TaxTMI 
TaxTMI 
2020 (10) TMI 1228
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....dvocates of Tri Legal, Adithya Sondhi, Senior Advocate, Paritosh Gupta, Karan Joseph, Advocates, K.G. Raghavan, Udaya Holla, Senior Advocates instructed by Ashish Bhan, M.B. Naragund, Additional Solicitor General, M.N. Kumar, CGC, Nithin Prasad, Vidur Nair, T. Suryanarayana, Advocates of King and Partridge, Arvind Datar, Senior Advocate, Tushar Mehtha, Solicitor General of India/Senior Advocate and Pratap Venugopal, Advocate For Applicant: Puneet Jain, Revathy Adinath Narde and Ashish A. Kamath, Advocates JUDGMENT Abhay Shreeniwas Oka, J. 1. The event which lead to filing of this group of petitions is the notice dated 23rd April, 2020 issued by the Franklin Templeton Trustee Services private Limited (for short "the Trustees") by taking recourse to the provision of sub-clause (a) of clause (2) of Regulation 39 of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (for short 'the Mutual Funds Regulations'). By the said notice, it was declared that the Trustees have decided to wind up the following six Schemes of the Franklin Templeton Mutual Fund: i) Franklin India Low Duration Fund (Number of Segregated portfolios-2) ii)....
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....thers, W.P. No. 7744/2020 filed before the Madras High Court. • Areez Phirozsha Khambatta and Ors. V. SEBI and Ors., Civil Application No. 7201 of 2020 filed before the Gujarat High Court. • Amruta Garg (Formerly Amruta Narendra Nikam) V. UOI and Ors., W.P. (Civil) 3366/2020 filed before the Delhi High Court. • M/S. Chennai Financial Markets and Accountability V. Additional Director General of Police, CRL OP No. 8660/2020 filed before the Madras High Court. • SEBI V. Franklin Templeton Trustee Services Pvt. Ltd., bearing LPA No. 311/2020 in SCA No. 7201/2020 filed before the Gujarat High Court. • LPA No. 311/2020-Securities and Exchange and Board of India Versus Franklin Templeton Trustees Services Pvt. Ltd. & others. In view of the above, the Special Leave Petition and the Transfer Petitions are disposed of." 4. In Writ Petition No. 7744/2020 filed in the Madras High Court, Special Civil Application No. 7201/2020 filed in the Gujarat High Court and Writ Petition (Civil) No. 3366/2020 filed in the Delhi High Court, the challenge in substance is to the decision of the winding up of the said Schemes. In addi....
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....as also badly affected the High Court of Karnataka and in July 2020, more than fifty staff members were tested positive. By the time we deliver this Judgment, the figure has crossed 180 mark. The COVID-19 has not spared Judicial Officers in the State and Registrars of this Court. To reduce the footfall in the High Court complex, there was no other option but to take recourse to virtual hearing. That suited the learned members of the Bar. The reason is that the members of the Bar could argue while sitting at New Delhi, Mumbai, Chennai, Bengaluru and London. As noted in the last part of this Judgment, with the cooperation of all the learned counsel, video conference hearing was conducted to everyone's satisfaction for several days and hours. The submissions were concluded on 24th September 2020. 7. The hearing commenced on 12th August, 2020. Before commencement of the oral arguments, this Court made a query to the learned counsel appearing for all the parties whether anyone had any objection for the use of zoom platform for conducting the video conferencing hearing. None of the learned members of the Bar had any reservations about the use of zoom platform. 8. Before we go t....
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.... amended by a supplemental investment agreement of management dated 26th August, 2005. The investment manager was approved by SEBI to act as AMC for FTMF. The petitioner has invested a sum of Rs. 5,00,000/- in the year 2018 in Franklin India Short Term Income Plan launched by FTMF. 11. The first case of novel corona Virus (COVID-19) was reported in India on 30th January, 2020 and from 25th March, 2020, the nationwide lockdown was imposed by the Government of India. Prior to that, on 11th March, 2020, the World Health Organization (WHO) had declared COVID-19 as a global pandemic. On 9th April, 2020, AMC requested SEBI for enhancement of borrowing limit prescribed in Regulation 44 (2) of the Mutual Funds Regulations, from 20% to 30%. This request was made in respect of Franklin India Income Opportunities Fund. By a letter dated 13th April 2020, SEBI allowed the said request subject to certain conditions including the condition that incremental borrowing limit should be used only for the purposes of redemption. It appears that by e-mail dated 22nd April 2020, a similar request was made by AMC in respect of three other Schemes. By a letter dated 22nd April 2020, SEBI communicated to....
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....t the funds available under SLF-MF shall be used by Banks for extending loans to Mutual Fund. On 6th May 2020, Ms. Jenny Johnson, the Chief Executive Officer of Franklin Templeton had issued a public statement blaming SEBI for issuing strict regulations and circulars leading for winding up of the said Schemes. On 7th May 2020, a press release was issued by SEBI stating that SEBI has advised FTMF to focus on returning money to the investors in the context of the winding up of the said Schemes. On 8th May 2020, AMC issued a notice explaining what Ms. Jenny Johnson said. On 28th May, 2020, the Trustees issued notices of e-voting and unit-holders meet as per Regulation 41(1) of the Mutual Funds Regulations, seeking approval of unit-holders for one of the two options. The first option was of authorizing the Trustees to take steps for winding up of the said Schemes. The second option was to authorize Deloitte Touche Tohmatsu India LLP (for short 'Deloitte') to do the said job. 14. On 3rd June, 2020, the writ petition was filed before the Delhi High Court to which, this Court has on its transfer assigned W.P. No. 8545 of 2020. The first substantive prayer in the writ petition w....
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.... Single Judge, SEBI has preferred an appeal to the Division Bench of the Gujarat High Court which has been numbered as Writ Appeal No. 399/2020 on its transfer to this Court. IN WRIT PETITION NO. 8748 OF 2020. 17. Writ Petition No. 8748/2020 was filed before the High Court of Judicature at Madras. The petitioner therein is a Society registered under the Tamil Nadu Societies Registration Act, 1975. The said society has filed the said petition in the nature of a Public Interest Litigation. The main grievance in the petition is about the inaction on the part of SEBI. It is pointed out that the petitioner has made a representation to SEBI on 28th April, 2020 against AMC. IN CRL.P. NO. 3206/2020 18. CRL. P. No. 3206/2020 was filed by the petitioner in Writ Petition No. 8748/2020 in the High Court of Judicature at Madras seeking a direction to the respondents to register First Information Report against AMC and the Trustees as well as various officers of the said companies for the offences under the Economic Offences Act. As First Information Report was registered during the pendency of this petition, the same has been disposed of. BRIEF SUMMARY OF IMPORTANT CONTENTIONS IN....
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....d have to reopen the Scheme for transactions and all unit-holders would put 100% redemption requests immediately, as a result, the Mutual Fund would have to make distress sale of securities at very deep discount as the market is under distress. It is contended that such a distress sale of the assets of a Scheme would considerably reduce the Net Asset Value (NAV) which will be detrimental to all the unit-holders. It is contended that winding up of the Schemes after paying all liabilities will preserve the value for all unit-holders and provide equitable exit to all investors. 21. It is repeatedly stated in the statement of objections that sub-clause (a) of clause 2 of Regulation 39 does not envisage any consent of the unit-holders and the voting in terms of clause (1) of Regulation 41 is only to authorize the Trustees or any other person to take steps to realize the assets of the Schemes. It is contended that a few investors should not be allowed to derail the whole procedure of winding up, as it may adversely affect the other investors of the Mutual Fund Schemes and millions of investors in the market at large. 22. It is contended that SEBI has already initiated a Forensic Au....
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....ection. 28. Reliance is placed on the Master Circular for Mutual Funds dated 10th July, 2018 and other circulars. It is submitted that the circulars have put in place an extensive regime to regulate management of the Mutual Funds. Various safeguards provided in the said Master Circulars have been set out. It is submitted that SEBI has wide powers of special review, audit and inspection with respect to the affairs of the Mutual Funds under SEBI Act as well as under Chapter-VIII of the Mutual Funds Regulations. Reliance is placed on Regulations 61 and 66 of the Mutual Funds Regulations which authorize SEBI to appoint an investigating officer to inspect and/or to investigate the affairs of the management Trustees and AMC. Reliance is placed on Section 11 of SEBI Act read with Regulation 76 of the Mutual Funds Regulations which confer powers on SEBI to take any measures as it thinks fit in order to protect the interests of the investors in securities and promote the development of, and to regulate the securities market. 29. It is submitted that where the legislature has designated an authority under a specific law to regulate a specific sector, the Courts should refrain from inte....
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....rt from the said six debt Schemes, FTMF manages additional 27 open ended Schemes, 24 close ended Schemes and 6 Fund Of Funds (FOF) Schemes with approximately Rs. 50,000 crores of assets under management. It is pointed out that around 20 lakh investors who have invested in the other Schemes are not affected by the present winding up. 34. Various details have been set out as to why the decision was taken to wind up the said Schemes. It is contended that COVID-19 pandemic and consequent lockdown of the economy led to severe and sustained liquidity challenges for the said Schemes as bond yields spiked and liquidity in the bond market completely collapsed. There were no viable buyers in the market for certain types of debt instruments. At the same time, the Schemes were facing massive and sustained redemptions from the investors precipitated by the economic shock and uncertainty created by COVID-19 crisis. It is pointed out that the debt Schemes ordinarily make redemption payments from two main sources of liquidity. The first source is scheduled maturities and interest payments by issuers of the debt instruments from time to time. The second source is prepayments of amounts due by is....
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....re taking such a decision. Various facts and figures have been set out in paragraph 71 and 72 in this behalf. 39. In subsequent paragraphs, there is a reference to detailed considerations and deliberations. It is submitted that the Trustees and AMC were faced with very difficult choice so as to ensure protection of interest of all unit-holders of the Scheme as well as to ensure fair and equitable treatment to all the unit-holders. It is submitted that all potential avenues were duly exhausted. The appropriate answer and the course of action for the Trustees was to wind up the said Schemes pursuant to the express provisions of the Mutual Funds Regulations which was necessary to protect the interests of the investors due to the unprecedented economic environment arising from COVID-19 pandemic. This decision gave the said Schemes the ability to preserve value and to undertake a managed monetization of the portfolio securities. This was necessary for maximizing the value for unit-holders and for distribution of proceeds to unit-holders in a fair, orderly and equitable manner in accordance with the process prescribed under Regulation 41 of the Mutual Funds Regulations. The alternativ....
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....h the Schemes of Mutual Fund constitute a specific and complete code dealing with winding up of Schemes of a Mutual Fund. The Regulation 18 is a general Regulation which must be read harmoniously with the specific provisions of Regulations 39 to 42 relating to winding up of the Schemes. It is submitted that if sub-clause (c) of clause (15) of Regulation 18 is to be read into sub-clause (b) of clause (2) of Regulation 39, the provisions of Regulation 39 will be rendered otiose. 43. It is contended that holding of meeting of unit-holders is necessary for seeking approval of unit-holders pursuant to Regulation 41(1). It is submitted that the process of obtaining authorization from the unit-holders is fair and transparent. There are detailed averments made with regard to manner in which the investments were made by the Schemes. 44. It is contended that on 24th April 2020, the Trustees published notices in compliance with the provisions of sub-clause (b) of clause (3) of Regulation 39. The averments made in various paragraphs of writ petition have been separately dealt with. It is contended that in the petition filed in Delhi High Court, no grounds have been set out to substantiat....
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....holders. He pointed out the various provisions which require the Trustees to exercise due diligence and in particular, clause (25) of Regulation 18. He also pointed out the obligations of AMC under the Regulations. He also pointed out the procedure laid down for launching of the Schemes. 49. Thereafter, he has taken us through the Regulations 39, 40, 41 and 49. He submitted that sub-clause (a) of clause (2) of Regulation 39 permits the Trustees to wind up a Scheme on the happening of an event. He submitted that this provision is completely arbitrary, unguided and vague. There are no specific guidelines laid down by the Mutual Funds Regulation on the question as to which events will qualify the requirement of sub-clause (a) of clause (2) Regulation 39 empowering the Trustees to wind up the Schemes. He submitted that this provisions are manifestly arbitrary and ultra vires the provisions of SEBI Act, inasmuch as, the very object of SEBI Act is to protect the interest of the investors and sub-clause (a) appears to have granted a blanket power to the Trustees to wind up Schemes as per their whims and fancies. He submitted that he is going to submit in the alternate that sub-clause (....
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....he communication dated 14th April 2020 that they have never thought of winding up of the Scheme and they were considering of only postponement of redemption. He submitted that within a span of three days thereafter, suddenly, there was a change of opinion of the Trustees and they wanted to wind up the said Schemes. He submitted that though the report/guidance of SEBI was sought specifically by addressing a letter, in fact, without waiting for the guidance or advice of SEBI, straightaway the impugned notice dated 23rd April 2020 has been issued. He submitted that as the Trustees and AMC are bound to follow the statutory Regulations framed under SEBI Act, they are performing a public duty and, therefore, their actions are amenable to a challenge under Article 226 of the Constitution of India. He has taken us through the several documents to show as to how the situation did not warrant the winding up of the said Schemes. He submitted that the reasons given for winding up of the Schemes were already in existence much before the COVID 19 pandemic. He submitted that no other Mutual Fund has gone for winding up due to the pandemic. He pointed out that RBI has taken several measures for im....
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....fore, submit that there is no power vesting in SEBI to frame such Regulations providing for winding up of a Scheme of Mutual Funds. He, would, therefore submit that the Regulations 39 to 41 of the Mutual Funds Regulations are completely ultra vires SEBI Act. 54. Thereafter, referring to the provisions of the Regulation 39, in particular sub-clause (a) of clause (2), he submitted that it enables the Trustees to wind up a Scheme, when, in their opinion an event occurs which requires the Scheme to be wound up. He submitted that this provision is very vague. What is the event contemplated by sub-clause (a) of clause (2) of Regulation 39 is not laid down. There are no checks and balances in the said provisions in the sense that there is no specific provision which enables SEBI to decide whether the event as contemplated by sub-clause (a) has indeed happened. He submitted that sub-clause (a) gives a blanket power to the Trustees for winding up of Schemes as per their whims and fancies which is detrimental to the interests of the investors. He submitted that this Regulation making power is conferred under SEBI Act only with the object of protecting the interests of the investors. But, ....
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....me, as mentioned in clause (2) of the offer document indicate that one of the risk factor mentioned is that the length of time for settlement may be affected in the event the Scheme has to meet an inordinately large number of redemption requests. He pointed out that clause (2) also mentions that the Trustees have reserved right to limit or withdraw, sale and/or repurchase/redemption of the units. He also pointed out to the clause relating to the fundamental attributes of the Scheme. He submitted that the liquidity provision such as repurchase or redemption is a fundamental attributes of the Scheme. He pointed out that the provision regarding the procedure for redemption incorporated in the offer document mentions that the Mutual Funds may limit the right to make redemption. He pointed out that there is a provision for suspension of redemption of units. He pointed out that there are similar provisions in the offer document of all the six Schemes. He submitted that the statement of additional information published by FTMF makes it clear that Templeton International Inc USA is the sponsor. He also pointed out that the clause under the caption 'responsibilities and duties of the Tr....
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....cation dated 23rd September 2019 by which, the Securities and Exchange Board of India (Mutual Funds) (second amendment) Regulation 2019 (for short 'the said amendment of 2019') was brought into force and submitted that Regulation 24 was amended with effect from 15th October, 2019 and clause 1A of the 7th Schedule was substituted. The seventh schedule contains restrictions on investments, as provided in clause (1) of Regulation 44. Clause 1A which is incorporated in 7th schedule provides that a Mutual Fund Scheme shall not invest in unlisted debt instruments including commercial papers, except Government Securities and other money market instruments. The proviso therein lays down that Mutual Fund Schemes may invest in unlisted non-convertible debentures up to a maximum of 10% of the debt portfolio of the Scheme, subject to conditions which may be imposed by SEBI. 60. He invited our attention to what is set out in e-mail dated 14th April, 2020 sent by the President of AMC to SEBI and pointed out that the e-mail sets out the anticipated and continued liquidity stress for the reasons which are mentioned therein. It is pointed out in the said e-mail that the present SEBI Regu....
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....at the place where the Mutual Fund is formed, as provided under sub-clause (b) of clause (3) of Regulation 39. He submitted that mere notice of winding up of the said Schemes is not sufficient but the circumstances leading to the winding up must be disclosed. He pointed out the reply given by SEBI when information was sought under the Right to Information Act, 2005. It is stated that SEBI neither confirmed nor denied the existence of any investigation on any specific matters. He invited attention of the Court to the statement of objections filed by SEBI and in particular, paragraph 18 and submitted that SEBI, instead of acting for the benefit of the unit-holders, seems to have taken the side of FTMF. He submitted that SEBI has not at all rebutted the averments made in the writ petition regarding applicability of sub-clause (c) of clause (15) of Regulation 18 to the process of winding up of the said Schemes. He submitted that SEBI has virtually abdicated its statutory duty by failing to take concrete steps/care to protect the interests of the unit-holders/shareholders. He invited our attention to large number of articles written in several magazines/newspapers which are on record wh....
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....xchange Board of India vs. Ajay Agarwal (2010) 3 SCC 765 and submitted that as held by the Apex Court, SEBI Act was enacted to achieve the purpose of promoting the orderly and healthy growth of securities market and protecting the interests of the investors/unit-holders. He submitted that SEBI Act is a welfare legislation and therefore, the paramount duty of the Courts is to adopt such an interpretation as to further and strengthen the very object of enacting such law. He invited our attention to Section 11-C of SEBI Act, and the powers which can be exercised by SEBI. 67. Coming to sub-clause (a) of clause (2) of Regulation 39, he submitted that the provisions contained therein are very vague, inasmuch as, the event contemplated by sub-clause (a) is not specifically defined anywhere. There is no procedure laid down for arriving at the decision by the Trustees that an event has indeed occurred as contemplated by sub-clause (a). He submitted that the unguided power has been conferred on the Trustees to wind up of a Mutual Fund as per their whims and fancies. He urged that there are no checks and balances provided in the Regulations either before or after the formation of the opini....
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...., redemption of units in the Scheme cannot be made. He relied upon the decision of the Apex Court in the case of LIC of India and another vs. Consumer Education and Research Centre and others (1995) 5 SCC 482 which in turn relies upon the decision of the Apex Court rendered in the case of D.S. Nakara and others vs. Union of India (1983) 1 SCC 305. He submitted that the said Regulations have been framed in exercise of the powers of delegated legislation which do not enjoy the same immunity which a legislation enjoys. He relied upon a decision of the Apex Court in the case of Life Insurance Corporation of India and others vs. Retired LIC Officers Association and others: (2008) 3 SCC 321 and submitted that SEBI as a delegatee ought to have exercised its power to frame the Regulations within the four corners of the statutory provisions of SEBI Act. He also invited our attention to a decision of the Apex Court in the case of Indian Express Newspapers (Bombay) Private Limited and others vs. Union of India and others (1985) 1 SCC 641. 68. He pointed out that the grounds on which a subordinate legislation can be challenged have been laid down in paragraph-15 of the decision of the Apex ....
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....of clause (2) of Regulation 39. He submitted that the Trustees who are expected to discharge their duties in trust and for the benefit of the unit-holders have not at all performed their duties. The winding up is solely on extraneous grounds. He submitted that the decision of winding up of the Scheme is patently against the interests of the unit-holders. He invited our attention to clause (15) of Regulation 18 and submitted that sub-clause (c) of clause (15) requires that when the majority of the Trustees decide to wind up a Scheme, they are required to obtain the consent of the unit-holders and they cannot curtail the rights of the unit-holders of redemption without their consent. He submitted that the Regulations do not contemplate winding up of a Mutual Fund and in fact, there is no provision of winding up of Mutual Fund in the said Regulations. Therefore, the decision of the Trustees for winding up of the said Schemes is violative of the provisions of sub-clause (c) of clause (15) of Regulation 18. He submitted that sub-clause (c) of clause (15) of Regulation 18 and sub-clause (a) of clause (2) of Regulation 39 will have to be harmoniously construed. He submitted that before th....
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....ees to wind up of the Scheme is not placed on record. He submitted that even the temporary liquidity crunch can never be a ground for such a decision. He submitted that the decision of the Trustees of winding up of the Scheme is an arbitrary decision. He submitted that not only that the recommendation of AMC is not placed on record but also the decision of the Trustees is not placed on record. He stated that even the material showing the statutory compliance with the provisions of sub-clause (3) of Regulation 39 has not been placed on record. 72. Now coming to the language used in sub-clause (2) of Regulation 39, he submitted that the repayment to the unit-holders is a condition precedent for exercise of the powers mentioned therein. He submitted that in the present case, no attempt is made to make repayment to the unit-holders. He relied upon a decision of the Apex Court in the case of Bhikhubhai Vithlabhai Patel and others vs. State of Gujarat and another (2008) 4 SCC 144. He submitted that the decision making process of the Trustees can be certainly gone into by this Court. He submitted that the Court is entitled to examine as to whether there was any material available with ....
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....the Apex Court has accepted the argument that permitting such withdrawal would lead to encouragement of unscrupulous elements to speculate in the stock market. He pointed out that the Apex Court further held that permitting the appellants therein to withdraw such public offer would deprive the ordinary shareholders of their valuable right to have an exit option under the said Regulations. Therefore, the learned Senior Counsel submitted that in the present case, the right of redemption of the unit-holders in 'open ended Scheme' is a valuable right. The learned counsel relied upon a decision of the Apex Court in the case of Hathising Manufacturing Co. Ltd., Ahmedabad and another vs. Union of India and another: AIR 1960 SC 923=(1960) 3 SCR 528. 76. Thereafter, the learned counsel addressed the Court on the issue of maintainability of writ petition against AMC, Trustees and sponsor. He relied upon what is observed in paragraph 1 of the decision of the Apex Court in the case of B.P. Achala Anand vs. S. Appi Reddy and another (2005) 3 SCC 313 and submitted that the law never remains static and as social norms and values change, the laws too will have to be reinterpreted and re....
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....s. V. Sadasivan and others (2005) 6 SCC 657 and submitted that the Apex Court has reiterated that Article 226 is worded in such a manner that the writ of mandamus could be issued even against the private authority, provided that such Private Authority must be discharging a public function and the decision sought to be corrected or enforced must be in discharge of a public function. 78. On the issue of maintainability, the learned Senior Counsel relied upon the decisions in the case of VST Industries Ltd. vs. VST Industries workers' Union and another (2001) 1 SCC 298, Ramesh Ahluwalia vs. State of Punjab and others (2012) 12 SCC 331 and Board of Control for Cricket in India vs. Cricket Association of Bihar and others (2015) 3 SCC 251. In substance, his submission is that the source of powers vesting in the Trustees is under the Mutual Funds Regulations. Therefore, he submitted that a public duty is imposed by the statutory regulations and discharge of all the obligations of the Trustees towards the unit-holders is a public function and, therefore, the writ petition seeking mandamus against Trustees is maintainable. 79. The learned Senior Counsel relied upon a decision of t....
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.... without the consent of the unit-holders, as contemplated by sub-clause (c) of clause (15) of the Regulation 18, recourse to winding up of the Schemes cannot be taken. He would, therefore, submit that this Court will have to step in and protect the interests of the large number of investors. 82. In Writ Petition No. 8644/2020, Shri. Adithya Sondhi, learned Senior Counsel had made the submissions on behalf of the petitioners. Inviting our attention to the Regulation 39 (2) (a) of the Mutual Funds Regulations he submitted that the condition precedent for winding up of a Scheme is the formation of opinion of the Trustees. He submitted that in the present case, AMC has influenced the decision of the Trustees and in fact, the decision of the Trustees or formation of the opinion of the Trustees is not placed on record at all. He urged that it is very clear from the documents on record that AMC influenced the decision of the Trustees. He invited the attention of the Court to the impugned notice dated 23rd April, 2020 and submitted that while arriving at the decision, the Trustees have relied upon the recommendations of AMC and such recommendations of AMC are also not placed on record. ....
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....ed out that said request was immediately granted by SEBI. 85. He invited our attention to the rejoinder filed by the petitioner and in particular, Annexure-T which is a notice of 26th extraordinary general meeting of the Trustees convened on 18th June, 2020. He pointed out that it was proposed to pass a resolution that the Trustees Company shall indemnify all directors, in connection with liability that any of them may incur in connection with the winding up of the said Schemes. He submitted that this conduct of the Trustees is completely contrary to the provisions of the Mutual Funds Regulations. He invited our attention to various sub-clauses of the Regulations 16 and 18. He submitted that very high standard of conduct is expected from the Trustees and in the present case, there is a clear conflict of interests between the Trustees and AMC. He invited our attention to statement of additional information furnished by FTMF and the email dated 21st May, 2020 addressed by the Grievances Redressal Mechanism Team to the investors and pointed that in the said communication, it was clearly stated that heightened redemptions were noticed since January, 2020. He submitted that the said ....
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.... language used by the Regulations and submitted that sub-clause (c) of clause (15) of the Regulation 18 clearly provides that the Trustees are under a mandate to obtain consent of the unit-holders, when the majority of the Trustees decide to wind up the Scheme. He submitted that clause (1) of Regulation 41 refers to approval by simple majority of the unit-holders to the resolution for authorizing the Trustees or any other person to take steps for winding up of a Scheme. He submitted that this approval is entirely different from the consent contemplated in sub-clause (c) of clause (15) of Regulation 18. He invited our attention to the Statement of Additional Information published by FTMF which specifically refers to the procedure for obtaining the consent of the unit-holders in accordance with the provisions contained in clause (15) of Regulation 18. He pointed out that it lays down the manner in which the consent of the unit-holders can be obtained. He submitted that if the Scheme of the Mutual Funds Regulations is considered in its true letter and spirit, it is apparent that every Scheme of a Mutual Fund becomes a trust within a trust. He pointed out the specific provision of the ....
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...., in view of Regulation 40, the right of redemption conferred on the unit-holders is taken away and the Scheme ceases to be an 'open ended Scheme'. He submitted that therefore, the action initiated by the Trustees for winding up of the said Schemes clearly amounts to a change in the fundamental attributes of the said Schemes. The condition precedent for change in fundamental attributes is that the unit-holders are given an option to exit at the prevailing NAV without any exit load. He submitted that in view of non-compliance with the mandatory requirements of clause (15A) of Regulation 18, the decision of the Trustees to wind up of the said Schemes becomes completely illegal. He submitted that by virtue of the publication of a notice under clause (3) of Regulation 39 and in view of what is provided under Regulation 40, the facility of redemption is taken away and therefore unit-holders will not get their hard earned investment back unless the entire procedure under Regulation 41 and 42 is completed. He submitted that thus, the action taken under clause 2(a) of Regulation 39 clearly brings about a change in the fundamental attributes of the said Scheme, inasmuch as, there is....
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....rned Senior Counsel relied upon clause (2) of Regulation 25 of the Mutual Funds Regulations which required AMC to exercise due diligence and care in all its investment decisions. He submitted that the said care has not been taken by AMC. He invited our attention to the annexure to rejoinder filed by the petitioner which is a communication addressed by the President of AMC to the unit-holders and pointed out that AMC has blamed the pendency of the present case for the delay. He invited our attention to clause (v) of paragraph 92 of the statement of objections of AMC and the Trustees, in which it is specifically contended that the two Schemes i.e., Franklin India Ultra Short Bond Fund and Franklin India Dynamic Accrual Fund out of six Schemes are now cash positive and have ready cash available for distribution. He pointed out that those two Schemes have the ability to immediately start paying monies to their investors and the main reason why the payments are on hold is the ongoing litigation and specifically the stay order passed by the Gujarat High Court. He submitted that on the one hand, the Trustees took a decision to wind up the said Schemes and on the other hand, they continued....
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....inted out that AMC had indulged in making the investments which are not prudent, as 30% of the investments were made in an illiquid and un-listed documents. He submitted that it was imprudent conduct on the part of AMC to contend that requests for large-scale redemption were due to COVID-19, inasmuch as the same started from October, 2019. He submitted that the Trustees were under an obligation to act in trust and for the benefit of the unit-holders, but they have failed to do so. From the joint statement of objections filed by the Trustees and AMC, it is crystal clear that the Trustees have not acted independently and therefore, the decision of the Trustees was influenced by AMC and hence, an adverse inference is required to be drawn. 96. By pointing out the averments made in paragraphs 66 and 67 of the counter affidavit jointly filed by the Trustees and AMC, he submitted that after 23rd April, 2020, the loan amounts of the creditors have been illegally cleared, which could not have been done in the teeth of Regulation 40. He submitted that on 24th April, 2020, redemptions were made contrary to Regulation 40, inasmuch as, after the publication of notice under sub-clause (3) of ....
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.... order of the Ministry of Home Affairs dated 24th March, 2020 and submitted that action of the Trustees of winding up could not have been taken in the teeth of the said guidelines, as all commercial establishments were ordered to remain closed. 100. He submitted that COVID-19 is not at all a ground for winding up and in any case, the Trustees could have taken a decision for postponement of redemption for meeting the exigency created large scale requests for redemption. 101. He submitted that the relationship between the unit-holders and Trustees is that of principal and agents and, therefore, the provisions of Section 211 and 212 of the Indian Contract Act, 1872 will apply. He submitted that the stand of SEBI regarding Forensic Audit is also confusing. He stated that it is not clear whether it is an investigation or it is an audit. He invited our attention to clauses 4A, 17 and 18 of Regulation 18 and submitted that compliance with the said statutory provisions in respect of these Schemes has not been made and no material has been placed on record in that behalf. He submitted that what action was taken after 1st October, 2019 is not placed on record. 102. He submitted that....
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....ording an opportunity to the unit-holders to exercise an option to exit by taking the Net Asset Value without any exit load. He submitted that the liquidity issue can never be a ground under sub-clause (a) of clause (2) of Regulation 39 to initiate winding up of the Scheme. He submitted that sub-clause (a) of clause (2) of Regulation 39 will have to be read with clauses (15) and (15A) of Regulation 18. He submitted that the interplay between Regulation 39 and clause 15 of Regulation 18 is very important. 105. He submitted that the investment of the unit-holders does not become asset of either Trustees or AMC. He submitted that the investment is held by the Trustees in fiduciary capacity in trust and for the benefit of the unit-holders. He submitted that the Scheme is founded on trust. He placed reliance on a decision of the Apex Court in the case Charan Lal Sahu vs. Union of India (1990) 1 SCC 613. He has also relied upon Shafin Jahan vs. Asokan K.M. and others. (2018) 16 SCC 368 He invoked parens patriae doctrine. He submitted that this Court as a constitutional Court has to act as parens patriae and protect the investors of FTMF. 106. The learned counsel appearing for the a....
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.... query made by the Court, he stated that though for taking action under sub-clause (a) of clause (2) of Regulation 39, a resolution has to be passed by the Board of Directors of the Trustees, SEBI is not aware whether in this case, any such resolution has been passed. He submitted that after the decision was taken by the Trustees, action has been taken by SEBI starting investigation in accordance with the regulation 61 by ordering a Forensic Audit. He submitted that further action will be taken after receipt of the final Forensic Audit report. 109. Thereafter, he dealt with the arguments addressed by the petitioners regarding applicability of clause 15(c) of Regulation 18 to sub-clause (a) of clause (2) of Regulation 39. He submitted that Regulations 39 to 42 form a part of Chapter-V which deal with the winding up of the Schemes of Mutual Fund and Regulation 18 which is a part of Chapter-III of the Regulations deals with constitution and management of Mutual Fund and obligations of the Trustees etc. He submitted that action sub-clause (a) of clause (2) of Regulation 39 does not require consent of the unit-holders. He urged that whenever consent of unit-holders is required, the R....
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....judice to the other unit-holders. He submitted that sub-clause (b) of clause (2) of Regulation 39 contains specific provision where seventy-five percent of the unit-holders can decide to wind up a Scheme and if interpretation put to sub-clause (c) of clause (15) of Regulation 18 is accepted, even 50% of the unit-holders will be able to prevent the Trustees from the winding up a Scheme. He invited our attention to the provisions of Section 29 of the Trusts Act which always empowers the Trustees to do the acts which are reasonable for protection of the trust property and for protection or support of the beneficiaries. 112. Now coming to the writ petition filed in the High Court at Madras, he submitted that the said Public Interest Litigation is not maintainable. He submitted that the unit-holders are not in a helpless position and they can always approach the Court of law for redressal of their grievances. He placed reliance on a decision of the Apex Court in the case of S.P. Gupta vs. Union of India and another AIR 1982 SC 149 and in particular, paragraph 17 of the said decision in support of his plea that Public Interest Litigation is not maintainable. He submitted that the Publ....
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....decision of the Apex Court in the case of Swiss Ribbon Private Limited and another vs. Union of India and others which are referred earlier. 114. He submitted that SEBI is willing to produce a copy of report submitted by the Forensic Auditor on 3rd August 2020. He, however, submitted that it is not a final report and the investigation by the Forensic Auditor is not yet completed. He states that the response of AMC and Trustees has been sought for and after considering their response, final report will be submitted by the Forensic Auditor. He submitted that when the investigation is not yet completed, if the report submitted on 3rd August, 2020 is made public, it will prejudice the investigation. He submitted that there are annexures consisting of more than one thousand pages to the said report and when the Forensic Auditor is yet to complete the investigation, it will be improper for SEBI to disclose its contents. He submitted that at this stage, no conclusion can be drawn on the basis of the said report. He submitted that he has no objection if for the purposes of deciding this contention raised by SEBI, a copy of the report can be made available to this Court. He submitted tha....
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....visions of sub-section (2) of Section 2 of the SEBI Act. 117. Shri. Harish Salve, learned Senior Counsel submitted that the writ petitions filed by the petitioners are based on misconception. A Mutual Fund is not a company which is holding the deposits of the investors. He submitted that on the one hand, the unit-holders have strong objection to the actions of the Trustees and AMC and on the other hand, the unit-holders want to compel AMC and the Trustees to continue to run the Schemes. He submitted that every unit-holder has taken a risk, while making an investment in the Mutual Fund which is always subject to market risks. He submitted that unit-holders are not in a position of either customers of a bank or shareholders of a company. 118. The learned Senior Counsel has invited our attention to various Regulations and submitted that all the actions done by AMC and the Trustees are in private domain. He invited our attention to Regulation 38 which specifically lays down that no guaranteed returns can be provided to unit-holders in a Scheme unless such returns are fully guaranteed by the sponsor or AMC and unless the name of the person who will guarantee the returns and the ma....
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....ents made by the Mutual Fund are regulated under Regulations 43 and 44. He invited our attention to key information memorandum of Franklin India Credit Risk Fund, which is one of the Schemes under winding up. He pointed out that in the investment objectives of the said Scheme specifically stated therein, it is clearly stated that the investments will be made in AA and below rated corporate bonds (excluding AA+ rated corporate bonds). He stated that even on page two of the said document, this is reiterated. He pointed out from the same document that the investors were fully aware about the risk factors involved in the investment. He submitted that considering the investment objective, the unit-holders were fully aware of the risks involved in the investment. 122. He invited our attention to e-mail sent by AMC to SEBI on 14th April 2020. The said e-mail contains various factual statements. It is pointed out in the said e-mail that though RBI stepped in with a package of rate cuts and Targeted Long-Term Repo Operations (TLTRO), the same created liquidity only for public sector undertakings and the liquid private sector issuers in the industry. He pointed out that in the e-mail it w....
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.... letter, SEBI was informed about the impact on the Mutual Fund operations of pandemic of COVID-19. He submitted that the details and figures given in the letter dated 20th April, 2020 clearly show that the decision of the Trustees to wind up the said Schemes is not based only on what had happened due to COVID-19, but it is based on prognosis. He invited our attention to the letter dated 30th March, 2020 addressed by the Associations of Mutual Funds in India. He submitted that the Association, by the said letter, brought to the notice of the Executive Director of SEBI the impact on Mutual Funds operations on account of COVID-19 pandemic and requested SEBI to relax certain guidelines applicable to Mutual Funds. By the said letter, the Association sought exemption from the guidelines issued by SEBI on 30th September 2020 effective from 1st October 2020. He submitted that SEBI did not respond to the said request. 123. He urged that the consent as contemplated by Regulation 18 (15) (c) cannot be read into Regulation 39 (2) (a). He urged that if consent of the unit-holders is considered as a requirement under Regulation 39 (2) (a), the difference between Regulation 39 (2) (a) and Regu....
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....tract, but the right to terminate the contract is constricted by Regulations 39 to 41. He submitted that the contractual relationship between the Trustees and the unit-holders is strictly regulated by the said Regulations. He submitted that if the prayer sought in clause-A in the petition filed before the Delhi High Court (WP. No. 8545/2020) is granted, the said contractual relationship will become unregulated. 126. He submitted that each Scheme of a Mutual Fund is a separate trust. The reason is that the assets of Schemes run by the same Mutual Fund are not pooled. He submitted that the assets of different Schemes run by the Mutual Funds are like watertight compartments. He submitted that under none of the Schemes, the returns are guaranteed. He submitted that even after winding up of the Schemes, the provisions regarding disclosure of half yearly reports and annual reports will continue to be applicable till the process of winding up is completed. 127. He requested the Court to again go through the figures reflected in the letter dated 20th April 2020 and submitted that if the figures of AUM (Assets Under Management) of the Schemes as on 1st March 2020 are considered, it is....
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....correctness of the decision of the Trustees. He pointed out that the Regulations provide three modes of winding up. The first mode can be adopted by the Trustees, the second mode can be adopted by 75% of the unit-holders and the third mode can be adopted by SEBI. The Scheme of the Regulations is such that SEBI cannot interfere with the decision making power conferred on the Trustees or on 75% of the unit-holders, as the case may be, to wind up a Scheme. The role of SEBI is under Regulation 42 which requires SEBI to verify as to whether all measures for winding up of the Scheme, as provided under the Regulations have been complied with. He submitted that if the requirement of consent is read into sub-clause (a) of clause (2) of Regulation 39, effectively, the process of winding up of the Schemes under sub-clauses (a) and (b) will be winding up as per the desire of the unit-holders. 131. The learned Solicitor General of India submitted that it is well settled that the scope of judicial review of economic decisions is considerably narrow. He submitted that the Mutual Funds Regulations constitute a specialized delegated legislation belonging to the sphere of the economic policy and ....
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.... there are several restrictions on investments to be made by AMC and there are strict investment norms provided therein and therefore, the Trustees will have to pass through the stringent tests which are laid down in the Regulations and that is how a latitude is given to the Trustees when it comes to taking a decision regarding winding up. He submitted that the conduct of the Trustees is highly regulated by the Mutual Funds Regulations. He submitted that three tier structure constituting 'sponsor', 'Trustees' and 'AMC' is provided under the Regulations. He invited our attention to Regulation 38 which provides that no guaranteed returns can be provided in a Scheme unless such returns are fully guaranteed by the sponsor or AMC and unless a statement indicating the name of the person who will guarantee the returns and the manner in which the guarantee is to be met are specifically mentioned in the offer document. He submitted that the decision of the Trustees of winding up of the said Schemes is a commercial decision and when the Trustees have to act in a highly regulated regime, it cannot be said that the provisions giving freedom to the Trustees to wind up th....
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....of regulatory body like SEBI cannot be questioned unless it is shown to have been used for extraneous reasons. He would, therefore, submit that there is absolutely no merit in the challenge to the constitutional validity of Regulations 39 to 41. SUBMISSIONS OF AMC AND TRUSTEES: 137. Shri. Janak Dwarakadas, learned Senior Counsel appearing for AMC and the Trustees submitted that the relationship between the unit-holders, AMC and the Trustees is purely contractual and therefore, the issue involved in these petitions is purely in a private domain. He firstly dealt with the issue of borrowings made by AMC after 23rd April 2020. He submitted that the borrowings were made firstly for meeting the demand made by Bank of Baroda and secondly for meeting the redemption requests for which requisitions were made upto 23rd April 2020. He submitted that making such borrowing will not amount to carrying on business activities. He relied upon a decision of the Apex Court in the case of State of Gujarat vs. Raipur Manufacturing Co. Ltd AIR 1967 SC 1066 for the purposes of interpreting the word 'business'. He relied upon another decision of the Apex Court in the case of Director of Supp....
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....elhi) (2010) 6 SCC 1. SUBMISSIONS OF SEVENTH AND EIGHTH RESPONDENTS: 139. Shri. K.G. Raghavan, learned Senior Advocate appearing for 7th Respondent (the sponsor) and the 8th respondent in W.P. No. 8545/2020 and for the 4th respondent in W.P. No. 8644/2020 urged that there are no allegations made against the companies which he is representing. He urged that in paragraph 44 of the petition filed before the Gujarat High Court, there are only vague allegations. He submitted that really no action was prayed for against the companies which he is representing. He submitted that as far as the unit-holders are concerned, his clients will have no role to play. Inviting our attention to the Regulation 38(a) he submitted that in case of none of the said Schemes, the returns were guaranteed to the unit-holders and therefore, the said companies have no role to play. SUBMISSIONS OF THE DIRECTORS OF AMC AND TRUSTEES: 140. Shri. Udhay Holla, learned Senior Counsel representing the Directors of AMC and Trustees invited attention of the Court to the averments made in paragraph 8 of the writ petition filed before the Madras High Court and submitted that the averments made therein are not t....
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....9, he submitted that no opinion is formed by the Trustees, as can be seen from the minutes of meeting dated 24th April 2020. He submitted that though the notice of 23rd April 2020 refers to recommendation of AMC, a copy of the recommendation is also not placed on record. He submitted that the minutes only reflect approval of the Trustees to the decision of AMC. He submitted that the minutes do not reflect happening of an event which is contemplated by sub-clause (a). He submitted that the event contemplated by the sub-clause (a) is akin to public interest. He submitted that the large number of requests for redemption is mainly a ground for suspension of redemption. He pointed out that the copies of the minutes of the meeting of the Board of Trustees do not bear signatures. He submitted that the averments made in the statement of objections filed by the Trustees and AMC are not supported by verification and by an affidavit. He has taken us through the minutes of meeting dated 23rd April 2020 and submitted that the minutes clearly show that the Trustees have acted under the influence and dictates of AMC which completely defeats the very Scheme of the Mutual Funds Regulations regardin....
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....o respond to the letters dated 14th April 2020 and 20th April, 2020 is very significant. He submitted that SEBI has shown totally indifferent approach and has not done anything for protecting the interest of the unit-holders. He submitted that SEBI has not even examined whether the Trustees had complied with the statutory requirement of clause (3) of Regulation 39 and it has failed to ascertain as to whether there was a compliance with sub-clause (b) of clause (3) of Regulation 39. He submitted that if the minutes of meeting dated 20th April 2020 and 23rd April 2020 were forwarded by the Trustees to SEBI, it was the duty of SEBI to place the same on record. He submitted that perusal of the minutes of board meetings will show that the official business between statutory body like SEBI on the one hand and the Trustees and AMC on the other hand was conducted telephonically instead of transacting the official business by written communications. He submitted that inaction on the part of SEBI is very glaring, as it did not object to the borrowings made by the Mutual Fund after 23rd April 2020. He submitted that the argument to the effect that the Trustees have an unfettered discretion to....
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...., as held by the Apex Court in the case of S.P. Gupta vs. Union of India 1981 Supp SCC 87. He submitted that in judicial proceedings, the disclosure of facts is a rule and withholding the disclosure is an exception. He submitted that the document can be withheld only on the ground of overwhelming public interest. He submitted that even in a most sensational/sensitive case like purchase of Rafael Aircrafts, the Apex Court directed to supply of the documents which were required to be filed in a sealed cover to the parties. In support of his submission, he referred to a decision of the Apex Court in the case of Manohar Lal Sharma vs. Narendra Damodardas Modi and others (2019) 3 SCC 25. He submitted that the petitioners needed to go through the audit report only for assisting the Court. He submitted that the investigation by Forensic Auditors cannot be on par with the investigation in a criminal case. He submitted that unfortunately, SEBI, in paragraph 14 of its affidavit dated 2nd September 2020 has taken a stand for protecting the interests of FTMF. He submitted that the order dated 8th June 2020 passed by the Delhi High Court will indicate that by simply placing reliance on the fact....
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.... Funds Regulations are ultra vires the provisions of the Securities and Exchange Board of India Act, 1992 and unconstitutional being vague, manifestly arbitrary, unreasonable? Whether the Regulations 39, 40 and 41 are violative of Articles 14 and 21 of the Constitution of India? ii) Whether obtaining consent of the unit-holders in accordance with the provision of sub-clause (c) of clause (15) of Regulation 18 of the Mutual Funds Regulations is a condition precedent for winding up of a Scheme in accordance with the provision of sub-clause (a) of clause (2) of Regulation 39 of the Mutual Funds Regulations? iii) Whether compliance with clause (15A) of Regulation 18 of the Mutual Funds Regulations is a condition precedent for winding up of a Scheme in accordance with sub-clause (a) of clause (2) of Regulation 39? iv) Whether the writ petitions filed by the petitioners by invoking the Article 226 of the Constitution of India are maintainable for challenging the impugned notices dated 23rd April 2020 and 28th May, 2020 issued by Franklin Templeton Trustee Services private Ltd.? v) If the answer to question (iv) is in the affirmative, whether this Court....
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....ect of promoting orderly and healthy growth of the securities market and for investors' protection. At that time it was not a statutory body. The Securities and Exchange Board of India Ordinance, 1992 (Ordinance No. 5 of 1992) was promulgated on 30th January, 1992. The SEBI Act was subsequently enacted which shall be deemed to have come into force on 30th January, 1992. It is necessary to firstly refer to the statement of objects and reasons of the SEBI Act which read thus: "Statement of Objects and Reasons.-- Securities and Exchange Board of India (SEBI) was established in 1988 through a Government Resolution to promote orderly and healthy growth of the securities market and for investors' protection. SEBI has been monitoring the activities of stock exchanges, Mutual Funds, merchant bankers, etc., to achieve these goals. The capital market has witnessed tremendous growth in recent times, characterised particularly by the increasing participation of the public. Investors' confidence in the capital market can be sustained largely by ensuring investors' protection. With this end in view, Government decide to vest SEBI immediately with statutory power....
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....ng of intermediaries of securities markets; (g) prohibiting insider trading in securities; (h) regulating substantial acquisition of shares and takeover of companies; (i) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, Mutual Funds, other persons associated with the securities market, intermediaries and self-regulatory organisations in the securities market; (ia) calling for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act which, in the opinion of the Board, shall be relevant to any investigation or inquiry by the Board in respect of any transaction in securities; (ib) calling for information from, or furnishing information to, other authorities, whether in India or outside India, having functions similar to those of the Board, in the matters relating to the prevention or detection of violations in respect of securities laws, subject to the provisions of other laws for the time being in force in this regard: Provided that the Board, for the purpose ....
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....nd Section 11-B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:-- (a) suspend the trading of any security in a recognised stock exchange; (b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; (c) suspend any office bearer of any stock exchange or self-regulatory organisation from holding such position; (d) impound and retain the proceeds or securities in respect of any transaction which is under investigation; (e) attach, for a period not exceeding ninety days, bank accounts or other property of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder: Provided that the Board shall, within ninety days of the said attachment, obtain confirmation of the said attachment from the Special Court, establi....
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....d by the Board in accordance with the regulations made under this Act." (Underlines supplied) 159. Sub-section (1) of Section 11 specifically lays down that one of the duties of SEBI is to protect the interest of investors in securities. Considering the objects and reasons of SEBI Act, the duty to protect the investors is the paramount duty of SEBI. The second duty is to promote the development of securities market and the third duty is to regulate the securities market. The measures which can be taken by SEBI have been enlisted in subsection (2) which provides for registering and regulating the working of Mutual Funds. Sub-section (4) also confers vast powers on SEBI to take various measures in the interests of investors or securities market. Section 11-A empowers SEBI to issue regulations for protection of investors in the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which certain matters shall be disclosed by the companies. Clause (b) of subsection (1) of Section 11-A also confers a power on SEBI to issue general and special orders prohibiting companies from issuing of prospectus, or any other doc....
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.... Various directions can be issued under Section 11B (1) against the persons mentioned in Section 12. Perusal of Section 12 shows that the trustees of trust deed and intermediaries are included therein. Clause (g) of Regulation 2 of the Securities and Exchange Board (Intermediaries) Regulations, 2008 specifically includes AMC under the Mutual Funds Regulations in the definition of intermediaries. Therefore, SEBI has a power to issue directions under Section 11B (1) against the Trustees and AMC. Whether, SEBI can interfere with the decision of the Trustees of winding up is an issue which is discussed separately. 162. Section 11-C confers powers on SEBI to appoint investigating authority to investigate, when SEBI has a reasonable ground to believe that the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market or any person associated with securities market has violated the provisions of SEBI Act, the Rules framed thereunder and the Regulations made thereunder or the directions issued by SEBI thereunder. The investigating authority has been conferred with the vast powers as set out in sub-section (3) onwards of Section 11C.....
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....rd for settlement of proceedings under sub-section (2) and the procedure for conducting of settlement proceedings under sub-section (3) of Section 15-JB; (db) any other matter which is required to be, or may be, specified by regulations or in respect of which provision is to be made by regulations. 164. On conjoint reading of the objects and reasons of SEBI Act and its various provisions especially Sections 11, 11A, 11B and 11C, it can be said that SEBI is required to act as a watchdog of securities market. Apart from regulating and promoting growth of securities market, the paramount duty of SEBI is to protect the interest of investors. It is the duty of SEBI to keep a constant vigil on securities market for safeguarding the interest of investors. MUTUAL FUNDS REGULATIONS 165. The Mutual Funds Regulations have been framed by exercising powers under Section 30 read with clause (c) of subsection (2) of Section 11 of SEBI Act. As noted earlier, clause (c) of sub-section (2) of Section 11, inter alia, provides for registering Mutual Funds and regulating the working of Mutual Funds. 166. Some of the definitions under the Mutual Funds Regulations are very relevant f....
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....and custodian. Chapter V provides for Schemes of Mutual Fund. 169. The sponsor is required to apply for registration of a Mutual Fund in accordance with the provisions of Regulation 3 in the prescribed form. Along with the application form, the sponsor is required to submit a draft trust deed, a draft investment management agreement and a draft custodian agreement. Regulation 9 provides for grant of a registration certificate in Form No. B. Regulation 10 is relevant, which provides for terms and conditions of registration. It reads thus: "10. Terms and conditions of registration.--The registration granted to a Mutual Fund under regulation 9, shall be subject to the following terms and conditions-- (a) the Trustees, the sponsor, the asset management company and the custodian shall comply with the provisions of these regulations; (b) the Mutual Fund shall forthwith inform the Board, if any information or particulars previously submitted to the Board was misleading or false in any material respect; (c) the Mutual Fund shall forthwith inform the Board, of any material change in the information or particulars previously furnished, which have a bear....
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....siness of custodian of securities under the provisions of the Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996. 173. Now we come to the 'Schemes' of Mutual Fund. There can be various Schemes of a particular Mutual Fund. As provided in clause (1) of Regulation 28, every Scheme shall be launched by AMC. But it is provided that no such Scheme shall be launched by AMC unless it is approved by the Trustees and a copy of the offer document is filed with SEBI. What should be the contents of offer document is also specified. There is a provision for listing of units of a Scheme of a Mutual Fund on a recognized stock exchange, as provided in Regulation 31-B. 174. Regulations 39 to 41 which are most material for deciding the questions involved in this group of writ petitions provide for winding up of a Scheme. We are elaborately dealing with the same separately. 175. Chapter VI under the heading 'Investments Objectives and Valuation Policies' provides for computation of Net Asset Value (for short 'NAV') in accordance with the Regulation 48. This chapter also provides for the manner in which investments should be made by a Mut....
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....are being maintained by the Mutual Fund, the Trustees and asset management company in the manner specified in these regulations; (b) to ascertain whether the provisions of the Act and these regulations are being complied with by the Mutual Fund, the Trustees and asset management company; (c) to ascertain whether the systems, procedures and safeguards followed by the Mutual Fund are adequate; (d) to ascertain whether the provisions of the Act or any rules or regulations made thereunder have been violated; (e) to investigate into the complaints received from the investors or any other person on any matter having a bearing on the activities of the Mutual Funds, Trustees and asset management company; (f) to suo motu ensure that the affairs of the Mutual Fund, Trustees or asset management company are being conducted in a manner which is in the interest of the investors or the securities market." (underlines supplied) Under Regulation 66, SEBI has power to appoint an Auditor to inspect and investigate into books of accounts and affairs of AMC and the Trustees. The Auditors, in view of proviso to Regulation 66, can act as inspecting....
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....riteria for becoming the sponsor is laid down in chapter II with which we are not concerned. In understanding the relationship amongst the three players i.e., the sponsor, AMC and Trustees, Regulation 7B is relevant which reads thus: "7B. (1) No sponsor of a Mutual Fund, its associate or group company including the asset management company of the fund, through the Schemes of the Mutual Fund or otherwise, individually or collectively, directly or indirectly, have- (a) 10% or more of the share-holding or voting rights in the asset management company or the trustee company of any other Mutual Fund; or (b) Representation on the board of the asset management company or the trustee company of any other Mutual Fund. (2) Any shareholder holding 10% or more of the share-holding or voting rights in the asset management company or the trustee company of a Mutual Fund, shall not have directly or indirectly,- a) 10% or more of the share-holding or voting rights in the asset management company or the trustee company of any other Mutual Fund; or b) Representation on the board of the asset management company or the trustee company of any other ....
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.... 181. As regards the obligations of the Trustees to the beneficiaries, there are important mandatory clauses required to be incorporated in the trust deed. As far as the duties and responsibilities of the Trustees are concerned, clauses (8) to (10) of the third schedule are relevant which read thus: "8. The Trust Deed shall provide for the duty of the trustee to take reasonable care to ensure that the funds under the Schemes floated by and managed by the asset management company are in accordance with the Trust Deed and Regulations. 9. The Trust Deed must provide for the power of the Trustees to dismiss the asset management company under the specific events only with the approval of Board in accordance with the Regulations. 10. The Trust Deed shall provide that the Trustees shall appoint a custodian and shall be responsible for the supervision of its activities in relation to the Mutual Fund and shall enter into a custodian Agreement with the custodian for this purpose." The above clauses must be incorporated in a Trust Deed in view of Regulation 15 which reads thus: "15. Contents of trust deed.--(1) The trust deed shall contain such clauses....
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.... Schemes for the Mutual Fund after approval by the Trustees and Board, and manage the funds mobilised under various Schemes, in accordance with the provisions of the Trust Deed and Regulations. The Trustees shall enter into an Investment Management Agreement with the asset management company for this purpose, and shall enclose the same with the Trust Deed." (Underlines supplied) 184. Thus, AMC is to be appointed by the Trustees after seeking approval of SEBI. AMC so appointed is empowered to launch Schemes of a Mutual Fund after approval of SEBI and manage the funds mobilized under various Schemes in accordance with the provisions of the trust deed and the Mutual Funds Regulations. It is the duty of AMC to invest the funds collected under the Schemes. 185. Now we come to the rights and obligations of the Trustees as laid down in Regulation 18. The first and foremost obligation is to enter into an investment management agreement containing the clauses which are provided in the fourth schedule. As laid down in clause (4) of the Regulation 18, the duty of the Trustees is that they should ensure before the launch of any Scheme that AMC complies with the various requireme....
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.... redeem the units. (d) [* * *] [(15A) The Trustees shall ensure that no change in the fundamental attributes of any Scheme or the trust or fees and expenses payable or any other change which would modify the Scheme and affects the interest of unit-holders, shall be carried out unless,-- (i) a written communication about the proposed change is sent to each unit holder and an advertisement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Office of the Mutual Fund is situated; and (ii) the unit-holders are given an option to exit at the prevailing Net Asset Value without any exit load.] (underlines supplied) 186. We are considering clause (15) of Regulation 18 in the subsequent part of the judgment, when we consider the provisions of Regulations 39 to 42. Clause (18) of Regulation 18 provides that the Trustees shall quarterly review the net worth of AMC. Thereafter, there are other clauses regarding Due Diligence and Specific Due Diligence, as contained in clause (25). As a part of specific due diligence, it is provided that it is the duty o....
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....t in the best interest of investors. There are provisions regarding listing the 'close ended Scheme' and re purchase of 'close ended Scheme'. In case of open ended Scheme, the unit-holders can apply for redemption at any time. 190. Thus, to summarize, a Mutual Fund is registered at the instance of the sponsor. The sponsor is required to execute a trust deed in favour of the Trustees. It can be a Board of Trustee or a Trustee company. The appointment of Trustees is to be made with the prior approval of SEBI. The Trustees have to appoint AMC by entering into investment management agreement. Perusal of the fourth schedule which describes the contents of the investment management agreement shows that it is the responsibility of AMC to float the Schemes for the Mutual Fund with the approval of the Trustee. It is the responsibility of AMC to manage the funds mobilized under various Schemes which shall be invested by AMC in accordance with the provisions of the Trust Deed and the Mutual Funds Regulations. There is also a power vesting in the Trustees to dismiss AMC with the prior approval of SEBI. Before doing so, AMC must be asked to submit a report, as may be required....
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....ny other Scheme or activities of AMC [Regulation 18 (8)]; (iii) To ensure that all the activities of AMC are conducted in accordance with the provisions of the Mutual Funds Regulations [Regulation 18 (9)]; (iv) To take remedial steps and to inform SEBI about the violations of the Mutual Funds Regulations committed by AMC [Regulation 18 (10)]; (v) The Trustees shall be accountable for and be the custodian of the funds and property of the respective Schemes and shall hold the same in trust for the benefit of the unit-holders in accordance with the Mutual Funds Regulations and the provisions of the Trust Deed [Regulation 18 (12)]; (vi) Obligation to take steps to ensure that the transactions of the Mutual Fund are in accordance with the provisions of the trust deed [Regulation 18 (13)]; (vii) The Trustees shall be under an obligation to obtain consent of the unit-holders when the majority of the Trustees decide to wind up or prematurely redeem the units [Regulation 18 (15) (c)]; (viii) Obligation not to effect change in the fundamental attributes of any Scheme or any other change which would modify the Scheme and which affects the ....
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....asis of calculating the repurchase price and NAV of various Schemes of the fund to the investors at such intervals, as may be specified by the Trustees and SEBI [clause (viii) of fourth schedule]; v) To furnish information to the Trustees concerning the operations of various Schemes of the Mutual Fund managed by it at such intervals and in such a manner, as may be required by the Trustees [clause (ix) of fourth schedule]; vi) To submit quarterly reports on functioning of the Schemes to the Trustees [clause (x) of fourth schedule]; vii) To take all reasonable steps and exercise due diligence to ensure that investment of funds pertaining to any Scheme is not contrary to the provisions of the Mutual Funds Regulations and the Trust Deed [clause (1) of Regulation 25]; viii) To exercise due diligence and care in all its investments decisions as would be exercised by other person engaged in the same business [clause (2) of Regulation 25]; ix) To abide by the provisions of the Code of Conduct, as specified in fifth schedule; x) To report and disclose all the transactions in debt and money market securities including inter Scheme transfe....
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....ct 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. 41. Procedure and manner of winding up.-- (1) The trustee shall call a meeting of the unit-holders to approve by simple majority of the unit-holders 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 unit-holders 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 unit-holders 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 unit-holders in proportion to their respective interest in the assets of the Scheme as on the date when the decision for winding ....
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....a newspaper published in the language of region where the Head Office of the Mutual Fund is situated; and (ii) the unit-holders are given an option to exit at the prevailing Net Asset Value without any exit load." (Underlines supplied) 196. The argument of the petitioners is that the consent, as contemplated by sub-clause (c) of clause (15) of Regulation 18 is mandatory and it is a condition precedent for winding up of a Scheme pursuant to sub-clause (a) of clause (2) of Regulation 39. 197. On the other hand, the contention of the respondents is that Regulations 39 to 42 which are a part of Chapter-V of the Mutual Funds Regulations constitute a complete code for winding up of a Scheme and, therefore, what is provided in clauses (15), and (15A) of Regulation 18 which form a part of Chapter-III of the Mutual Funds Regulations cannot be imported into Regulation 39. It is contended that if the consent of the unit-holders as contemplated by sub-clause (c) of clause (15) of Regulation 18 is made applicable to winding up of a Scheme pursuant to sub-clause (a) of clause (2) of Regulation 39, sub-clause (b) of clause (2) of Regulation 39 will become redundant, inasmu....
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.... It was submitted that there was no difference between the concept of 'consent' and 'approval' and in fact, it is one and the same. 198. There is a serious doubt whether the aforesaid arguments are open to FTMF, in view of the Statement of Additional Information published by it. We find that the fact that the consent of unit-holders is required for winding up of a Scheme pursuant to sub-clause (a) of clause (2) of Regulation 39 is accepted by FTMF in the Statement of Additional Information published by it. But, still we will have to do the exercise of interpreting relevant Regulations. Now the question is in what manner sub-clause (c) of clause (15) of Regulation 18 can be interpreted. On the approach of the Court, we will be guided by the law laid down by the Apex Court in the case of Ajay Agarwal (supra). That was a case where the issue was of the interpretation of Section 11B of the SEBI Act, in the context of invocation of the said provision by the Chairman of SEBI for restraining the respondents before the Apex Court from associating with any corporate body in accessing the securities market and prohibiting/restraining them from buying and selling in the ....
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....s mentioned therein need not be performed. An obligation is a legal duty to do or not to do any act. The Trustees have no choice but to discharge their obligations. Moreover, the Trustees have to act in fiduciary capacity qua unit-holders. Regulation 18 does not provide for any exceptions. Therefore, strict interpretation of the clauses in Regulation 18 is called for. Mutual Funds Regulations, being framed under SEBI Act, is a piece of subordinate/delegated Social Welfare Legislation as SEBI Act, as held by the Apex Court, is itself a Social Welfare Legislation. There are as many as twenty seven clauses in Regulation 18. Clause (15) of Regulation 18 provides that the Trustees shall obtain the consent of the unit-holders in three contingencies which are enlisted in sub-clauses (a), (b) and (c) thereof. Sub-clause (a) is applicable whenever the Board requires the Trustees to do so in the interest of the unit-holders. The Board is defined in clause (a) of Section 2 of the SEBI Act to mean SEBI. Thus, for doing a particular act, if SEBI wants the Trustees to take consent of the unit-holders in the interest of the unit-holders, it is the obligation of the Trustees to obtain their consen....
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....ority of the Board of Directors of the Trustees. As stated earlier, the Mutual Funds Regulations do not provide for winding up of any of the entities, save and except a Scheme. Hence, clause (c) undoubtedly refers to winding up of a Scheme. 202. Whenever the Trustees exercise powers which are conferred on them or whenever the Trustees take actions which are permissible to be taken under the Mutual Funds Regulations, they remain bound by their obligations laid down under Regulation 18. There are no exceptions carved out to the obligations contained in Regulation 18. There is no specific provision in the Mutual Funds Regulations which overrides the obligations of the Trustees as provided in Regulation 18. The reason appears to be that it is the obligation of the Trustees to take in their control the property of Schemes of a Mutual Fund and hold it in trust and for the benefit of the unit-holders. They always act in fiduciary capacity. Such a clause is required to be incorporated in the trust deed which is required to be executed as per Regulation 14. The said mandatory clause is clause (3) in third schedule. 203. Now, we come to sub-clause (a) of clause (2) of Regulation 39 whi....
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....a stage when the majority of the Trustees decide to wind up a Scheme or prematurely redeem the units. This consent is to the decision to wind up a Scheme. It has nothing to do with the approval granted by the unit-holders under Regulation 41 (1) for authorizing either the Trustees or any other person to take steps for winding up of the Scheme. The steps for winding up of a Scheme are provided in clause (2) of Regulation 41. The first step is to dispose of the assets of the Scheme in the best interest of the unit-holders. The second step is to apply the sale proceeds towards discharge of liabilities as are due and payable under the Scheme. The third step is to set apart the amount of the expenditure likely to be required for liquidation. The fourth step is to distribute the balance to the unit-holders in proportion to their respective interest in the assets of the Scheme as on the date of the decision of winding up. Even assuming that the word 'approval' and 'consent' convey the same meaning, the approval contemplated by clause (1) of Regulation 41 is completely different from the 'consent' contemplated by sub-clause (c) of clause (15) of Regulation 18. Thus,....
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...."purposeless piece" of legislation and that the provision had been enacted without any purpose and the entire exercise to enact such a provision was "most unwarranted besides being uncharitable". (emphasis added) Therefore, sub-clause (c) of clause (15) of Regulation 18 has to be interpreted in such manner that the 'consent' contemplated therein does not become ineffective or purposeless. It cannot be allowed to become redundant. There is another decision on the subject which is in the case of Union of India vs. Brigadier P.S. Gill (2012) 4 SCC 463, in paragraph 17, the Apex Court held thus: "17. Each word used in the enactment must be allowed to play its role howsoever significant or insignificant the same may be in achieving the legislative intent and promoting legislative object. Although it is unnecessary to refer to any decisions on the subject, we may briefly recount some of the pronouncements of this Court in which the expression "subject to" has been interpreted." (emphasis added) 208. Thus, it is the duty of this Court to assign some significant meaning to the word 'consent' contemplated by sub-clause (c) of clause (15) of R....
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.... continues to be majority. Majority cannot be said only confining to more than half. Majority of three-fourths of the total number, two-thirds of the total number would all come within the sphere of the word "majority". A person is 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." (emphasis added) 210. 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 major....
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....n in the additional information published by FTMF itself, there is a specific clause that the Trustees shall obtain consent of the unit-holders of the Scheme, if a majority of the directors of the Trustee company decide to wind up a Scheme. Thus, even FTMF clearly understood and accepted that if majority of directors of the Trustee company decide to wind up a Scheme, the consent of the unit-holders of such Scheme is mandatory. 212. Therefore, there is no merit in the argument canvassed on behalf of the Trustee company and AMC that the consent referred in sub-clause (c) of clause (15) of Regulation 18 cannot be read into sub-clause (a) of clause (2) of Regulation 39. The question of reading it consent into sub-clause (a) of Clause (2) of Regulation 39 is not material. Sub-clause (c) of Clause (15) of Regulation 18 constitutes the obligation of the Trustees. The argument canvassed that the consent referred in sub-clause (c) is an approval as referred in clause (1) of Regulation 41 also deserves to be rejected. Thus, we are of the considered view that after majority of the directors of the Trustee company decide to wind up a Scheme pursuant to sub-clause (a) of clause (2) of Regula....
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....the obligation of the Trustees, the argument that not giving freedom to the Trustees to wind up a Scheme will be disastrous, will not stand to reason. In fact, the provision for consent ensures that the Trustees do not wind up any Scheme as per their whims and fancies. This provision is made consistent with the object of protecting interest of the unit-holders. If such a provision of consent is not provided, the sub-clause (a) will attract vice of arbitrariness. The Court cannot allow the Trustees to commit breach of their own obligations contemplated under Regulation 18 of the Mutual Funds Regulations solely on the ground that the compliance with the obligations will be disastrous. The Trustees and AMC must work within the framework of the Regulations. The Trustees have to act in fiduciary capacity. They cannot say that they will not perform a particular obligation set out in Regulation 18 on the pretext that the consequences of compliance will be disastrous. It is argued that if the unit-holders by a simple majority do not consent to the decision of the winding up, AMC will have to make distress sale of investments resulting into substantial reduction of NAV and the same will cau....
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....e that sub-clause (d) was deleted by the SEBI (Mutual Funds) (Second Amendment) Regulations, 2000 with effect from 22nd May 2000. By the same second Amendment Regulations, with effect from the same date, clause 15A of Regulation 18 was incorporated, which reads thus: "(15A) The Trustees shall ensure that no change in the fundamental attributes of any Scheme or the trust or fees and expenses payable or any other change which would modify the Scheme and affects the interest of unit-holders, shall be carried out unless,-- (i) a written communication about the proposed change is sent to each unit holder and an advertisement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Office of the Mutual Fund is situated; and (ii) the unit-holders are given an option to exit at the prevailing Net Asset Value without any exit load." 217. Sub-clause (d) of clause (15) before its deletion was applicable only in case of change in the fundamental attributes of a Scheme or the trust or fees and expenses payable or any other change which would modify the Scheme or affect the int....
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....butes. The act of change of fundamental attributes is completely different from the action of winding up of a Scheme inasmuch as, once the winding up of a Scheme in accordance with Regulation 39 triggers in, the redemption comes to an end. Therefore, the argument that winding up of an 'open ended Scheme' cannot be made unless clause (15A) of Regulation 18 is complied with is completely devoid of any merit and deserves to be rejected. THE MEANING OF THE WORDS "AFTER REPAYING AMOUNT DUE TO UNIT-HOLDERS" 220. There are other issues concerning the provisions regarding winding up of the Schemes. One of the arguments canvassed was that before winding up takes place, repayment of the amount due to the unit-holders has to be made. For that purpose, reliance was placed on the phraseology used in clause (2) of Regulation 39 to the effect that 'a Scheme of a Mutual Fund may be wound up, after repaying the amount due to the unit-holders ...... '. clauses (1) and (2) of Regulation 39 lay down the modes or the contingencies in which a Scheme can be wound up. Clause (1) is applicable only to a 'close-ended Scheme'. We have already referred to three contingencies/mode....
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....NCE WITH CLAUSE (3) OF REGULATION 39 (Issue No (vi): 221. It must be noted here that though the case of AMC and Trustees is that compliance with clause (3) of Regulation 39 was made on 24th April 2020, there is no material placed on record to show that a notice disclosing the circumstances leading to the winding up of the Schemes was published in a vernacular newspaper circulating at the place where the Mutual Fund is formed. The stand specifically taken during the course of submissions made by Shri Arvind Datar, the learned Senior Counsel appearing for SEBI was that it is for AMC and Trustees to show whether compliance of sub-clause (b) of clause (3) of Regulation 39 was made. However, no documents are placed on record by the Trustees to show such a complete compliance was made by publication of notice in vernacular newspaper having circulation at the place where the Mutual Fund is formed. Regulation 40 triggers in only from the time at which compliance with sub-clause (b) of clause (3) of Regulation 39 is made. ISSUE No (vii) BORROWINGS: 222. Though, in the facts of the case, in the absence of consent contemplated by sub-clause (c) of clause (15) of Regulation 18, there ....
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.... 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." (emphasis added) 224. Regulation 40 triggers in from the date of publication of notice as provided under sub-clause (b) of clause (3) of Regulation 39. The contention of AMC and Trustees is that the borrowing made by them after the stage of clause (3) of Regulation 39 will not amount to carrying on business activities within the meaning of clause (a) of Regulation 40. The submission of AMC and Trustees is that business activities contemplated by clause (a) of Regulation 40 will not include the borrowings. In this regard, reliance was placed on the decision in the case of State of Gujarat vs. Raipur Manufacturing Co. Ltd. (supra). This was a case wherein the Apex Court dealt with the interpretation of expression 'business' within the meaning of the Bombay Sales Tax Act, 1953. In paragraph 4, the Apex Court specifically observed that....
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....required to be invested by AMC strictly in accordance with Regulation 43. The investments are to be made subject to investment restrictions specified in the seventh schedule. As far as borrowings are concerned, clause (2) of Regulation 44 provides that the Mutual Fund shall not borrow except to meet temporary liquidity needs of the Mutual Fund for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit-holders. The proviso to clause (2) of Regulation 44 clearly provides that a Mutual Fund shall not borrow more than twenty percent (20%) of the net assets of the Scheme and the duration of such borrowing shall not exceed a period of six months. Thus, in short, the business of a Mutual Fund consists of (i) launching Schemes, (ii) receiving the investments from the unit-holders/investors, (iii) investing the money so collected from the unit-holders/investors in accordance with Regulation 43 and other relevant Regulations and (iv) paying the returns in various modes to the unit-holders/investors. The returns can be in the form of repurchase of the units, redemption of units, payment of interest or dividend to the unit-holders, as the case may be, dep....
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....reation or cancellation of units and issue or redemption of the units of the said Scheme must also cease. The reasons is, as required by sub-clause (a) of clause (2) of Regulation 41, all the assets of the Scheme under winding up are required to be disposed of in the best interest of unit-holders and thereafter, as per sub-clause (b) of clause (2) of Regulation 41, the proceeds of the sale are required to be applied firstly towards discharge of liabilities of the Scheme. Secondly, the expenses in connection with the winding up are required to be set apart and thirdly, the balance amount remaining after clearing the liabilities has to be distributed to the unit-holders in proportion to their respective interest in the assets of the Scheme. The object of Regulation 40 of the Mutual Funds Regulation is to ensure that the moment compliance is made with clause (3) of Regulation 39, the assets available at that point of time should be made available for sale. The assets cannot be allowed to be depleted by creating more liability. That is the reason why the redemption must immediately cease. Therefore, it must be held that the borrowings made by AMC, in terms of clause (2) of Regulation 4....
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....various decisions have been relied on by the rival parties. The first decision is in the case of Rohtas Industries (supra) wherein, the issue before the Apex Court was whether writ jurisdiction under Article 226 of the Constitution of India can be exercised for interfering with an Award passed by an Arbitrator under Section 10A of Industrial Disputes Act, 1947. The Apex Court held that interference can be made with the Award passed under Section 10A, in exercise of the powers conferred under Article 226 of the Constitution of India. 231. In the case of Praga Tools Corporation vs. C.A. Imanual and others (1969) 1 SCC 585, the issue before the Apex Court was whether in a writ petition filed under Article 226 of the Constitution of India, the Court can go into the question of validity of an agreement entered into between the employees and a company. In paragraphs 6 and 7, the Apex Court held thus: "6. In our view the High Court was correct in holding that the writ petition filed under Article 226 claiming against the company mandamus or an order in the nature of mandamus was misconceived and not maintainable. The writ obviously was claimed against the company and not again....
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....ty is constituted or governed and also to companies or corporations to carry out duties placed on them by the statutes authorising their undertakings. A mandamus would also lie against a company constituted by a statute for the purposes of fulfilling public responsibilities. [Cf. Halsbury's Laws of England, (3rd ed.), Vol. II, p. 52 and onwards]. 7. The company being a non-statutory body and one incorporated under the Companies Act there was neither a statutory nor a public duty imposed on it by a statute in respect of which enforcement could be sought by means of a mandamus, nor was there in its workmen any corresponding legal right for enforcement of any such statutory or public duty. The High Court, therefore, was right in holding that no writ petition for a mandamus or an order in the nature of mandamus could lie against the company." (emphasis supplied) 232. Thus, it was held that a mandamus can be issued to an official of a society to compel him to carry out the terms of the statute under or by which the society is constituted or governed. It was also held that a mandamus would also lie against a company or corporation constituted by a statute for the....
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....e exercise of those powers are free from the zone of judicial review and that there would be no limits to the exercise of such powers, but in normal circumstances, judicial review principles cannot be used to enforce contractual obligations. When that contractual power is being used for public purpose, it is certainly amenable to judicial review. The power must be used for lawful purposes and not unreasonably. 31. The decision of the employer in these two cases to terminate the services of their employees cannot be said to have any element of public policy. Their cases were purely governed by the contract of employment entered into between the employees and the employer. It is not appropriate to construe those contracts as opposed to the principles of public policy and thus void and illegal under Section 23 of the Contract Act. In contractual matters even in respect of public bodies, the principles of judicial review have got limited application. This was expressly stated by this Court in State of U.P. v. Bridge & Roof Co. (India) Ltd. [(1996) 6 SCC 22] and also in Kerala SEB v. Kurien E. Kalathil [ (2000) 6 SCC 293]. In the latter case, this Court reiterated that the inte....
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.... on the High Courts to issue writs for enforcement of the fundamental rights as well as non-fundamental rights. The words 'any person or authority' used in Article 226 are, therefore, not to be confined only to statutory authorities and instrumentalities of the State. They may cover any other person or body performing public duty. The form of the body concerned is not very much relevant. What is relevant is the nature of the duty imposed on the body. The duty must be judged in the light of positive obligation owed by the person or authority to the affected party. No matter by what means the duty is imposed, if a positive obligation exists mandamus cannot be denied. 22. Here again, we may point out that mandamus cannot be denied on the ground that the duty to be enforced is not imposed by the Statute. Commenting on the development of this law, Professor de Smith states: 'To be enforceable by mandamus a public duty does not necessarily have to be one imposed by statute. It may be sufficient for the duty to have been imposed by charter, common law, custom or even contract. We share this view. The judicial control over the fast expanding maze of bodies affecting th....
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....ays a just remedy for the violation of a right of a citizen. Though the remedy under Article 32 is not available, an aggrieved party can always seek a remedy under the ordinary course of law or by way of a writ petition under Article 226 of the Constitution, which is much wider than Article 32. 32. This Court in the case of Andi Mukta Sadguru Shree Muktajee Vandas Swami Suvarna Jayanti Mahotsav Smarak Trust v. V.R. Rudani [(1989) 2 SCC 691] has held: (SCC pp. 692-93) "Article 226 confers wide powers on the High Courts to issue writs in the nature of prerogative writs. This is a striking departure from the English law. Under Article 226, writs can be issued to 'any person or authority'. The term 'authority' used in the context, must receive a liberal meaning unlike the term in Article 12 which is relevant only for the purpose of enforcement of fundamental rights under Article 32. Article 226 confers power on the High Courts to issue writs for enforcement of the fundamental rights as well as non-fundamental rights. The words 'any person or authority' used in Article 226 are, therefore, not to be confined only to statutory authorities and inst....
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.... liability to discharge any function under any statute, to compel it to perform such a statutory function." (emphasis added) "26. A company registered under the Companies Act for the purposes of carrying on any trade or business is a private enterprise to earn livelihood and to make profits out of such activities. Banking is also a kind of profession and a commercial activity, the primary motive behind it can well be said to earn returns and profits. Since time immemorial, such activities have been carried on by individuals generally. It is a private affair of the company though the case of nationalized banks stands on a different footing. There may well be companies, in which majority of the share capital may be contributed out of the State funds and in that view of the matter there may be more participation or dominant participation of the State in managing the affairs of the company. But in the present case we are concerned with a banking company which has its own resources to raise its funds without any contribution or shareholding by the State. It has its own Board of Directors elected by its shareholders. It works like any other private company in the bankin....
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....) Act, 1951 that their production, which is important for the economy, may not go down, yet the business activity is carried on by such companies or corporations which only remains a private activity of the entrepreneurs/companies." 27. Such private companies would normally not be amenable to the writ jurisdiction under Article 226 of the Constitution. But in certain circumstances a writ may issue to such private bodies or persons as there may be statutes which need to be complied with by all concerned including the private companies. For example, there are certain legislations like the Industrial Disputes Act, the Minimum Wages Act, the Factories Act or for maintaining proper environment, say the Air (Prevention and Control of Pollution) Act, 1981 or the Water (Prevention and Control of Pollution) Act, 1974 etc. or statutes of the like nature which fasten certain duties and responsibilities statutorily upon such private bodies which they are bound to comply with. If they violate such a statutory provision a writ would certainly be issued for compliance with those provisions. For instance, if a private employer dispenses with the service of its employee in violation of the....
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....n. At the same time, there are private bodies also which may be discharging public functions. It is difficult to draw a line between public functions and private functions when they are being discharged by a purely private authority. A body is performing a "public function" when it seeks to achieve some collective benefit for the public or a section of the public and is accepted by the public or that section of the public as having authority to do so. Bodies therefore exercise public functions when they intervene or participate in social or economic affairs in the public interest. In a book on Judicial Review of Administrative Action (5th Edn.) by de Smith, Woolf & Jowell in Chapter 3, para 0.24, it is stated thus: "A body is performing a 'public function' when it seeks to achieve some collective benefit for the public or a section of the public and is accepted by the public or that section of the public as having authority to do so. Bodies therefore exercise public functions when they intervene or participate in social or economic affairs in the public interest. This may happen in a wide variety of ways. For instance, a body is performing a public function when it....
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....lated to functions which are performed by the State in its sovereign capacity. There is nothing on record to indicate that the hospital performs functions which are akin to those solely performed by State authorities. Medical services are provided by private as well as State entities. The character of the organisation as a public authority is dependent on the circumstances of the case. In setting up the hospital, the Mission cannot be construed as having assumed a public function. The hospital has no monopoly status conferred or mandated by law. That it was the first in the State to provide service of a particular dispensation does not make it an "authority" within the meaning of Article 226. State Governments provide concessional terms to a variety of organisations in order to attract them to set up establishments within the territorial jurisdiction of the State. The State may encourage them as an adjunct of its social policy or the imperatives of economic development. The mere fact that land had been provided on a concessional basis to the hospital would not by itself result in the conclusion that the hospital performs a public function. In the present case, the absence of State ....
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....ise power of judicial review of the action of such a body. 241. There cannot be any difficulty in holding that a writ of mandamus can be issued against SEBI, as it can be said to be an agency and instrumentality of the State. The question is whether a writ of mandamus under Article 226 can be issued against the Trustees. 242. It was argued that the relationship between the unit-holders on the one hand and AMC and the Trustees on the other hand is purely a contractual relationship which is regulated by the Mutual Funds Regulations and, therefore, a writ cannot be issued in contractual matters. However, the above submission cannot be accepted inasmuch as, the Mutual Funds Regulations are framed in exercise of the powers under statutory provisions of Section 30 of the SEBI Act and a Mutual Fund is a creation of the said statutory Regulations and is governed by the said statutory Regulations. Therefore, the Trustees, as defined in the Mutual Funds Regulations are also creation of statutory Regulations. Their activities are completely regulated by the said Regulations. 243. We have already quoted the mandatory obligations on the part of the Trustees as well as AMC under the Mut....
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....ischarge a public function qua large number of investors/unit-holders. The Trustees seek to achieve some collective benefits for a section of the general public namely, the unit-holders. Thus, it can be safely concluded that that the Trustees, while exercising powers under the Mutual Funds Regulations, discharge a public duty and perform public function. Any violation of public duty by the Trustees and corresponding denial of rights of unit-holders will entitle unit-holders to invoke Article 226 of the Constitution of India for enforcing the public duty. 244. Even otherwise, if the Trustees commit violation of statutory Regulations, this Court, in exercise of its extraordinary jurisdiction under Article 226 of the Constitution of India is certainly empowered to issue a writ of mandamus for enforcement of statutory Regulations. 245. What is challenged in these writ petitions is the decision of the Trustees under sub-clause (a) of clause (2) of Regulation 39 of the Mutual Funds Regulations. If the said decision is shown to be taken in violation of the express provisions of the Mutual Funds Regulations or by committing breach thereof, a writ of mandamus can be always issued to t....
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.... pleadings in the writ petition and the same was made for the first time during the course of oral arguments made in Writ Petition No. 8545/2020 and 8644/2020. Surprisingly, in paragraph five of the said affidavit, a specific contention was raised contending that the minutes of the meetings of the Board of Directors of the Trustees held on 20th April 2020 and 23rd April 2020 are confidential in nature which contain confidential/sensitive information. In fact, in the copy of the minutes of the meeting held on 23rd April 2020 annexed to the said affidavit, two portions have been redacted. The above contention of the Trustees and AMC cannot be accepted for the reasons which we are recording. As noted earlier, the Trustees have to act in a fiduciary capacity and the beneficiaries are the unit-holders. Under clause (25) of Regulation 18, it is laid down that the Trustees shall exercise due diligence in the matters set out therein. There are two categories of due diligence. One is 'Specific Due Diligence' and another is 'General Due Diligence'. Under the heading 'Specific Due Diligence', in sub-clause (v), it is provided that the Trustees shall maintain records of....
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.... furnish the information to the unit-holders, as may be specified by SEBI. This is over and above clause (2) above. Unfortunately, SEBI did not exercise its statutory power. However, the obligation to maintain the minutes of the meetings and obligation to disseminate information to the unit-holders will naturally include the obligation to provide copies of the minutes of the meeting recording a decision of winding up of a Scheme to the affected unit-holders. As far as the unit-holders are concerned, no confidentiality can be attached to such a resolution inasmuch as, the requirement of third Schedule is that the Trust Deed must provide that the unit-holders will have beneficial interest in the Trust property to the extent of individual holding in respective Schemes. If the unit-holders have beneficial interest in the Trust property which includes the assets of the Scheme, surely, the unit-holders are also entitled to have a look at the decision taken by the Trustees to wind up the Scheme. Therefore, the said contention raised in paragraph five of the affidavit dated 17th September 2020 regarding confidentiality attached to the minutes deserves to be rejected. And, therefore, there ....
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.... the resolution recorded in the minutes that based on a review of the material placed before it and recommendations of the Board of AMC, winding up of the Schemes is the only viable mode of preserving value for investors and an event has occurred, which requires the Scheme to be wound up. Ultimately, it is recorded that "after careful considerations, deliberations and re-evaluations of the options placed in the previous meeting and in this meeting of the Board of Directors and the informal discussions with SEBI, the Board of Directors approved the winding up of the Schemes by passing the following resolution ..... .. ". The resolution provides that the six Schemes named therein be wound up pursuant to Regulation 39 (2) (a) as an event has occurred which require the said Schemes to be wound up. 253. Prior to the meeting of the Board of Directors of the Trustee company held on 23rd April 2020, there was a meeting of the Board of Directors of the Trustees on 20th April 2020. Mr. Sanjay Sapre, the President of AMC was invited to attend the meeting apart from Senior Corporate Counsel-Legal of AMC. In that meeting, there was in depth discussion based on the statements made by Mr. Sanj....
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....iquidity issue. It is noted that on the reopening after ten days period of redemption restrictions, there will be significant increase in the redemptions which will exceed the capacity of the said Schemes to generate liquidity through sale of assets. It is, therefore, stated that it was inadvisable to adopt the said approach. It is recorded that if the Schemes continue to operate for another day of redemptions, there would be further loss of investor value. There was a further discussion recorded about the consequences if HSBC does not provide Rs. 385 crores from the line of credit. Ultimately, it is mentioned in the minutes that the Board noted that based on the review of the materials placed before it and recommendations of the Board of AMC, winding up of the Schemes is the only viable mode of preserving the value for investors/unit-holders and an event has occurred which requires the Scheme to be wound up. In the Resolution, it is mentioned that this was a difficult, yet necessary decision, which has to be made to protect the interests of unit-holders. 255. There was some argument canvassed about the genuineness of these minutes on the ground that the affidavit along with whi....
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....between the Board of Directors of the Trustees and the President of AMC and other persons associated with AMC on the four options which have been noted in the minutes dated 20th April 2020. In the said meetings, certain queries were made by the Board of Directors of the Trustees to Mr. Sanjay Sapre, the President of AMC and other officers of AMC who were present in the meeting about the viable options. The effect of postponement of redemptions by ten days was also discussed. There is a reference to the liquidity crisis created on account of pandemic COVID-19. The minutes record the opinion of AMC that it will be very difficult to meet the significant increase in the demand for redemptions in case there is a postponement of redemptions for ten days. It has been recorded that due to large borrowings which will be required to be made for meeting the redemptions requests, the investor value and NAV of the units will drastically go down. The tenor of minutes of the meeting dated 23rd April 2020 clearly suggests that there was a detailed discussion with the President of AMC and other officers. The detailed discussion was on the functioning of the said Schemes and financial condition ther....
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.... Schemes in fiduciary capacity and as the unit-holders are the beneficiaries of the Trust, the decision under sub-clause (a) of clause (2) of Regulation 39 has to be taken in the best interests and for benefit of the unit-holders. The question raised is whether an event had indeed happened, compelling the Trustees to take a recourse to the provisions of Regulations 39 (2) (a) of the Mutual Funds Regulations. 259. An argument was canvassed by the petitioners that in the communication dated 14th April 2020 sent by AMC to SEBI, the view expressed was that postponement of redemption has to be adopted as a last resort. It was argued that how the situation drastically changed within few days is not brought on record. It is pointed out that nothing is placed on record to show that there was any drastic change in the situation between 14th and 20th April 2020. 260. On this aspect, we must remember that the lockdown on account of pandemic COVID 19 was imposed from 25th March 2020 which adversely affected the economy and it created enormous stress on economy. The situation in securities market became very volatile, not only in India but also in other countries including the developed c....
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....ng up of the said Schemes is a commercial decision. It cannot be said that the factors which are set out in the minutes of the meetings dated 20th April 2020 and 23rd April 2020 were irrelevant or extraneous. The commercial viability of the decision to wind up cannot be decided by a Writ Court. We have held that merely because of the presence of top brass of AMC in the meeting of the Board of Directors of the Trustees, the decision making process is not vitiated. We find nothing wrong with the decision making process. The Court cannot enter into an arena of the merits of the decision which is essentially a commercial decision. It should be best left to the experts in the field. The Board of Trustee company is not a quasi judicial authority. It is not expected to record detailed reasons. Moreover, some latitude has to be given to such decision making process based on commercial considerations and the prevailing condition of economy. Therefore, in exercise of writ jurisdiction under Article 226 of the Constitution of India, this Court cannot go into the merits of the decision of the Trustee Company to wind up the said Schemes. Therefore, we are unable to interfere with the ultimate d....
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....Judgment. Considering the specific object of the SEBI Act, as found in its preamble, it cannot be disputed that the Regulations of Mutual Funds and its development are the objects of the SEBI Act. On plain reading of sub-section (1) of Section 30, it is crystal clear that the Regulations can be framed for promoting development of Mutual Funds and for regulating the same for protecting the interest of the investors. The regulation of Mutual Funds will also include regulation of winding up of the Scheme of Mutual Funds. If the activity of winding up is not regulated, the Trustees, at their whims and fancies may wind up the Schemes prejudicing the interest of the unit-holders. Therefore, the Regulations which have been framed for regulating the action of winding up of the Schemes can be said to have been framed for carrying out the purposes of the SEBI Act. In absence of Regulations 39 to 42, the action of winding up of the Schemes will remain completely unregulated which will defeat the very object of enacting the SEBI Act. Therefore, it cannot be said that the Regulations 39 to 42 are ultra vires the provisions of the SEBI Act. It is not possible for this Court to accept the submiss....
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....ided. The vice of arbitrariness is not attracted by Regulation 39 (2) (a). 267. The prayer in the petition filed before Delhi High Court is to strike down Regulations 39 to 41. If the activity of winding up of the Scheme is not regulated by introducing the stringent provisions like Regulation 39, the Trustees will be in a position to arbitrarily wind up the Schemes of a Mutual Fund. In view of sub-clause (a), (b) and (c) of clause (2) of Regulation 39, winding up of a Scheme can take place in three contingencies. The first is with consent of majority of unit-holders on the happening of any event which in the opinion of the Trustees requires a Scheme to be wound up. The second contingency is of 75% of the unit-holders of a Scheme passing a resolution that a Scheme be wound up. The third contingency is if SEBI is of the view that winding up of a Scheme is in the interests of the unit-holders. There is no fourth option available for winding up of a Scheme except the above three options. Once winding up process triggers in by virtue of Regulation 39 (3), as per Regulation 40, the business activities of a Scheme under winding up become standstill. This provision ensures that neither ....
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....ion can be issued when SEBI, after making or causing to be made an enquiry, is satisfied that (a) it is necessary to issue directions in the interest of investors or orderly development of securities market; (b) to prevent the affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the interests of investors of securities market; or (c) to secure the proper management of any such intermediary or person. The first question is whether SEBI has power to interfere with the decision taken by the Trustees under Regulation 39 (2)(a). If SEBI is to test the correctness or validity of such decision of the Trustees, an adjudication is required. The Trustees and AMC will have to be heard in the adjudication process. Section 11B does not contemplate any such adjudication. If an entity to whom a direction under Section 11B has been issued commits any breach thereof or disobeys the same, it will attract penalty under Section 15HB. Before imposing penalty, adjudication as contemplated by Section 15-I is required to be made. There is no provision made in SEBI Act for issuing a notice of the proposed direction under Section 11B and hearing t....
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....ppearing for SEBI has stated that SEBI was not aware whether compliance of sub-clauses (a) and (b) clause (3) of Regulation 39 was made by the Trustees. It is an admitted position that this was perhaps the first case in the history where Regulation 39(2)(a) was invoked. Therefore, SEBI ought to have been cautious and ought to have played very active role. Even for SEBI, such a winding up was an extraordinary event. SEBI did not bother to even enquire about the compliance with clause (3) of Regulation 39 by the Trustees. SEBI did not bother to ascertain whether redemptions and borrowings ceased assuming that compliance of clause (3) of Regulation 39 was made. At the time of admission of Gujarat writ petition, SEBI specifically relied upon an order, by which, Forensic Audit was ordered. But, SEBI did not place on record a copy of an order appointing Forensic Auditor and a copy of such order was filed on record only when this Court questioned the learned Senior Counsel appearing for SEBI about non production of the order of appointment of the Forensic Auditor. The copy was produced on 2nd September 2020 though hearing commenced on 12th August, 2020. No material was placed on record to....
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..... The Auditor is also required to go into the issues raised in various complaints received by SEBI regarding said Schemes under winding up and to find out the lapses committed by AMC. It is stated in the affidavit that various documents were forwarded to the Forensic Auditors including the gist of complaints of the investors. It was further stated that after completion of Forensic Audit, a report dated 31st July, 2020 was submitted by the Auditors which was received by SEBI on 3rd August, 2020. It is further stated that supplementary findings recorded by the Forensic Auditors were received by SEBI on 21st, 24th and 25th of August 2020. It is stated that the report and findings of the Forensic Auditors have been sent to AMC and the Trustees calling for their response. It is stated that what is submitted is not the final report and that the final report will be submitted after considering the views that may be expressed by AMC and Trustees. By the same affidavit, SEBI prayed that a direction should not be issued to it to make the audit report public at this stage. 274. At this juncture, it is necessary to refer to Regulation 66 which reads thus: "66. Appointment of Audito....
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....eof. The procedure to be followed in inspection and investigation is also mentioned in Chapter-VIII. Under Regulation 64, the inspecting officer is under an obligation to submit a report on completion of the inspection or investigation. SEBI has power to direct the inspecting officer to file interim report. It is provided in Regulation 65 that SEBI or its Chairman, after considering the inspection or investigation report, is empowered to take further action including action under Chapter-V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 which includes cancellation of registration. The other action which can be taken is a penal action of imposing penalty as specified under Chapter VIA of the SEBI Act. We have already referred to the said provision including the provisions of Section 15HB. 277. As can be seen from the proviso to Regulation 66, the Auditor so appointed has the same powers of the inspecting officer under Regulation 61. Therefore, the appointment of Forensic Auditor for inspection and investigation is in terms of Regulation 61. The provisions of Regulations 62 and 63 are applicable to such investigations by the Auditors. After final r....
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....nfidential' in the interest of justice." (underline supplied) 2. Today, we have heard the submissions of Shri Arvind Datar, the learned Senior Counsel appearing for SEBI in support of what is pleaded in the aforesaid affidavit. Notwithstanding the statement made in paragraph 15 of the affidavit, he states that SEBI will produce before the Court in a sealed envelope, a copy of the Forensic Audit report submitted by M/s. Chokshi and Chokshi LLP as well as a copy of reply submitted by Asset Management Company (for short "AMC") and the Trustees. He, however, submits that since it is the contention of SEBI that the report is of confidential nature, copies of the report should not be allowed to be furnished to the parties to the petition and the report shall be kept on record in a sealed envelope. However, he states that SEBI has no objection if the Court peruses the report only for the limited purpose of considering the deciding the objections raised by SEBI. We have heard Shri Arvind Datar, the learned Senior Counsel on the plea raised in the affidavit dated 2nd September 2020. 3. At this stage, Shri Arvind Datar, the learned Senior Counsel also stated th....
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....appear before the Court. After opening both the sealed covers, notes were taken by one of us (Chief Justice) consisting of two sheets. Thereafter, both the covers were again resealed by the Registrar (Judicial) in open Court and took the same into his custody. The three Advocates who were physically present before the Court have countersigned on resealed covers containing the report of the Auditors and copies of the minutes. The notes made by the Court running into two pages were also kept in a sealed cover which was handed over by the Court Officer to the Personal Secretary to the Chief Justice. 280. We have already referred to Regulation 66. The Forensic Auditor appointed as per Regulation 66 for inspection and investigation has same the powers of the inspecting officers appointed under Regulation 61. Regulation 64 provides that inspecting officer shall, on completion of inspection or investigation submit a report to SEBI. Proviso to Regulation 64 shows that if it is directed to do so by SEBI, he may submit an interim report. Therefore, if SEBI wants the Auditor appointed under Regulation 66 to submit an interim report, SEBI will have to issue a direction to that effect. But, ....
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....the purposes of deciding the issues involved in these petitions. If this report is made public, it will adversely affect further investigation considering the fact that it will go viral on social and other media. A writ of mandamus has not been sought by any of the petitioners for production of the report of the Forensic Auditors. Therefore, the only question to be decided is whether the said document produced by SEBI is relevant for deciding the petitions on merits. As the said report is only a tentative report which can undergo modifications, this Court cannot rely upon the said report. Therefore, there is no question of issuing a direction to provide copies thereof to the parties to these writ petitions. 281. Had it been the final report as per Regulation 64 or a provisional/interim report as per the direction of the SEBI, the issue could have arisen whether a privilege can be claimed. Whether privilege can be claimed or not is the question which will require consideration, provided the final findings or a final report in accordance with Regulation 64 is submitted by the Auditors. Suffice it to say that as the said document is not relevant at all to decide the issue on merits....
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....EFFICACIOUS REMEDIES 285. One of the argument canvassed was that alternative efficacious remedies are available to the petitioners under the SEBI Act. An argument was canvassed that complaints have been filed by the petitioners with SEBI. It is urged that SEBI has power to impose penalty for violation of the Mutual Funds Regulations. Another argument was canvassed that a remedy of appeal is available before the Securities Appellate Tribunal. We find that an appeal is provided to the Securities Appellate Tribunal under Section 15-T. But there is no appeal provided therein against the decision of winding up. An appeal can lie only after an order is made by adjudicating officer in accordance with Section 15-I. As can be seen from Section 15-I, the power to adjudicate is only for the purposes of imposing penalty. Thus, there is no statutory remedy available to the investors to challenge the decision of the Trustees of winding up. There is no provision under the SEBI Act for adjudication of complaints of the investors, as a matter of right. In fact, the stand of SEBI is that it has no jurisdiction to go into the question of correctness of the decision of the Trustees of winding up. ....
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....violated the provisions of the SEBI Act or Mutual Funds Regulations, a Writ Court, in exercise of its jurisdiction under Article 226 of the Constitution of India, can always issue a writ of mandamus, requiring the Trustees to abide by the mandatory provisions of the SEBI Act or the Mutual Funds Regulations. Issue No. (iv) is answered accordingly; v) In the facts of the case, for the reasons which we have recorded earlier, no interference can be made with the decision of the Trustees dated 23rd April 2020 of winding up of the said Schemes. However, the decision can be implemented only after obtaining the consent of unit-holders as required by sub-clause (c) of clause 15 of Regulation 18. Issue No. (v) is answered accordingly; vi) Issue No. (vi) is answered against the Trustees; vii) On compliance being made with sub-clauses (a) and (b) of clause (3) of Regulation 39, Regulation 40 triggers in and therefore, AMC or Trustees have no right to continue the business activities of the Schemes which will include borrowings. Similarly, from the date of publication of the notice in accordance with sub-clause (b) clause (3) of Regulation 39, AMC is disentitled to ho....
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....g was conducted on 25 working days for total 61 hours. What is more important is that hearing went on very smoothly without any major glitch. It enabled the learned members of the Bar to appear from London, New Delhi, Chennai, Mumbai and Bengaluru. Only once an issue of connectivity of internet was faced for a brief period of ten minutes just before the submissions of learned Solicitor General of India were heard. During the course of hearing, decisions of various Courts and number of documents were forwarded by e-mail which were considered by this Court. All the parties will not agree about the correctness of the conclusions drawn on merits. But we are sure that all the parties will agree that notwithstanding the voluminous record, long length of arguments and involvement of complicated legal and factual issues, hearings can be effectively conducted by use of video conferencing facility. 289. While we part with the judgment, we must note that all the learned counsel appearing for the respective parties, at the time of conclusion of hearing, have complimented and appreciated service rendered by the Registrar (Judicial) Shri. K.S. Bharath Kumar and his team as well as Shri. B.M. ....