SC says consent of majority unit-holders needed to close debt schemes after notice

The apex court's judgement came on pleas, including the appeal filed by Franklin Templeton, against the Karnataka HC order restraining the company from winding up its six MF schemes.
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Franklin Templeton Investments logo
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In a key verdict, the Supreme Court on Wednesday held that the trustees are required to seek consent of majority unit-holders for closing mutual fund schemes after publishing notice disclosing reasons for their decision to wind up debt schemes. The top court, which interpreted various provisions of the Securities and Exchange Board of India (SEBI) Regulations on winding up of mutual funds, held that the markets regulator has the power to intervene if the trustees of such schemes violate the regulations.

The apex court's judgement came on pleas, including the appeal filed by Franklin Templeton, against the Karnataka High Court order restraining the company from winding up its six mutual fund (MF) schemes without obtaining the consent of its investors by a simple majority. 

The high court had refused to accept the contention that SEBI had power to adjudicate upon the correctness of the decision taken by the trustees to wind up a scheme. However, when SEBI finds that the Trustees or AMC are not abiding by the specific provisions of the Mutual Funds Regulations, the power to issue directions can be exercised by SEBI, the high court had said.

A bench of justices S Abdul Nazeer and Sanjiv Khanna at the apex court on Wednesday dealt with the interpretation of rules and regulations on the issue, and not with the facts of the case related to the winding up of the six mutual fund schemes of Franklin Templeton.

In view of the...discussion and harmoniously interpreting Regulations 39 to 42 (dealing with winding up of mutual funds), we hold that the consent of the unit-holders, as envisaged under clause (c) to Regulation 18(15), is not required before publication of the notices under Regulation 39(3). Consent of the unit-holders should be sought post publication of the notice and disclosure of the reasons for winding up under Regulation 39(3), Justice Khanna said in the 77-page judgement.

SEBI regulation 18 (15) (c) provides with the situation where trustees shall obtain the consent of the unit-holders when they by majority decide to wind up or prematurely redeem the units and Regulation 39 (3) deals with the aspect of public notice in newspapers to be given by trustees disclosing circumstances leading to the winding up.

Writing the judgment for the bench, justice Khanna also dealt with the powers of SEBI in dealing with complaints on mutual fund schemes. We have reservations on the said observations (of Karnataka HC) for the simple reason that if there is a violation of the regulations...by the trustees or AMC, it is open to SEBI to proceed in accordance with law...

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

No doubt, a clause gives primacy to the opinion of the trustees in winding up of the scheme and does not require prior approval of SEBI, yet the market regulator is entitled to conduct an inquiry and investigation when justified and necessary to ascertain whether the trustees have acted in accordance with their fiduciary duty, it said.

Section 11B of the SEBI Act deals with the power of the regulator to issue directions and levy penalty if it is satisfied after an enquiry that it will act to safeguard the interest of investors, or ensure orderly development of securities market etc. 

It referred to submissions of trustees and the AMC filed in the high court interpreting the SEBI Act and the Regulations and said they had conceded that the regulator has extensive powers with respect to the regulation of mutual funds including trustees' decision to wind up a scheme of the mutual fund. 

Nevertheless, we clarify that our observations in this Order and the earlier Order should not be read as binding factual findings or conclusions on any disputed facts, which could be a subject matter of a show-cause notice and consequent decision, the judgement said.

The apex court had upheld on February 12 the validity of e-voting process for winding up of the MF schemes and said that disbursal of funds to unit-holders will continue. Prior to this, on February 2, it had ordered that Rs 9,122 crore be disbursed to the unit-holders.

It had said that disbursal of money would be done by State Bank of India (SBI) Mutual Fund in proportion to unit holders' interest in the assets. The e-voting with regard to the winding up of the schemes had taken place in the last week of December last year and it has been approved by a majority of unit holders.

The six schemes are: Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund. Franklin Templeton MF closed these six debt mutual fund schemes on April 23, 2020 citing redemption pressure and lack of liquidity in the bond market.

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