TaxTMI 
TaxTMI 
TaxTMI 
2011 (5) TMI 1066
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....d to as the Regulations) is the short question that arises for our consideration in this appeal. Facts giving rise to the appeal are these. 2. The appellants before us are husband and wife and they claim that they regularly invest in shares and mutual fund schemes through market intermediaries duly registered with the Securities and Exchange Board of India (the Board) and/or recognized by the stock exchanges. Respondent no. 2 is the Board of Trustees of HSBC Mutual Fund. Respondent no. 3 is the HSBC Mutual Fund set up in the year 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsors of the mutual fund. Respondent no. 4 is a private limited company promoted by HSBC Limited and appoint ed by respondent no. 3 to manage the mutual funds and operate the schemes of such funds in accordance with the provisions of the Regulations. Respondent no. 5 is the Chief Executive Officer of the fourth respondent. 3. Respondents 2 to 4 had launched an open ended Gilt scheme by the name of HSBC Gilt Fund during the year 2003 (hereinafter referred to as the scheme) which sought to generate reasonable re turns through investments in government securities. The scheme had....
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....changed to a term investment not exceeding 15 years. The respondents had also changed the na me of the scheme by dropping the words "SHORT TERM" from its name. They also changed the benchmark index of the scheme from 'I sec Si-Bex' to 'I sec composite index'. According to the appellants, the fall in the NAV was as a consequence of the changes made in the scheme and their grievance is that the respondents had changed the fundamental attributes of the scheme without informing the unitholders or the distributor of the changes and without giving a reasonable opportunity to the unitholders to exit the scheme as required under the Regulations. The appellants also allege that they were completely unaware of the changes until March 2009. It is their case that mutual funds are required to follow the guidelines and procedures laid down by the Board under the Regulations and respondent s 2 to 5 were under an obligation to inform each unitholder including the appellants of any changes in the policy, whether fundamental or otherwise, which would affect the interest of the investors. According to the appellants, the laid down procedure was not followed by respondents 2 to 5 and the short term pl....
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....ges to the unitholders and giving them an exit option ". Having said this, he goes on to hold that the changes did not fall within the clarifications issued by the Board as per its circular of February 4, 1998 and, therefore, they did not alter the 'fundamental attributes' of the scheme so as to attract Regulation 18(15A). He also observed that the changes in the scheme did fall within "any other change which would modify the scheme and affects the interest of unitholders" and thereby attract Regulation 18(15A) of the Regulations but he did not record any adverse finding against Respondents 2 to 5 on the plea that there was no such allegation in the s how cause notice issued to them. The whole time member also referred to the change in the benchmark index and concluded that such a change did not affect the 'fundamental attributes' of the scheme. As regards issues (b), (c) a nd (d) referred to in paragraph 4 of the impugned order, the whole time member found that the Board of trustees of the fund and the fund had contravened the provisions of Regulation 18(9) and 18(22) of the Regulations and clauses 2, 6 and 9 of the code of conduct prescribed in the fifth schedule to the Regulatio....
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....ave been given a right to exit the scheme at the then prevailing NAV. Further grievance of the appellants is that even though the Board on their complain t has found that material changes were brought about in the scheme which affect ed the rights of the unitholders, it has erred in not issuing directions to respondents 2 to 5 to comply with the provisions of Regulation 18(15A) and give a right to exit to every unitholder who on the date of the change was a member of the scheme. The provisions of Regulation 18(15A) of the Regulations shall be dealt with in detail while dealing with the merits of the contentions raised before us and suffice it to mention th at under the said provision, if a change in the fundamental attribute of a scheme is carried out or the scheme is modified affecting the interest of the unit holders, then every unitholder on the date of the change ought to be given a right to exit the scheme. If the appellants are right in making the grievance that they have made before us then there is no gainsaying the fact that they are persons aggrieved and would have a right to exit from the scheme when the changes were made which right has been denied to them. Admittedly, ....
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....nterfere in th ings which do not concern them and act in the name of Pro Bono Publico though they have no interest of the public or even of their own to protect. The learned Judges observed that distinction between persons aggrieved and strangers was real and they laid down the following broad tests in this regard :- "Whether the applicant is a person whose legal right has been infringed? Has he suffered a legal wrong or injury, in the sense, that his interest, recognized by law, has been prejudicially and directly affected by the act or omission of the authority, complained of? Is he a person who has suffered a legal grievance, a person "against whom a decision has been pronounced which has wrongfully deprived him of something or wrongfully refused him something, or wrongfully affected his title to something? Has he a special and substantial grievance of his own beyond some grievance or inconvenience suffered by him in common with the rest of the public? Was he entitled to object and be heard by the authority before it took the impugned action? If so, was he prejudicially affected in the exercise of that right by the act of usurpation of jurisdiction on the part of the authority....
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....erm plan and the long term plan and that the appellants consciously chose the short term plan where under the investments in the scheme could be made for a period not exceeding 7 years though the said period could be brought down to 5 years. It is argued that after the appellants had invested their life's savings in the scheme, respondents 2 to 5 brought about substantial changes therein changing its fundamental attributes and, therefore, it was incumbent upon them to have sent a written communication about the proposed change to each unit holder including the appellants and also to have given them an option to exit at the prevailing net asset value without burdening them with any exit load. In other words, what is argued is that because of the material changes made in the scheme, respondents 2 to 5 ought to have complied with the provisions of Regulation 18(15A ) of the Regulations and not having done so they flouted the law. It is also the grievance of the appellants that they made a complaint to the Boar d which enquired into the same and having found that material changes had been ma de in the scheme which affected the interest of the unitholders, it (the Board) failed to issue....
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....was wound up in January 2009 and the short term plan under which investments were to be made for a period from 5 to 7 years has been changed to a term investment for a period not exceeding 15 years. The name of the scheme was also changed and the words "SHORT TERM" appearing in the title of the scheme were also dropped. Apart from changing the duration of the investments to be made, the benchmark index of the scheme was also changed from 'I sec Si-Bex' to 'I sec composite index'. It is pertinent to mention here that a benchmark index of a scheme is a methodology adopted to measure the success and performance of a scheme. It is, thus, clear that the name of the scheme was changed, the duration of the investments to be made therein ha d undergone a substantial change and the benchmark index to measure its performance was also altered. 9. We may now refer to the provisions of the Regulations. These were framed by the Board with a view to regulate the mutual funds and the schemes operated by them which have to be in accordance with the provisions of the Regulations. A mutual fund is a fund established in the form of a trust to raise monies through sale of units to the public or a sect....
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....vestment scheme, one of the important f actors that an investor looks at is the duration for which the investments are going to be made in that scheme. In this sense, the duration of the investment constitutes one of the fundamental attributes thereof. In the instant case when the scheme was launched it had two plans - short term plan and long term plan the duration of both was different and the investors took an informed decision in investing in one or the other plan. As already observed, the appellants chose the short term plan as, in their perception the said plan would give better returns. It is the case of respondents 2 to 5 that the long term plan which had a long average maturity period had to be wound up as they could not muster even a minimum of 20 investors so as to continue with the said plan. It was on the winding up of the long term plan that the duration of investments in the short term plan was altered from 5 to 7 years to a period not exceeding 15 years. It is, thus, clear that there were no takers for the long term plan and what respondents 2 to 5 did was after winding up the long term plan, they increased the duration of the short term pl an to a long term without....
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....s referred to in the circular, there could be other fundamental attributes of a scheme like the duration of a scheme as in the present case. We agree with the learned senior counsel for the respondents that if the nature of the investments were to change, the fundamental attributes of a scheme would get altered. He was right in contending that if investments were to be made in equity or money market instruments instead of Government securities as originally stipulated, th e fundamental attributes of a scheme would undergo a change. But those could not be the only fundamental attributes of a scheme. As already observed, there could be other attributes as well depending upon the nature of the scheme. 11. We are really amazed that the whole time member after recording a finding that respondents 2 to 5 had changed the scheme which affected the interest of the unitholders without complying with Regulation 18(15A) of the Regulations failed to issue directions to these respondents for complying with the provision. The finding recorded in this regard has already been reproduced above and we agree with the whole time member that respondents 2 to 5 had brought about changes in the scheme wh....