021) and (subject only to provision for expenses in ordinary
course)] is immediately available for disbursement to unitholders; and
(iv) Assets Under Management ('AUM') of the six schemes has
increased from Rs.25,648 crores as on 23rd April, 2020 to Rs.26,343
crores as on 15th January, 2021. Lastly and importantly, during the course
of hearing on 2nd February, 2021, counsels for the objecting unitholders
have agreed to disbursal of Rs.9,122 crores amongst the unitholders,
which, it has been directed would be in proportion to the unitholders'
respective interest in the assets of the scheme, as suggested by SEBI. It
is obvious that this disbursal to unitholders is possible only when we
accept that the six schemes should be wound up.
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED
v. AMRUTA GARG [SANJIV KHANNA, J.]
4 Regulation 40: Effect of winding up
On and from the date of the publication of notice under clause (b) of subregulation (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.
5 The trustees state that NAV valuation of the portfolio securities is being computed by
an independent valuation agency as per SEBI guidelines and is being reported daily.
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6. Before we advert to the order passed by this Court for eliciting
consent/approval from the unitholders, we deem it appropriate to first
reproduce sub-regulation (15) to Regulation 18 of the Mutual Fund
Regulations, which reads as under:
"Regulation 18: Rights and obligations of the trustees
xx xx xx
(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 unit-holders of any scheme; or
c) when the majority of the trustees decide to wind up or
prematurely redeem the units."
7. Interpreting the term 'consent' with reference to clause (c) of
sub-regulation (15) to Regulation 18, the judgment under challenge holds:
"221. Obviously, there can be a 'consent' of the unit-holders to a
proposed of winding up of a Scheme only if the majority of the
unit-holders give consent to do so. Sub-clause (c) of clause (15)
of Regulation 18 is silent on the nature of majority. Obviously, it is
not a specific majority like three-fourth majority. Wherever threefourth majority of the unit-holders was intended, the Mutual Funds
Regulations say so. For example, sub-clause (b) of clause (15) of
Regulation 18 and sub-clause (b) of clause (2) of Regulation 39.
Therefore, it has to be a simple majority. For this purpose, we
must make a reference to a decision of a Full Bench of the
Allahabad High Court in the case of Wahid Ullah
Khan v. District Magistrate, Nanital. In paragraph 32, the
Allahabad High Court held thus:
"32. The word "majority" speaks, of greater number out of the
total number which cannot be a fixed number. In fact, the
starting point of majority is more than half, but any number
more than half still continues to be majority. Majority cannot
be said only confining to more than half. Majority of threefourths of the total number, two-thirds of the total number would
all come within the sphere of the word 'majority'. A person is
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said to have won by a majority of fifty thousand votes or thirty
thousand votes. All speak about the extent of majority. A
majority may start from a number which is more than half and
would continue till the balance of the number excluding one
number. In the matter of votes if a resolution is carried either
in favour or against by all it is said to be unanimous. Majority is
used in contradiction to minority. Thus, there must exist a
minority vote. So, even where one vote is cast in favour or
against resolution the balance of the total number of votes cast
would all be a number of majority vote."
222. The meaning assigned by the Allahabad High court to the
word majority appears to be most correct meaning. The Black's
Law Dictionary provides that a majority means a number that is
more than half of a total. Therefore, consent, as contemplated by
sub-clause (c) of clause (15) of Regulation 18 will have to be by
a simple majority of the unit-holders of a particular Scheme which
is decided to be wound up."
While we partly agree with the aforesaid observations, we would
like to emend the meaning given to the expression 'the consent of the
unitholders' for the purpose of clause (c) to sub-regulation (15) of
Regulation 18.
8. However, we begin by rejecting the argument raised by some
of the objecting unitholders that consent would be binding only on those
who have consented to winding up of the mutual fund schemes and
cannot be imposed on others. The word 'consent', in the context of the
clause, clearly refers to 'consent of the majority of the unitholders', and
not consent given by individual unitholders who alone would be bound by
their consent, that is, it excludes unitholders who are not agreeable. To
accept the second or contra view, as pleaded by some of the objecting
unitholders, would be to negate the very object and purpose of clause
(c) to sub-regulation (15) of Regulation 18. In fact, the submission, if
accepted, will make the Mutual Fund schemes and the winding up
provisions in the Mutual Fund Regulations unworkable as there would
be two different classes of unitholders - one bound by the consent, and
others who are not bound by consent. Consequently, the scheme would
not wind up. The intent behind the provision is to bind even those who do
not consent.
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED
v. AMRUTA GARG [SANJIV KHANNA, J.]
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9. Black's Law Dictionary (10th Edition) defines the word
'consent' as "a voluntary yielding to what another proposes or
desires; agreement, approval, or permission regarding some act or
purpose, esp. given voluntarily by a competent person; legally
effective assent." The dictionary also defines 'general consent' to mean
"adoption without objection, regardless of whether every voter
affirmatively approves." Shackleton on the Law and Practice of
Meetings, 14th Edn., while defining majority, and the binding effect of
majority, has opined:
"
Definition
7-30. Majority is a term signifying the greater number. In legislative
and deliberative assemblies, it is usual to decide questions by a
majority of those present and voting. This is sometimes expressed
as a "simple" majority, which means that a motion is carried by
the mere fact that more votes are cast for than against, as distinct
from a "special" majority where the size of the majority is critical.
The principle has long been established that the will of a corporation
or body can only be expressed by the whole or a majority of its
members, and the act of a majority is regarded as the act of the
whole.
A majority vote binds the minority
7-31. Unless there is some provision to the contrary in the
instrument by which a corporation is formed, the resolution of the
majority, upon any question, is binding on the majority and the
corporation, but the rules must be followed."6
The word/expression 'consent' in sub-regulation (15) to Regulation
18 refers to affirmative consent to winding up by 'the majority of the
unitholders'. Conversely, consent is denied when 'majority of the
unitholders' do not approve the proposal to wind up the scheme.
10. However, the question which still remains to be answered is
whether 'consent' would mean majority of the unitholders who exercise
their right in the poll, or majority of all the unitholders of the scheme.
Connected with the question is the concern of quorum, which means the
6 See State of Madhya Pradesh and Another v. Mahendra Gupta and Others, (2018) 3
SCC 635.
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minimum number of members of the entire body of members required to
be present to legally transact business.
11. Shackleton in the above quotation has referred to distinction
between simple and special majority. More appropriate for our discussion
is William Paul White's thesis 'History and Philosophy of the Quorum
as a Device of Parliamentary Procedure' published in 1967, in which
he elucidates:
"Much of the controversy that has been historically associated
with the quorum can be traced to the problem of simply determining
just what is meant by a quorum. "From the very earliest times it
has been recognised as a general rule that a majority of a group is
necessary to act for the entire group." In the case of a public
body, the power or authority which establishes the body may also
determine what constitutes a quorum. Sturgis states that common
parliamentary law fixes the quorum as a "majority of the
members". The constitution of the United States sets the quorum
requirement in the House of Representatives at a majority of the
membership. But to state that a quorum is a majority of the
membership opens the way to potential conflict; which is precisely
what has happened on numerous occasions."
After examining the various definitions of the term quorum, the
author observes that the definitions by themselves give no key as to how
to determine what is minimum number or what constitutes majority. The
expression 'majority' can mean - (i) majority of total membership list;
(ii) exclude or include delinquent members; (iii) members present and
voting; or (iv) those present, voting and not voting. Different meanings,
he observed, have added to the confusion around the concept of the
quorum. Albeit referring to the position in 1967, the author observed:
"As we have emerged into the modern era, it is not surprising that
by now the method, which has been legally agreed upon by the
courts, to determine minimum and majority, is well established."
12. Clause (c) to sub-regulation (15) of Regulation 18 per se does
not prescribe any quorum or specify the criterion for computing majority
or ratio of unitholders required for valid consent for winding up. Clause
(b) of Regulation 39(2), on the other hand, specifies that seventy-five
per cent of the unitholders of a scheme can pass a resolution that the
scheme be wound up. Similarly, Regulation 41(1) requires the trustees
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED
v. AMRUTA GARG [SANJIV KHANNA, J.]
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to call a meeting to approve, by simple majority of the unitholders present
and voting, a resolution for authorising the trustees or any other person
to take steps for winding up of the scheme. Section 48 of the Companies
Act, 2013 states that where share capital of a company is divided into
different classes of shares, the rights attached to the shares of any class
may be varied with the consent in writing of the shareholders of not less
than three-fourths of the issued shares of that class. Sub-section (3) to
Section 55 of the Companies Act, 2013 in case of failure to redeem or
pay dividend refers to consent of holders of three-fourths in value of the
preference shares. Section 103 of the Companies Act, 2013 prescribes
minimum quorum for shareholder meetings.
13. In Shri Ishwar Chandra v. Shri Satyanarain Sinha and
Others,7 this Court on the question of quorum has held:
"If for one reason or the other one of them could not attend, that
does not make the meeting of others illegal. In such circumstances,
where there is no rule or regulation or any other provision for
fixing the quorum, the presence of the majority of the members
would constitute it a valid meeting and matters considered there
at cannot be held to be invalid."
This decision had also relied on the exposition on the subject of
quorum in the Halsbury's Laws of England, Third Edition (Vol. IX, page
48, para 95), which reads:
"95. Presence of quorum necessary. The acts of a corporation,
other than a trading corporation, are those of the major part of the
corporators, corporately assembled. In other words, in the absence
of special custom or of special provision of the constitution, the
major part must be present at the meeting, and of that major part
there must be a majority in favour of the act or resolution
contemplated. Where, therefore, a corporation consists of thirteen
members, there ought to be at least seven present to form a valid
meeting, and the act of the majority of these seven or greater
number will bind the corporation. In considering whether the
requisite number is present, only those members must be included
who are competent to take part in the particular business before
the meeting. The power of doing a corporate act may, however,
be specially delegated to a particular number of members, in which
7 (1972) 3 SCC 383
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case, in the absence of any other provision, the method of procedure
applicable to the body at large will be applied to the select body.
If a corporate act is to be done by a definite body along, or
by definite body coupled with an indefinite body, a majority of the
definite body must be present.
Where a corporation is composed of several select bodies,
the general rule is that a majority of each select body must be
present at a corporate meeting; but this rule will not be applied in
the absence of express direction in the constitution, if its application
would lead to an absurdity or an impossibility. ..."
(emphasis supplied)
14. The concept of 'absurdity' in the context of interpretation of
statutes is construed to include any result which is unworkable,
impracticable, illogical, futile or pointless, artificial, or productive of a
disproportionate counter mischief8. Logic referred to herein is not formal
or syllogistic logic, but acceptance that enacted law would not set a
standard which is palpably unjust, unfair, unreasonable or does not make
any sense.9 When an interpretation is beset with practical difficulties,
the courts have not shied from turning sides to accept an interpretation
that offers a pragmatic solution that will serve the needs of society10.
Therefore, when there is choice between two interpretations, we would
avoid a 'construction' which would reduce the legislation to futility, and
should rather accept the 'construction' based on the view that draftsmen
would legislate only for the purpose of bringing about an effective result.
We must strive as far as possible to give meaningful life to enactment or
rule and avoid cadaveric consequences11.
15. We would neither hesitate in stating the obvious, that modern
regulatory enactments bear heavily on commercial matters and, therefore,
must be precisely and clearly legislated as to avoid inconvenience, friction
and confusion, which may, in addition, have adverse economic
consequences12. The legislator in the present case must, therefore, reflect
and take remedial steps to bring about clarity and certainty in the Mutual
Fund Regulations.
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED
v. AMRUTA GARG [SANJIV KHANNA, J.]
8 See Bennion on Statutory Interpretation, 5th Edition, at 969.
9 Ibid at 986.
10 Ibid at 971, quoting Griffiths LJ.
11 See Principles of Statutory Interpretation by Justice G.P. Singh, 14th Edition, at 50.
12 See Bennion on Statutory Interpretation, 5th Edition, at 980.
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16. Reading prescription of a quorum as majority of the unitholders
or 'consent' as implying 'consent by the majority of all unitholders' in
Regulation 18(15)(c) of the Mutual Fund Regulations will not only lead
to an absurdity but also an impossibility given the fact that mutual funds
have thousands or lakhs of unitholders. Many unitholders due to lack of
expertise, commercial understanding, relatively small holding etc. may
not like to participate.