Court upholds Mutual Funds Regulations requiring unit-holders' consent for winding up. Writ petitions against Trustees deemed maintainable.

The court upheld the validity of Regulations 39 to 41 of the Mutual Funds Regulations, requiring unit-holders' consent for winding up a Scheme. It found writ petitions against Trustees and AMC maintainable and directed compliance with specific regulations before implementing the winding up decision. SEBI was directed to oversee the submission of the Forensic Audit report and take action accordingly. The court restrained Trustees from proceeding without unit-holders' consent and provided specific directives to SEBI for further actions.

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Issues Involved:
1. Validity of Regulations 39, 40, and 41 of the Mutual Funds Regulations.
2. Requirement of unit-holders' consent under sub-clause (c) of clause (15) of Regulation 18 for winding up a Scheme under sub-clause (a) of clause (2) of Regulation 39.
3. Applicability of clause (15A) of Regulation 18 to the winding up of a Scheme.
4. Maintainability of writ petitions under Article 226 of the Constitution of India against the Trustees and AMC.
5. Legality of the decision of the Trustees to wind up the Schemes.
6. Compliance with sub-clauses (a) and (b) of clause (3) of Regulation 39.
7. Legality of borrowings and redemption payments after the compliance with clause (3) of Regulation 39.
8. Entitlement of petitioners to receive a copy of the Forensic Audit report and the minutes of the Trustees' meetings.
9. SEBI’s jurisdiction under Section 11B of SEBI Act to interfere with the decision of winding up.
10. Directions to SEBI.

Detailed Analysis:

1. Validity of Regulations 39, 40, and 41:
The court upheld the validity of Regulations 39 to 41 of the Mutual Funds Regulations. It was determined that these regulations are within the powers conferred by Section 30 of the SEBI Act and are necessary for regulating the winding up of Mutual Fund Schemes to protect investors' interests. The regulations were found not to be arbitrary or violative of Articles 14 and 21 of the Constitution of India.

2. Requirement of Unit-Holders' Consent:
The court held that when the Board of Directors of a Trustee company, by majority, decides to wind up a Scheme under sub-clause (a) of clause (2) of Regulation 39, it is mandatory to obtain the consent of the unit-holders as per sub-clause (c) of clause (15) of Regulation 18. This consent must be obtained by a simple majority before issuing and publishing a notice under clause (3) of Regulation 39.

3. Applicability of Clause (15A) of Regulation 18:
Clause 15A of Regulation 18, which deals with changes in the fundamental attributes of a Scheme, does not apply to the process of winding up a Scheme. Therefore, compliance with Clause 15A is not a condition precedent for winding up a Scheme under sub-clause (a) of clause (2) of Regulation 39.

4. Maintainability of Writ Petitions:
The court determined that the Trustees perform a public duty under the Mutual Funds Regulations. Therefore, a writ of mandamus can be issued against the Trustees for violating the provisions of the SEBI Act or the Mutual Funds Regulations. The writ petitions under Article 226 of the Constitution of India are maintainable.

5. Legality of the Decision of the Trustees:
The court found no interference was necessary with the decision of the Trustees dated 23rd April 2020 to wind up the Schemes. However, the implementation of this decision is contingent on obtaining the consent of the unit-holders as required by sub-clause (c) of clause (15) of Regulation 18.

6. Compliance with Clause (3) of Regulation 39:
The court held that the Trustees did not comply with sub-clauses (a) and (b) of clause (3) of Regulation 39. Therefore, the decision to wind up the Schemes cannot be implemented until such compliance is achieved.

7. Legality of Borrowings and Redemption Payments:
Once compliance is made with sub-clauses (a) and (b) of clause (3) of Regulation 39, Regulation 40 triggers, and AMC or Trustees cannot continue the business activities of the Schemes, including borrowings. Similarly, from the date of publication of the notice under sub-clause (b) of clause (3) of Regulation 39, AMC is not entitled to honor redemption requests made earlier.

8. Entitlement to Receive Forensic Audit Report and Minutes:
The court held that the petitioners are not entitled to receive a copy of the Forensic Audit report as it is a tentative report and not relevant for deciding the petitions. However, the Trustees are obligated to provide true copies of the Board Resolutions to unit-holders upon request.

9. SEBI’s Jurisdiction Under Section 11B:
SEBI does not have jurisdiction under Section 11B of the SEBI Act to interfere with the decision of winding up a Scheme made under Regulation 39(2)(a). SEBI's role is limited to ensuring compliance with the Mutual Funds Regulations.

10. Directions to SEBI:
The court directed SEBI to ensure that the Forensic Auditors submit their report in accordance with Regulation 64 at the earliest. After receiving the final report, SEBI must examine it and decide on taking action as provided in Regulation 65 of the Mutual Funds Regulations and under the SEBI Act within six weeks.

Order:
The court restrained the Trustees from taking further steps on the basis of the impugned notices until the consent of the unit-holders is obtained. The writ petitions were partly allowed, and SEBI was directed to take necessary actions based on the Forensic Audit report.

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