TaxTMI 
TaxTMI 
2020 (10) TMI 1228
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...., 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) Franklin India Ultra Short Bond Fund (Number of Segregated....
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....cation 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 addition, there are directions prayed for against the Securities and Exchange Board of India (for short, 'SEBI') established under the provisions of the Securities and Exchange Board of Indi....
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....VID-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 to the submissions made across the Bar, it will be necessary for us to briefly narrate the few factual aspects set out in the pleadings filed on record. The factual aspects are common in all these petiti....
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....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 AMC that its request for enhancement to 40% in case of Franklin India Short Term Income Fund and Franklin India Income Opportunities Fund was granted subject to conditions mentioned therein. In case of Franklin ....
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....g 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 was to declare Regulations 39, 40 and 41 of the Mutual Funds Regulations as ultra vires SEBI Act, 1992. A prayer was also made for quashing the impugned notices dated 23rd April 2020 and 28th May 2020. Another prayer wa....
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....ition 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 THE STATEMENT OF OBJECTIONS FILED BY SEBI, AMC AND TRUSTEES: 19. Now we are referring to the statement of objections/response/counter filed by the contesting respondents. 20. In W.P. No. 8545/2020, the 3rd respondent-SEBI has conte....
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....tress. 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 Audit/inspection with regard to the said Schemes under winding up. It is contended that vide letter dated 27th May, 2020, the Forensic Audit/inspection of the books of accounts and other records and documents of the FTMF, AMC and Trustees has a....
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....rovided 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 interfering in respect of the said matter. It is pointed out that SEBI has already taken action by appointing a Forensic Auditor. It is stated that both the companies are cooperating with the Auditor. 30. It is submitted that the petitioners have not exhauste....
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....ested 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 issuers in certain cases. The third source of redemption payment is the sale of investments in the portfolio of Non Convertible Debenture/Bonds (for short, 'NCDs') in the secondary market. It is submitted that the net result for the Schemes due to COVID-19 pan....
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....ficult 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 alternative would have been a disorderly liquidation by forced sale of sound assets in a hasty and disorganized manner at discounted valuations in adverse market conditions, which would have caused value losses to the entire body in particular, small and retail unit-holders. It is subm....
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....emes. 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 substantiate the challenge to constitutional validity of Regulations 39 to 41. It is submitted that the Trustees is not a public authority or agency or instrumentality of the State. It is urged that the petitions ought not to be entertained. 45. As far as two foreign entities are concerned, a co....
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....ereafter, 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 (a) of clause (2) of Regulation 39 needs to be read down as the consent provided in sub-clause (c) of clause (15) of Regulation 18 will have to read into it. He urged that both the provisions must be construed harmoniously and it must be held that the powers under sub-clause (a) cannot be exercised....
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.... 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 improving the liquidity. He urged that SEBI, being a statutory authority has not at all gone into the question of genuineness of the reasons put forth by the Trustees for winding up of the said Schemes. He submitted that SEBI, which is the protector of the unit-holders/investors has failed to discharge ....
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.... 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, the impugned Regulations provide for Trustees taking arbitrary action, which will be against the interests of the investors. He submitted that as per sub-clause (a) of clause (2) of Regulation 39, an unfettered power has been conferred on the Trustees without authorizing any statutory authority including SE....
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.... 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 Trustees' provides that it is the obligation and duty of the Trustees to obtain consent of the unit-holders of the Scheme, if majority of the Directors of the Trustee company decide to wind up of the Scheme. He pointed out that the offer document contains a clause consistent with the Regulations which provides ....
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....dule 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 Regulations permit suspension of redemptions for a maximum period of 10 working days in every 90 days. Therefore, a request was made to SEBI to remove the restriction on the period of suspension of redemption. He also pointed out that on 20th April, 2020, the Trustees submitted a proposal to SEBI for winding up of the said....
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....ht 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 wherein the large number of violations made by the Trustees and AMC were pointed out. 63. He submitted that the challenge to the Regulations 39 to 41 is firstly on the ground that the same are ultra vires the statutory provisions of SEBI Act. Secondly, the same offend the rights conferred on the unit-holders under Article 1....
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....efore, 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 opinion by the Trustees. He submitted that the Regulations do not confer any power on SEBI to supervise the exercise of the power under sub-clause (a) of clause (2) of Regulation 39. He submitted that Regulation 40 is completely arbitrary, inasmuch as, it comes into operation from the moment the compliance is made by the Trustees with cl....
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....983) 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 Court in the case of State of Tamil Nadu and another vs. P. Krishnamurthy and others (2006) 4 SCC 517. He urged that when provisions of subordinate legislation are directly inconsistent with the mandatory provisions of the parent statute, such a subordinate legislation can be held to be invalid. He submitted that in the present case, ....
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.... 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 the Trustees take action under sub-clause (a) of clause (2) of Regulation 39, they are required to obtain consent of the unit-holders, as provided under sub-clause (c) of clause (15) of Regulation 18. He submitted that if such interpretation is not accepted, firstly, sub-clause (c) of clause (15) of Regulation 18 will become redundant. Se....
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.... 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 the Trustee and whether there were reasons recorded for formation of an opinion by the Trustees. He submitted that the Court can also look into the question whether the reasons recorded have any rational relationship with the formation of an opinion by the Trustees. 73. Thereafter, the learned Senior Counsel has taken us through the decision....
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....n 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 recast and the task of a Judge is to mould the law so as to serve the needs of the time. Thereafter, he relied upon a decision of the Apex Court in the case of Rohtas Industries Ltd. and another vs. Rohtas Industries Staff Union and others (1976) 2 SCC 82 and pointed out by relying upon paragraph 9 of the said decision that the expansive and extraordin....
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....ischarge 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 the learned Single Judge of the Delhi High Court in the case of M/S. Narinder Batra vs. Union of India which reiterates that the powers of the High Court under Article 226 of the Constitution of India are plenary and it constitutionally empowers a High Court to issue writs to any person not only for enforcement of fundamental rights but also for any purpose....
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....nior 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. He submitted that in the letter to investors issued by FTMF which is placed on record, it is merely mentioned that in view of the recommendations of AMC, the Trustees were of the opinion that an event has occurred which required the Schemes to be wind up. He stated that the role played by AMC in the decision of the winding up of the Schemes is on record. He invi....
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....tors, 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 e-mail shows that the decision to winding up of the said Schemes is by AMC and not by the Trustees. He pointed out that there was a direct involvement of AMC in the decision making process. 86. He submitted that there is a material on record to show that the Trustees have delegated their power to AMC despite the fact that there was no such provision in the Trust Deed....
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....olution 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 Regulations that the Trustees hold the assets of a Scheme in trust and for the benefit of the unit-holders. He submitted that each Scheme of a Mutual Fund being a trust, the same cannot be revoked without prior consent of the beneficiaries/unit-holders, as required under Section 78 of the Trusts Act. He submitted that winding up of an individual Scheme amounts to revocation....
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....ental 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 no opportunity for the unit-holders to exit by taking the NAV after the date of the decision. Therefore, the decision for winding up of the said Schemes is completely illegal. 91. Learned senior counsel appearing for the petitioner relied upon a decision of the Delhi High Court in the case of Mahanagar Telephone Nigam Ltd. and etc., vs. Telecom Regulatory Authority of Delhi a....
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....-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 to request SEBI for extension of limit of borrowing. The learned counsel has invited our attention to the fact that the progress of the Forensic Audit of the said Schemes is not brought on record and in fact, in the statement of objections, SEBI has categorically stated that it is an internal document of SEBI. Referring to the averments made in paragraphs 29 and 30 of the statement ....
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....igation 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 Regulation 39, no redemption could have been made. He submitted that mandate of clause (15A) of Regulation 18 was not complied with by obtaining consent of the unit-holders or by providing them exit option. The learned counsel invited our attention to Section 11 of SEBI Act and in particular, sub-section (1) which lays down that the duty of the Board is to protect the interests of the inve....
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....mption 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 on the issue of maintainability, a very elitist stand has been taken by SEBI. He submitted that Rupees twenty five lakhs crores is the total investment made in the Mutual Funds and therefore, element of public interest is certainly involved. 103. Now turning to the Criminal Petition No. 3206/2020, he submitted that the first respondent, the Economic Offence Wing of SEBI is a police station within th....
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....ubmitted 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 applicants in IA No. I and II of 2020 in writ petition No. 8748/2020 made submissions contending that there is no enquiry made by SEBI about the legality of the decision of the Trustees. He also invited our attention to various provisions of SEBI Act. He submitted that sub-clause (c) of clause (15) of Regulation 18 will apply to winding up of the Scheme under sub-clause (a) of clause (2) of Regulation 39 and, th....
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....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 Regulations specifically provide for it. He submitted that sub-clause (c) of clause (15) of Regulation 18 comes into operation only after the Trustees decide that a Scheme should be wound up in accordance with sub-clause (a) of clause (2) of Regulation 39. He pointed out that only under sub-clause (1) of Regulation 41, an approval of the unit-holders by simple majority is contemplated for authorising the Trustees or any....
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....sions 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 Public Interest Litigation should be dismissed with costs. He submitted that while dealing with the case of the investors, it must be also remembered that investment in market is always involves a risk and, therefore, the investment made in the Mutual Funds is also subject to risks. He submitted that if the entire Scheme of the Mutual Funds, as envisaged by the Mutual Funds Regulations is considered, the unit-holders are not ent....
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....s 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 that the Court can always go through the report which will be filed in the Court in a sealed cover without making it public. He urged that the Court can go through the report and decide whether it should be made available to the petitioners. At this stage, learned Senior Counsel appearing for the petitioners in Delhi petition submitted that the report cannot be withheld in such a manner from the petitioners. Shri. Janak Dwarakadas,....
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....l 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 manner in which the guarantee is to be met is specifically mentioned in the offer document. He submitted that unless the Scheme is governed by Regulation 38 where the returns are guaranteed, there is an inherent risk in the Mutual Fund transactions. 119. He submitted that the nature of winding up of a Scheme and the nature of winding up of a company are completely different and in fact, winding up of a Scheme is not in that sense winding u....
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....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 was specifically mentioned that the moratorium will create significant stress on non-banking financial corporations. It was mentioned in the said e-mail that in case of said Schemes, the maturities of Rs. 4,500/- crores were stipulated per quarter and continued liquidity stress was anticipated for the reasons stated in the said e-mail. He pointed out that it was stated therein that in view of the circular dated 1st October 2019 issued by SEBI, unl....
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....ds 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 Regulation 39 (2) (b) will be completely obliterated. Moreover, Regulation 40 does not provide that the restrictions thereunder will be triggered only on the unit-holders consenting for winding up as contemplated by sub-clause (a) of clause (2) of Regulation 39. In fact, the restrictions imposed by Regulation 40 trigger immediately after compliance with clause (3) of Regulation 39. He submitted that sub-clause (d) of clause (15) of Regulation 18 which ....
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....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 apparent that between 1st March, 2020 till 20th April 2020, the redemption amounts are 1/3rd or more than 1/3rd of AUM as on 1st March, 2020. He invited our attention to the provisions of the Trusts Act and submitted that winding up of a Scheme does not amount to revocation of the Trust and in fact, it is an execution of the Trust. 128. He, submitted that the prayer made in the writ petition for investigation will not survive for consideration, inasmuch ....
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....f 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 therefore, the scope of judicial review is considerably narrow. In support of his submissions, he relied upon the law laid down by the Apex Court in the case of Swiss Ribbon Private Limited (supra) and in particular, the decision of justice Holmes quoted therein. He also relied upon a decision of the Apex Court in the case of Bhavesh D. Parish and others vs. Union of India and another (2000) 5 SCC 471. He submitted that the Mutual Funds Regulations constitute the Re....
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....ructure 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 the said Schemes is manifestly arbitrary. He relied upon a decision of the Apex Court in the case of Joseph Shine vs. Union of India (2019) 3 SCC 39. He submitted that the provisions can be manifestly arbitrary, only when something is done by the Legislature capriciously, irrationally and in disproportionate manner. He submitted that this type of manifest arbitrariness is not attracted in these petitions. He submitted that the same is the test laid down by the Apex Cour....
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....re, 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 Supplies and Disposals, Calcutta vs. Member, Board of Revenue, West Bengal, Calcutta AIR 1967 SC 1826 and in the case of Girdharilal Jivanlal Maheswari vs. The Assistant Commissioner of Sales Tax, Nagpur (1957) 59 Bom LR 710. He submitted that on 24th April 2020, only one borrowing was made. He also pointed out from the affidavit filed on 18th September 2020 the circumstances under which the borrowings were made. 138. He invited our attention to clause (12) and (25) of Regulation 18....
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....ly 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 tenable. He also invited our attention to paragraph 32 of the Statement of objections filed in the said writ petition. He invited our attention to Regulations 16, 18 and 49R and submitted that there is adequate system of internal control and risk management in AMC. He submitted that AMC is strictly maintaining the books of accounts, records and the documents, as required by Regulation 50. REJOINDER OF THE PETITIONERS: 141. Shri. Ravindra Srivatsava, the learned Senior Counsel appearing fo....
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....ntemplated 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 regarding functional and decisional separation between AMC and the Trustees in the matter of a winding up decision. He submitted that the deliberations recorded in the minutes on the adverse impact of COVID 19 cannot be a ground for winding up. Relying upon a decision of the Apex Court in the case of Commissioner of Police, Bombay vs. Gordhandas Bhanji AIR 1952 SC 16, he submitted that though the Trustees could have taken factual inputs from AMC, the Directors of AMC could not have been a part of the deci....
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....e 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 take a decision of winding up is completely fallacious, as can be seen from paragraph 23 of a decision of the Apex Court in the case of Delhi Transport Corporation vs. D.T.C. Mazdoor Congress and others 1991 Supp (1) SCC 600. He submitted that the arguments canvassed by the petitioners about the arbitrariness of the decision have not been rebutted by any of the respondents. 148. He submitted that the argument that the petitioners want to compel the Trustees to run the Scheme is completely unfounded. He ....
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....e 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 that the Forensic Audit was ordered, SEBI wanted the Court to throw out the petition. He submitted that the affidavit of SEBI also shows that the summary of the complaints of the investors was forwarded to the Forensic Auditors which includes the complaints made by the petitioners and other investors. 151. Shri. Adithya Sondhi, learned Senior Counsel submitted that the report on Forensic Audit is not an evidence and therefore, privilege cannot be claimed. In any case, the privilege has to be specifically clai....
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....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 in exercise of its writ jurisdiction under Article 226 of the Constitution of India, can go into the merits of the decision of the Trustees to wind up the said Schemes? Whether the notices dated 23rd April, 2020 and 28th May, 2020 are valid and legal? vi) Assuming that the decision of winding up is valid, whether the Trustees have established that they have complied with sub-clauses (a) and (b) of clause (3) of Regulation 39? vii) Assuming that the decision of the Trustees of winding up is lawful, whether AMC could have lawfully made the borrowings after 2....
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....solution 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 powers required to deal effectively with all matters relating to capital market. As Parliament was not in session, and there was an urgent need to instill a sense of confidence in the public in the growth and stability of the market, the President promulgated the Securities and Exchange Board of India Ordinance, 1992 (Ord. No. 5 of 1992) on 30th January, 1992. The Bill seeks to replace the aforesaid Ordinance". (Underline supplied) 157. As can be seen from the preamble of SEBI Act, the same has been enacted to provide for the establishment of a Board (SEBI) to protect the interests of investors in securities and to promot....
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.... 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 of furnishing any information to any authority outside India, may enter into an arrangement or agreement or understanding with such authority with the prior approval of the Central Government; (j) performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), as may be delegated to it by the Central Government; (k) levying fees or other charges for carrying out the purposes of this section; (l) conducting research for the above purposes; (la) calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions; (m) performing such other functions ....
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....son 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, established under Section 26-A, having jurisdiction and on such confirmation, such attachment shall continue during the pendency of the aforesaid proceedings and on conclusion of the said proceedings, the provisions of Section 28-A shall apply: Provided further that only property, bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached. (f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation: Provided that the Board may, without prejudice to the provisions contained in sub-section (2) or sub-section (2-A), take any of the measures specified in clause ....
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....al 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 document, soliciting money from the public for the issue of securities. At this stage, we may note here that the words 'securities' has been defined in clause (i) of Section 2 of SEBI Act. It provides that securities has the same meaning assigned to it in Section 2 of the Securities Contracts (Regulation) Act, 1956. Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 defines the securities which include the units or any other instruments issued to the investors under any Mutual Fund Scheme. 160. Section 11-B of SEBI Act provides for vesting of plenary powers in SEBI to issue directions. Section 11-B reads thus: 11B. Power to issue directions and levy penalty - (1) Save as otherwise provided in Section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary-- (i) in the interest of investors, or orderly development of securities market; or (ii) to ....
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.... 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. There are various penal provisions incorporated in Chapter VI-A of SEBI Act. Section 15D provides for imposition of the penalties in case of certain defaults in relation to Mutual Funds. Section 15E provides for imposition of penalty on AMCs, on account of its failure to comply with any of the Rules and Regulations providing for restrictions on the activities of AMCs. The minimum penalty prescribed is of Rupees one lakh. Section 15HB provides for imposition of penalty on whoever fails to comply with any provision of SEBI Act, the Rules and Regulations made thereunder or the directions issued by SEBI, for which, no separate penalty has been specifically provided. Such person shall be liable to a penalty which shall not be less than Rupees one lakh but it may extend to Rupees one crore. The procedure for imposing penalties is laid down under Section 15-I. 163. Another relevant provision of SEBI Act is Section 30 which confers powers to make Regulations, which reads thus: 30. Power to make....
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....g the working of Mutual Funds. 166. Some of the definitions under the Mutual Funds Regulations are very relevant for deciding the issues involved in this group of writ petitions. The first relevant definition is of 'Mutual Fund' which is in clause (q) of Regulation 2 of the Mutual Funds Regulations which reads thus: "(q) "Mutual Fund" means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more Schemes for investing in securities including money market instruments or gold or gold related instruments or real estate assets. Provided that infrastructure debt fund Schemes may raise monies through private placement of units, subject to conditions specified in these regulations; Provided further that Mutual Fund Schemes investing in exchange treaded commodity derivatives may hold the underlying goods in case of physical settlement of such contracts." (underlines supplied) 167. The word "sponsor" is defined in clause (x) of Regulation 2 which reads thus: "(x) "sponsor" means any person who, acting alone or in combination with another body corporate, establishes a Mutual Fund;" Ther....
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....ch have a bearing on the registration granted by it; (d) payment of fees as specified in the regulations and the Second Schedule." (underlines supplied) 170. Regulation 14 provides for constitution of a Mutual Fund in the form of a Trust. It provides that the instrument of trust which shall be in the form of a deed shall be executed by the sponsor in favour of the Trustees and the same is required to be registered under the provisions of the Indian Registration Act, 1908. Thus, a Mutual Fund is a trust within the meaning of the Trusts Act. The contents of the deed should be as provided in the Third Schedule. 171. In view of clause (y) of Regulation 2, the Trustees within the meaning of the Mutual Funds Regulations will be either a Board of Trustees or a Trustee Company. The Trustees within the meaning of Regulation 2(y) have fiduciary relationship with the unit-holders of the Mutual Fund. As per Regulation 17, the appointment of a Trustee can be made only with the prior approval of SEBI. As far as the duties, responsibilities and obligations of the Trustees are concerned, we are discussing the same at a subsequent stage. The appointment of the Trustees is to be made by the s....
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....ncorporates restrictions on investments. 176. We may note here that in the Mutual Funds Regulations, there is no specific provision for cancellation of registration of a Mutual Fund or winding up of a Mutual Fund. The provisions contained in Regulations 39 to 42 are only in respect of winding up of a particular Scheme of a Mutual Fund. A Mutual Fund can float various Schemes of various categories such as 'open ended Schemes', 'close ended Schemes', 'capital protection oriented Schemes' and 'real estates Mutual Fund Schemes' etc. Chapter VI-A is a chapter which deals with the 'Real Estate Mutual Funds Schemes'. 177. From the Mutual Funds Regulations, it appears that a Mutual Fund can have one or more Scheme. The monies collected from the investors/unit-holders under a Mutual Fund Scheme can be invested by Mutual Fund in accordance with Regulation 43 in (i) securities, (ii) money market instruments, (iii) privately placed debentures, (iv) securitized debt instruments, which are either asset backed or mortgage backed securities, (v) gold or gold related instruments, or (vi) real estate assets as defined in clause (a) of regulation 49A or (vii)....
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....ation 61. After a report is submitted on investigation or inspection in accordance with Regulation 64, it is the duty of the Chairman of SEBI or SEBI to take action as laid down in Regulation 65. This power is apart from the plenary power vesting in SEBI under Section 11C of SEBI Act to appoint Investigating Authority to investigate into affairs of an intermediary. Chapter IX of the Mutual Funds Regulation lays down the procedure for action in case of default. The defaults for which action can be taken have been set out in Regulation 68. Other defaulters are laid down in Regulation 75A. Regulation 76 is relevant which reads thus: "76. Adjudication, etc..--The Board may for the offences specified in sections 15A to 15E of the Act initiate action under section 15-I of the Act and in case of violation of any of the provisions of the Act or the regulations, initiate action under section 11, 11B or section 24 of the Act. (2) The Board may in addition to suspension or cancellation of certificate, order suspension of launching of any scheme of a mutual fund for a period not exceeding one year for violation of any of the provisions of these regulations after following procedure under t....
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....is regulation shall comply with the sub-regulations (1) and (2) within a period of one year from the date of the coming into force of this regulation: Provided that in the event of a merger, acquisition, Scheme of arrangement or any other arrangement involving the sponsors of the Mutual Funds, shareholders of the asset management companies or trustee companies, their associates or group companies which results in the incidental acquisition of shares, voting rights or representation on the board of the asset management companies or trustee companies, this regulation shall be complied with within a period of one year of coming into force of such an arrangement." 180. The Regulation 7B ensures that there is no conflict of interest. Therefore, the Regulation 7B provides that a sponsor of a Mutual Fund and even its associate and group companies including AMC of the fund through the Schemes of Mutual Fund cannot have 10% or more shareholding or voting rights in AMC or Trustee company or any other Mutual Fund. Similarly, the sponsor or its associates or group of companies cannot have the representation on the board of AMC or Trustee company or any other Mutual Fund. A trust deed, as co....
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.... of-- (i) limiting or extinguishing the obligations and liabilities of the trust in relation to any Mutual Fund or the unit-holders; or (ii) indemnifying the Trustees or the asset management company for loss or damage caused to the unit-holders by their acts of negligence or acts of commission or omission." 182. Basically, the duty to take care of the interest of the unit-holders is the most important duty of the Trustees, as they hold the assets of the Schemes in fiduciary capacity. Sub-clauses (i) and (ii) of clause (2) of Regulation 15 make it clear that by making a provision in the trust deed, the liabilities and obligations of the Trustees to any Mutual Fund cannot be limited or extinguished. Sub-clause (ii) clause (2) of Regulation 15 clearly indicates that the Trustees or AMC are responsible for any loss or damage caused to the unit-holders by their acts of negligence or acts of commission or omission. The reason is that it is provided that there cannot be a clause indemnifying the Trustees for such a loss or damage. There is a salutary provision in the third schedule in the form of clause 17 which lays down that the trust deed shall contain a clause to the effect that ....
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....ry important duties assigned to the Trustees in sub-clauses (8) to (15) of Regulation 18 of the Mutual Funds Regulations which read thus: "(8) The Trustees shall ensure that the asset management company has been managing the Mutual Fund Schemes independently of other activities and have taken adequate steps to ensure that the interest of investors of one Scheme are not being compromised with those of any other Scheme or of other activities of the asset management company. (9) The Trustees shall ensure that all the activities of the asset management company are in accordance with the provisions of these regulations. (10) Where the Trustees have reason to believe that the conduct of business of the Mutual Fund is not in accordance with these regulations and the Scheme they shall forthwith take such remedial steps as are necessary by them and shall immediately inform the Board of the violation and the action taken by them. (11) Each trustee shall file the details of his transactions of dealing in securities with the Mutual Fund on a quarterly basis. (12) The Trustees shall be accountable for, and be the custodian of, the funds and property of the respective Schemes and shall....
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....uthorized by the trust deed, the Trustees are empowered to appoint AMC. The qualifications for appointment of AMC are also laid down in Regulation 21. 188. The fourth schedule lays down what should be the mandatory clauses in the investment management agreement executed by and between the Trustees and AMC, as provided in clause (2) of Regulation 18. The role of AMC is reflected from the contents of the fourth schedule. What is important is clause (20) of the Regulation 25 which reads thus: "(20) The asset management company and the sponsor of the Mutual Fund shall be liable to compensate the affected investors and/or the Scheme for any unfair treatment to any investor as a result of inappropriate valuation." The said clause means that if any investor gets unfair treatment as a result of inappropriate valuation, AMC and sponsor of the Mutual Fund are liable to pay the compensation to the investors. Regulation 26 provides for Mutual Fund appointing a custodian to carry out the custodial services for the Schemes of the said fund. Regulation 27 provides that Mutual Fund is required to enter into a custodial agreement with the custodian with the prior approval of the Trustees. 189....
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....ons of the Regulations. 191. As provided in the third schedule, the property of the Schemes is in the custody and/or under control of the Trustees and that the Trustees are required to act in trust for the interest of the unit-holders. The unit-holders are having the beneficial interest in the trust property. Thus, it can be broadly said that it is the duty of the Trustees to safeguard the interests of the investors in the Scheme, as the assets of a Scheme are held by the Trustees in trust for the benefit of the investors. 192. Various provisions of the Regulations contemplate that there should not be any conflict of interest amongst key players and therefore, it is provided that no AMC or its Directors, Officers, or employee of any AMC shall be eligible to be appointed as a Trustee of any other Mutual Fund. It is also provided that no person who is appointed as a Trustee of a Mutual Fund shall be eligible to be appointed as a Trustee of any other Mutual Fund. It is provided that two third (2/3rd) of the Trustees shall be independent persons and they shall not be associated with the sponsors. If a trustee company is appointed as a trustee, its directors cannot act as a Trustee of....
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.... AMC [Regulation 18 (21)]; (xii) To exercise General Due Diligence, as incorporated in clause (25) of Regulation 18 which includes maintaining of the records of the decisions of the Trustees at their meetings and minutes of the meetings and prescribing as well as adhering to a code of ethics [Clause-A and B under Regulation 18 (25)]; (xiii) To take into custody or under their control all the property of the Schemes of the Mutual Fund and hold it in trust for unit-holders [clause (3) of Third Schedule]; (xiv) To act in the interest of the unit-holders [clause (5) of Third Schedule]; (xv) To dismiss AMC under specific events with the approval of SEBI [clause (9) of Third Schedule]; (xvi) To appoint a custodian and shall remain responsible for the supervision of its activities in relation to the Mutual Fund and to enter into an agreement with the custodian [clause (10) of Third Schedule]; (xvii) To perform the duties as specified in Regulation 49-I of the Mutual Funds Regulations (applicable to real estate Mutual Fund Scheme); and (xviii) To produce to the inspecting officer such books of accounts, records and other documents and to furnish such statements and informatio....
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....eport and annual statement of accounts of the Schemes [Regulation 54 read with 11th schedule]; and xvi) To make periodical and half yearly disclosures [Regulations 58 and 59]. INTERPRETATION OF PROVISIONS REGARDING WINDING UP OF A SCHEME (ISSUE Nos. (ii) and (iii): 194. Now, we go to the relevant provisions regarding winding up of Schemes. The specific provisions regarding winding up of a Scheme are contained in Regulations 39 to 42 which read thus: "39. Winding up.--(1) A close-ended Scheme shall be wound up on the expiry of duration fixed in the Scheme on the redemption of the units unless it is rolled over for a further period under sub-regulation (4) of regulation 33. (2) A Scheme of a Mutual Fund may be wound up, after repaying the amount due to the unit-holders,-- (a) on the happening of any event which, in the opinion of the Trustees, requires the Scheme to be wound up; or (b) if seventy-five per cent of the unit-holders of a Scheme pass a resolution that the Scheme be wound up; or (c) if the Board so directs in the interest of the unit-holders. (3) Where a Scheme is to be wound up under sub-regulation (2), the Trustees shall give notice disclosing the circum....
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....r sub-regulation (3) of regulation 41, if the Board is satisfied that all measures for winding up of the Scheme have been complied with, the Scheme shall cease to exist. (underlines supplied) 195. Apart from the question of validity of the provisions of Regulations 39 to 41, another issue is whether for winding up a Scheme, the requirement of obtaining the consent of the unit-holders, as provided in clause (15) of Regulation 18 can be read into sub-clause (a) of clause (2) of Regulation 39. Another issue is regarding interplay between, clause (15A) of Regulation 18 and sub-clause (a) of clause (2) of Regulation 39. For the sake of convenience, we are reproducing herewith both clauses (15) and (15A) of Regulation 18 which read thus: "(15) The Trustees shall obtain the consent of the unit-holders-- (a) whenever required to do so by the Board in the interest of the unit-holders; or (b) whenever required to do so on the requisition made by three-fourths of the unit-holders of any Scheme; or (c) when the majority of the Trustees decide to wind up or prematurely redeem the units. (d) [* * *]" (15A) The Trustees shall ensure that no change in the fundamental attributes of a....
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....by using their expertise, they have to decide what is in the interest of the unit-holders. If the Trustees are of the considered view that the interests of the unit-holders will be sub served by winding up of a Scheme, they should have freedom to take a decision of winding up. Except when compliance is made with the provisions of Regulation 38, the investment in Mutual Fund never has guaranteed returns and the investment in the Mutual Fund is always subject to risks. Those investors who wants fixed returns normally take recourse to safe investments like Government securities, bank deposits etc. Moreover, it was argued that the Trustees cannot be forced to continue to run the Schemes. One of the arguments made was that on the one hand, the petitioners have made very serious allegations against the Trustees and AMC of mismanaging the funds of not acting in fiduciary capacity in the interest of the unit-holders etc, and on the other hand, by filing these writ petitions, they want to force the Trustees and AMC to run the said Schemes. An argument is also canvassed by the respondents that the Trustees and AMC were never put to notice that even for winding up of the Schemes under sub-cla....
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....se of Securities and Exchange Board of India vs. Kishore R. Ajmera (2016) 6 SCC 368, the Apex Court has dealt with the objects of SEBI Act. In paragraph 25 of the said decision, the Apex Court held thus: "25. The SEBI Act and the Regulations framed thereunder are intended to protect the interests of investors in the Securities Market which has seen substantial growth in tune with the parallel developments in the economy. Investors' confidence in the capital/securities market is a reflection of the effectiveness of the regulatory mechanism in force. All such measures are intended to pre-empt manipulative trading and check all kinds of impermissible conduct in order to boost the investors' confidence in the capital market. The primary purpose of the statutory enactments is to provide an environment conducive to increased participation and investment in the securities market which is vital to the growth and development of the economy. The provisions of the SEBI Act and the Regulations will, therefore, have to be understood and interpreted in the above light". (emphasis added) 200. Regulation 18 is titled as "Rights and Obligations of the Trustees" which is a part of Chapt....
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....condly, Regulation 14 provides that a Mutual Fund shall be constituted in the form of a trust under a deed which is registered in accordance with the Indian Registration Act, 1908. As, a Mutual Fund is a trust which is governed by the Trusts Act, obviously, there is no provision made in the Mutual Funds Regulations for winding up of a Mutual Fund. As stated earlier, sub-clause (c) of clause (15) of Regulation 18 applies to a decision to wind up or a decision to prematurely redeem the units. The word 'unit' as defined in clause (z) of Regulation 2 to mean the interest of the unit-holders in a Scheme. Thus, the decision of majority of the Trustees to redeem the units is a decision to redeem units in a particular Scheme. This indicates that sub-clause (c) deals with a Scheme of a Mutual Fund. On the one hand, there is no specific provision incorporated in the Mutual Funds Regulations for winding up of a Mutual Fund and on the other hand, there is a specific provision for winding up of a Scheme. Therefore, there is no manner of doubt that sub-clause (c) of clause (15) of Regulation 18 refers to a decision of majority of the Trustees to wind up a Scheme. No other winding up is c....
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.... 41 reads thus: "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." 204. The approval contemplated by clause (1) of Regulation 41 is for limited purposes of authorizing either the Trustees or any other persons to take steps for winding up of the Scheme. Thus, clause (1) of Regulation 41 comes into picture only after a valid decision is taken to wind up a Scheme in accordance with one of the three sub-clauses (a), (b) and (c) of clause (2) of Regulation 39 and after due compliance is made with clause (3) of Regulation 39. The approval contemplated by said provision is not to the decision of the winding up of a Scheme. The approval is only on the issue who will take steps for winding up of the Scheme. Whether the Trustees will take steps or any other person. The approval under clause (1) of Regulation 41 has no....
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.... a rule or a section is a part of an integral Scheme, it should not be considered or construed in isolation. One must have regard to the Scheme of the fasciculus of the relevant rules or sections in order to determine the true meaning of any one or more of them. An isolated consideration of a provision leads to the risk of some other inter-related provision becoming otiose or devoid of meaning. xxxx" (emphasis added) Therefore, the provision of sub-clause (c) of clause (15) of Regulation 18 cannot be read in isolation. We have to consider the entire Scheme of the Mutual Funds Regulations for assigning meaning to the consent contemplated by sub-clause (c) of clause (15) of Regulation 18. 207. In the case of Hardeep Singh (supra), in paragraph 44 of the said decision, the Apex Court held thus: "44. No word in a statute has to be construed as surplusage. No word can be rendered ineffective or purposeless. Courts are required to carry out the legislative intent fully and completely. While construing a provision, full effect is to be given to the language used therein, giving reference to the context and other provisions of the statute. By construction, a provision should not be r....
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....ub-clause (a) of clause (2) of Regulation 39, the Trustees are under a mandate to take consent of the unit-holders as contemplated by sub-clause (c) of clause (15) of Regulation 18. Only after such consent is taken, it can be said that the Scheme is to be wound up as provided in clause (3) of Regulation 39. It is only after obtaining such consent that recourse to clause (3) of Regulation 39 can be taken. 209. Obviously, there can be a 'consent' of the unit-holders to a proposed of winding up of a Scheme only if the majority of the unit-holders give consent to do so. Sub-clause (c) of clause (15) of Regulation 18 is silent on the nature of majority. Obviously, it is not a specific majority like three-fourth majority. Wherever three-fourth majority of the unit-holders was intended, the Mutual Funds Regulations say so. For example, sub-clause (b) of clause (15) of Regulation 18 and sub-clause (b) of clause (2) of Regulation 39. Therefore, it has to be a simple majority. For this purpose, we must make a reference to a decision of a Full Bench of the Allahabad High Court in the case of Wahid Ullah Khan vs. District Magistrate, Nainital and others. In paragraph 32, the Allahabad....
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.... Centres/Website/Distributors or Brokers. This SAI is dated June 30, 2019." (emphasis added) Under the topic "Responsibilities and Duties of the Trustee" incorporated in the Statements of Additional Information (SAI) clause (b) is relevant which reads thus:- "b) The Trustee shall obtain consent of the unit holders of the Scheme(s): i) When the Trustee is required to do so by SEBI in the interests of the unit-holders; or ii) Upon the request of three-fourths of the unit holders of any Scheme(s) under the Mutual Fund; or iii) If a majority of the directors of the Trustee company decide to wind up the Scheme(s) or prematurely redeem the units." (underlines and emphasis added) Neither the Trustees nor AMC have disowned the above clause which is in their own statement of Additional Information. They have not placed on record any material to show that the above clause was subsequently modified. Sub-clause (iii) above is very specific which refers to a contingency when majority of the directors of the Trustee company decide to wind up Scheme(s). In such a case, as laid down by clause (b) above, the Trustees are under a mandate to obtain consent of the unit-holders. This i....
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....f Directors of Trustee company or the Board of Trustees decide to wind up a Scheme. To such a winding up, the consent of the unit-holders of the said Scheme necessary. The consent will be of simple majority. Under clause (a), the proposal of winding up must come from the Trustees. Under clause (b), winding up can start even when the Trustees are not willing to wind up a Scheme. In case of sub-clause (b), seventy five percent of the unit-holders must agree for winding up. When the winding up is proposed by the Trustees in accordance with sub-clause (a), it will require consent of unit-holders by a simple majority. The majority need not be of seventy five percent of the unit-holders. It will be a simple majority of the unit-holders. Sub-clauses (a) and (b) of clause (2) of Regulation 39 will operate in different contingencies even if our interpretation is correct. 214. On behalf of SEBI, it was canvassed that reading the word 'consent' of the unit-holders contained in sub-clause (a) will have disastrous consequences. As held earlier, it is the obligation of the Trustees to take consent of the unit-holders when the Board of Directors of the Trustee company, by majority, take ....
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....me or the trust or fees and expenses payable or any other change which would modify the Scheme or affect the interest of the unit-holders is proposed to be carried out unless the consent of not less than three-fourths of the unit holders is obtained: Provided that no such change shall be carried out unless three fourths of the unit holders have given their consent and the unit holders who do not give their consent are allowed to redeem their holdings in the Scheme. Provided further that in case of an open ended Scheme, the consent of the unit-holders shall not be necessary if: (i) The change in fundamental attribute is carried out after one year from the date of allotment of units. (ii) (ii) the unit-holders are informed about the proposed change in fundamental attribute by sending individual communication and an advertisement is given in English daily newspaper having nationwide circulation and in a newspaper published in the language of the region where the head office of the Mutual Fund is situated. (iii) The unit-holders are given an option to exit at the prevailing Net Asset Value without any exit load. Explanation: For the purposes of this clause "fundamental attrib....
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....However, on its plain reading, clause (15A) does not apply to winding up of a Scheme, but it is applicable only when there is a proposal to change any fundamental attributes of any Scheme or the trust or fees and expenses payable or any other change which would modify the Scheme, affecting the interest of the unit-holders. The effect of winding up of a Scheme is that after following the procedure under Regulations 39 to 41, the Scheme comes to an end and it is completely wiped out. In case of winding up of a Scheme, after distribution of money to the unit-holders in accordance with Regulation 41, the Scheme ceases to exist. Even if the changes, as contemplated by clause (15A) of Regulation 18 are brought about, the Scheme continues to exist. 219. In case of winding up of an 'open ended Scheme', in view of Regulation 40, the unit-holders cannot seek redemption and they are entitled to receive money on pro rata basis, remaining available after sale proceeds of the assets of the Scheme are applied for clearing all the liabilities of the Scheme. In case of winding up of an 'open ended Scheme', the right of redemption of the unit-holders is completely taken away due to ....
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....d from such sale shall be first applied to discharge of the liabilities in the Scheme. Thereafter, a provision has to be made for meeting the expenses in connection with the winding up. The balance amount is to 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 up is taken. Therefore, the repayment of the amount due to the unit-holders, as provided in clause (2) of Regulation 39 is the amount payable to the unit-holders in accordance with sub-clause (b) of clause (2) of Regulation 41. In case of winding up of a Scheme, the amount due to the unit-holders is the one which is payable as per sub-clause (b) of clause (2) of Regulation 41. If the argument that the amount due and payable as per the Scheme to the unit-holders must be paid before taking a decision for winding up is accepted, it will completely defeat the Scheme of Regulations 40 and 41. It will completely defeat the very object of providing for winding up of a Scheme. Therefore, once the process of winding up as per clause (2) of Regulation 39 commences, the unit-holders are entitled to claim the amounts payable only as per sub-clau....
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.... 15th September 2020. On 24th April 2020, an amount of Rs. 362 crores was borrowed from Tri-Party Repo Dealing and Settlement (for short 'TREPS'). This borrowing was for funding redemption received up to 23rd April 2020. As the loan through TREPS was a temporary facility, it was replaced by amount advanced by AMC of Rs. 363 crores on 27th April 2020. It is pointed out that the loan from Bank of Baroda of Rs. 1000 crores (utilised to meet the redemptions) was up for repayment on 20th May 2020. Though, moratorium was sought from Bank of Baroda, the same was denied. To avoid any action by Bank of Baroda, a loan of Rs. 900 crores was taken through TREPS and an amount of Rs. 100 crores was advanced by AMC. It is stated that on 8th September 2020, the amount borrowed from TREPS was repaid by availing loan of Rs. 900 crores from JP Morgan. This is the factual position which will have to be kept in mind in the context of the stand of the Trustees that the provisions of clause (3) of Regulation 39 were complied with on 24th April 2020. 223. For the sake of convenience, we are again reproducing the Regulation 40 which reads thus: "40. Effect of winding up.--On and from the date of....
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....es his lands no doubt engages himself in the business of agriculture, that is not the same thing as engaging in the business of sale and supply of agricultural produce. It was held that as the assessee who is the owner of the property is entitled to earn an income therefrom, and merely because he has engaged himself in certain activities which enable him to earn income, it cannot be said that he has engaged himself in a particular business. These are the decisions rendered specifically under the Taxation laws. The rules of interpretation of Taxing statutes require that if two interpretations of a provision are possible, the one which is favourable to the assessee is required to be accepted. 225. But, in the context of the Scheme of the Mutual Funds Regulations, this Court will have to consider the meaning of 'business activities'. As stated in the earlier part of our discussion, a Scheme is launched by AMC with the approval of the Trustees. There are different categories of Schemes in which the investments are made by the members of the public. From plain reading of the provisions of Regulation 43, it is clear that the money received from the unit-holders and investors is ....
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....tated earlier, the activities of repurchase of units, redemption of units or payment of interest or dividend are also a part of business of a Scheme. In view of clause (2) of Regulation 44, a Mutual Fund can borrow only for the purposes of meeting temporary liquidity needs for the purpose of repurchase, redemption of units, payment of interests or dividend to the unit-holders. For example, if there are large number of requests for redemption of units by the unit-holders in respect of 'open ended Scheme', a Mutual Fund may face temporary liquidity crunch. In such a situation, it is permissible for a Mutual Fund to make borrowings only for payment of redemption amount. Therefore, borrowings made as specified in clause (2) of Regulation 44 will certainly amount to 'business activities' of a Mutual Fund or a Scheme, inasmuch as, such borrowings are made for the purpose of meeting demand for redemption which is a part of business of the Scheme. 227. Regulation 40 is interlinked with Regulation 41. In view of Regulation 40, the moment compliance is made with clause (3) of Regulation 39, the 'business activities' of the Scheme of a Mutual Fund must stop. The creat....
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....Regulation 39, the mandatory provisions of Regulation 40 forthwith operate. There is no exception carved out to any of the clauses in Regulation 40. It is obvious that such a failure to dispatch the redemption or repurchase proceeds due to applicability of provision of Regulation 40 cannot be termed as a failure within the meaning sub-clause (c) of Regulation 53. Therefore, the consequences such as payment of interests and penalty as provided in clause (d) of Regulation 53 may not follow. Re. Issue No. (iv)- maintainability: 229. Now, we must deal with the issue of maintainability of the writ petitions. This issue must be dealt with in two parts. The first part is whether this Court is powerless to issue a writ under Article 226 of the Constitution of India, even if there is a specific breach of statutory provisions of the Mutual Funds Regulations and the provisions of the SEBI Act, by AMC or the Trustees. The second part will be whether in writ jurisdiction under Article 226 of the Constitution of India, this Court should interfere with the decision of the Trustees of winding of the said Schemes. 230. Now, coming to the first part of the issue of maintainability, various decisi....
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....it by a minister was not one under the Act but a private reference. "This Court has never exercised a general power" said Bruce, J. in R. v. Lawisham Union [(1897) 1 QB 498, 501] "to enforce the performance of their statutory duties by public bodies on the application of anybody who chooses to apply for a mandamus. It has always required that the applicant for a mandamus should have a legal and a specific right to enforce the performance of those duties". Therefore, the condition precedent for the issue of mandamus is that there is in one claiming it a legal right to the performance of a legal duty by one against whom it is sought. An order of mandamus is, in form, a command directed to a person, corporation or an inferior tribunal requiring him or them to do a particular thing therein specified which appertains to his or their office and is in the nature of a public duty. It is, however, not necessary that the person or the authority on whom the statutory duty is imposed need be a public official or an official body. A mandamus can issue, for instance, 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 go....
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....emedy can be enforced. The duty cast on the public body may be either statutory or otherwise and the source of such power is immaterial, but, nevertheless, there must be the public law element in such action. Sometimes, it is difficult to distinguish between public law and private law remedies. According to Halsbury's Laws of England, 3rd Edn., Vol. 30, p. 682, "1317. A public authority is a body, not necessarily a county council, Municipal Corporation or other local authority, which has public or statutory duties to perform and which perform those duties and carries out its transactions for the benefit of the public and not for private profit." There cannot be any general definition of public authority or public action. The facts of each case decide the point. 30. A contract would not become statutory simply because it is for construction of a public utility and it has been awarded by a statutory body. But nevertheless it may be noticed that the Government or government authorities at all levels are increasingly employing contractual techniques to achieve their regulatory aims. It cannot be said that the exercise of those powers are free from the zone of judicial review ....
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.... in the said case was regarding maintainability of a writ petition as against a private school receiving grant-in-aid to the extent of dearness allowance. In paragraph 15, the Apex Court held thus: "15. Writ application was clearly maintainable in view of aforesaid discussion and more so in view of the decision of this Court in Ramesh Ahluwalia v. State of Punjab (supra) in which this court has considered the issue at length and has thus observed: "13. in the aforesaid case, this Court was also considering a situation where the services of a Lecturer had been terminated who was working in the college run by the Andi Mukti Sadguru Shree Muktajee Vandas Swami Suvarna Jayanti Mahotsav Smarak Trust. In those circumstances, this Court has clearly observed as under: (V.R. Rudani case, SCC PP. 700-701, paras 20 & 22) "20. The term 'authority' used in Article 226, in the context, must receive a liberal meaning unlike the term in Article 12. Article 12 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....
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....kta Sadguru Shree Muktajee Vandas Swami Suvarna Jayanti Mahotsav Smarak Trust and another vs. V.R. Rudani and another (1989) 2 SCC 691. 235. In the case of Zee Telefilms Ltd., vs. Union of India (supra), the issue was whether the Board of control for Cricket in India can be subjected to a writ jurisdiction under Article 226 of the Constitution of India. In paragraphs 31 to 33, the Apex Court held thus: "31. Be that as it may, it cannot be denied that the Board does discharge some duties like the selection of an Indian cricket team, controlling the activities of the players and others involved in the game of cricket. These activities can be said to be akin to public duties or State functions and if there is any violation of any constitutional or statutory obligation or rights of other citizens, the aggrieved party may not have a relief by way of a petition under Article 32. But that does not mean that the violator of such right would go scot-free merely because it or he is not a State. Under the Indian jurisprudence there is always 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 rem....
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....aintainable against a company incorporated under the Companies Act, other than a Government company. This was a case where the Apex Court was dealing with an order passed by the High Court, by which, in a writ petition challenging the order of dismissal of a Manager of Federal Bank, it was held that the writ petition was maintainable. The entire law on the subject was considered in some detail by the Apex Court. Paragraphs 18, 26 and 27 of the judgment are relevant which read thus: "18. From the decisions referred to above, the position that emerges is that a writ petition under Article 226 of the Constitution of India may be maintainable against (i) the State (Government); (ii) an authority; (iii) a statutory body; (iv) an instrumentality or agency of the State; (v) a company which is financed and owned by the State; (vi) a private body run substantially on State funding; (vii) a private body discharging public duty or positive obligation of public nature; and (viii) a person or a body under 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 purp....
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....d. So as to ensure adherence to such fiscal discipline, if need be, at times even the management of the company can be taken over. Nonetheless, as observed earlier, these are all regulatory measures to keep a check and provide guidelines and not a participatory dominance or control over the affairs of the company. For other companies in general carrying on other business activities, maybe manufacturing, other industries or any business, such checks are provided under the provisions of the Companies Act, as indicated earlier. There also, the main consideration is that the company itself may not sink because of its own mismanagement or the interest of the shareholders or people generally may not be jeopardized for that reason. Besides taking care of such interest as indicated above, there is no other interest of the State, to control the affairs and management of the private companies. Care is taken in regard to the industries covered under the Industries (Development and Regulation) 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 th....
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....Court held thus: "11. Judicial review is designed to prevent the cases of abuse of power and neglect of duty by public authorities. However, under our Constitution, Article 226 is couched in such a way that a writ of mandamus could be issued even against a private authority. However, 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. The role of the State expanded enormously and attempts have been made to create various agencies to perform the governmental functions. Several corporations and companies have also been formed by the Government to run industries and to carry on trading activities. These have come to be known as public sector undertakings. However, in the interpretation given to Article 12 of the Constitution, this Court took the view that many of these companies and corporations could come within the sweep of Article 12 of the Constitution. 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 authori....
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....a for enforcement of a public duty. We have already quoted paragraph 29 of the above decision, in which it was held that if a private body is discharging a public function and the denial of any right is in connection with the public duty imposed on such body, the public law remedy can be enforced. A body can be said to be performing a public function when it seeks to achieve some collective benefits for the public or a section of the public and is accepted by the public or section of the public having authority do so. 238. In the case of Ramakrishna Mission and another vs. Kago Kunya and others (2019) 16 SCC 303 the Apex Court has dealt with the question whether Ramakrishna Mission is a State, within the meaning of Article 12 of the Constitution of India. In paragraph 32, the Apex Court held thus: "32. Before an organisation can be held to discharge a public function, the function must be of a character that is closely related 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 ....
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....nstitution of India can be invoked. A body is said to be performing a public function or duty when it seeks to achieve collective benefit to the general public or a section of the public and it is accepted by the public or a section of the public having authority to do so. Moreover, a writ may be issued to a private body or private person when they fail to comply with the provisions of any statute which need to be complied with by all concerned, including a private company. This is so because of the language used by Article 226 of the Constitution of India which shows that a writ can be issued to any person or authority. Applying these principles, it can very well be said that a writ of mandamus can be issued against a private body which is not "State" within the meaning of Article 12 of the Constitution provided the above tests are satisfied. Hence, the High Court under Article 226 of the Constitution can exercise 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....
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....th the provisions of the Mutual Funds Regulations. These are the duties and obligations of the Trustees to public or a section of public who invest money in Mutual Fund. Any member of public can become a unit-holder. In case of the Trustees of a Mutual Fund, they do not have the choice of selecting beneficiaries. As is clear from the Mutual Funds Regulations, object of said Regulations is to protect the investors and to regulate Mutual Funds. The investors are public or a section of public. The Regulations is a piece of a delegated legislation under SEBI Act. The object of SEBI Act is to protect the investors and to regulate securities market. It is a Welfare Legislation. A very important duty of looking after and protecting the interest of the unit-holders who are members of public or a section of public has been entrusted to the Trustees. Therefore, it can be said that Trustees perform a public duty or discharge 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 Mut....
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.... of the Schemes, at the outset, it must be noted that along with the statement of objections, neither AMC nor the Trustees have placed on record the resolution passed by the Trustees for winding up of the said Schemes. Even SEBI did not produce the resolution passed by the Trustees. In fact, when this Court made a query about the resolution, Shri. Arvind Datar, the learned senior counsel appearing for SEBI stated that the same will be produced by the Trustees. Only during the course of arguments made by Shri Harish Salve, learned Senior Counsel appearing for AMC and the Trustees, the minutes of the meeting of the Board of Directors of the Trustee company held on 20th April 2020 and 23rd April 2020 were placed on record along with an affidavit of 17th September 2020. The contention raised in this affidavit is that the grievance regarding the non production of minutes was not at all raised in the 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 o....
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....ers. Thus, if such an important decision is taken by the Trustees of winding up of a Scheme which affects the interest of unit-holders, they are entitled to know the reasons for the decision. If the Trustees withhold the reasons contained in the Board resolution from the affected unit-holders, they will be committing a breach of their duties under the Regulations and also a breach of trust. Hence, it is the duty and obligation of the Trustees to disseminate information by providing a copy of the resolution recording a decision to wind up a Scheme. 250. Another relevant provision is clause (6) of Third Schedule which reads thus: "(6). The Trust Deed shall provide that it is the duty of Trustees to provide or cause to provide information to unit-holders and board as may be specified by the board." Hence, there is a statutory obligation on the part of the Trustees to 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 inclu....
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....vestors. It also records that formation of the said opinion is after careful analysis and review of the recommendations of AMC and in close consultation with the investment team. However, in the Resolution of the Board dated 23rd April 2020, it is recorded that apart from the Directors of the Trustees, two independent Directors of AMC, the President of AMC were invited to attend the meeting. Certain explanation was sought from the President of AMC. It further records that the President stated that number of engagements had taken place with SEBI on the need to wind up the Schemes and SEBI has confirmed informally that they will kindly look into the forbearance sought vide letter dated 20th April 2020. It also records that the President stated that SEBI has indicated that it shall be considerate in procedural forbearances. Ultimately, it is stated in 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 con....
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.... decision to exclude the said Fund of Fund Scheme from winding up. Various queries made by the Board of Directors of the Trustee Company to Mr. Sanjay Sapre are referred in the minutes. Mr. Sanjay Sapre clarified that SEBI Regulations allow AMC and Trustees to impose restrictions on redemptions for a period of ten working days in ninety days and even during said period of ten days, the Scheme is under obligation to honour redemptions requests up to Rs. 2 lakhs. It is recorded that the Schemes have more than three lakhs investors in aggregate and, therefore, the Schemes do not have ability to generate adequate cash through sale of assets to honour redemptions requests made by unit-holders/investors. It is recorded that the news regarding imposition of restrictions on redemptions may accelerate redemption demands which may further intensify the liquidity 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 t....
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....tement of accounts of each Schemes in respect of each financial year. There is a right vested in the Trustees of obtaining the information from AMC concerning the various Schemes of the Mutual Funds and to ensure that the activities of AMC are conducted in accordance with the provisions of the Regulations. AMC acts as a fund manager as well. The investments are made by AMC and in case of open ended Scheme, the redemptions are also dealt with by AMC. Naturally, AMC consists of experts in the field who have intricate knowledge of capital and securities market and various financial aspects. It is the obligation of AMC to report to the Trustees on various aspects of the functioning of the Schemes and from what has been recorded in the minutes of the meeting held on 20th April 2020 and 23rd April 2020, it can be seen that there was a discussion 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 ....
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....nion is of the Board of Directors of the Trustee Company. 258. Now, coming back to sub-clause (a) of clause (2) of Regulation 39, the Trustees can decide to wind up a Scheme of a Mutual Fund on the happening of any event which, in the opinion of the Trustees, requires the Scheme to be wound up. The 'happening of any event' is not specifically defined in the Mutual Funds Regulations. The event should be such that it requires winding up of a Scheme. 'Happening of an event' means existence of a factual situation or circumstance, which, in the opinion of the Trustees, warrant a decision to be taken to wind up a Scheme. The 'event' referred in sub-clause (a) is nothing but a factual situation arising which requires a drastic decision of winding up of a Scheme to be taken. As the Trustees are holding the assets of the 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....
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....BI also. Whether a situation was created requiring winding up of the said Schemes is a very complex and complicated issue to decide. A very large number of factors are required to be considered by the Trustees who have in their fold, experts in the field. The question whether the decision of winding up of the said Schemes will be ultimately beneficial to the investors/unit-holders or whether it will be detrimental to the interest of the investors/unit-holders can be dealt with only by the experts in the field. It is not possible for a Writ Court to decide whether the impugned decision is beneficial to the unit-holders or it is detrimental to their interest. We do not possess expertise to decide whether the decision of winding up was in the best interest of the unit-holders/investors, inasmuch as, basically, the decision of winding 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....
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....s market while promoting the development thereof. Therefore, one of the objects of the SEBI Act is to promote development of Mutual Funds and to regulate the same. Therefore, the Mutual Funds Regulations make elaborate provisions for creating a three-tier system consisting of 'sponsor', 'AMC' and the 'Trustees'. There are stringent provisions which regulate the activities of AMC and Trustees. The restrictions on their powers have been well defined in the Mutual Funds Regulations. Their rights and obligations have been expressly laid down. In fact, all the activities of the Mutual Funds including management of the Schemes floated by Mutual Funds are highly regulated by virtue of various provisions of the Mutual Funds Regulations which we have already elaborately discussed in the earlier part of this 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 th....
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....he action of formation of the opinion by the Trustees that an event has occurred which requires the Scheme to be wound up. In absence of such consent of the unit-holders to the decision of the Trustees of winding up, the Scheme cannot be wound up. Thus, the opinion of the Trustees as contemplated by Regulation 39 (2) (a) gets translated into actual winding up provided that there is a consent of the unit-holders as aforesaid. The obligation of obtaining consent of the unit-holders incorporated in sub-clause (c) of clause (15) of Regulation 18 acts as a major safeguard against arbitrary and/or colourable exercise of power by the Trustees. They cannot take any such decision as per their whims and fancies as the same is subject to consent of the unit-holders. Therefore, there are sufficient safeguards and safety rails provided. 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 o....
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....able, there is no right vested in unit-holders to get a particular return. When such being the case, we fail understand as to how the unit-holders' right guaranteed by Article 21 of the Constitution of India is violated by winding up of a Scheme. Therefore, the said argument is deserves to be rejected. In our considered view, the challenge to constitutional validity of Regulations 39 to 42 must fail. In any case, we are dealing with a legislation in the sphere of economic policy which requires a greater latitude. Re. Issue No. (ix): - power of SEBI under Section 11B: 270. Another question is about the powers of SEBI under Section 11B of the SEBI Act. We have already held that the power to issue directions under Section 11B (1) can be exercised to issue directions to AMC and the Trustees. The said direction 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 securitie....
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.... and reason, the confidence of investors in capital market can be sustained by ensuring that the interest of the investors is protected. The very Scheme of the SEBI Act suggests that SEBI has to act as a watchdog to protect the interests of the investors. 272. Coming back to the facts of the case, as noted in the earlier part of the Judgment, SEBI was not even possessing a copy of the resolution dated 23rd April 2020 passed by the Board of Directors of the Trustees providing for winding up. SEBI did not respond to the e-mail dated 14th April 2020 sent by AMC. SEBI failed to reply to the letter dated 20th April 2020 addressed by the Trustees, in which, permission and guidance of SEBI was sought for winding up of the Schemes. In response to a specific query made by the Court, the learned Senior Counsel appearing 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 windin....
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....ich were ordered to be wound up on 23rd April 2020 and Fund of Fund Scheme. The terms of reference have been annexed to the said letter. The terms of reference are very wide which include checking the exposure of unlisted securities in the wound up Schemes, examining the investment rationale and checking whether due diligence was shown at the time of making investments. The Auditors are also required to check whether adequate effort was made by AMC to sell the unlisted securities. Investigation is also ordered under the said order about the investments made by AMC. The Forensic Auditor is also required to check whether any exit was given to corporates, HNIs or related parties before the decision to wind up. The Forensic Auditor is also required to enquire into whether any money has been siphoned off. 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,....
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.... 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." 276. Regulation 61 contemplates SEBI appointing a person as inspecting officer for the purposes set out in clause (1) thereof. 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 acti....
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.... of SEBI very clear on production of the report of the Forensic Audit. Accordingly, SEBI has filed an affidavit of Shri Lamber Singh S/o Shri Hansraj Singh. The contention raised in the affidavit is that the report will have to be treated as a confidential document. In paragraph 15 of the affidavit, it is stated thus: "In view of the foregoing, I most respectfully pray, the Hon'ble Court may be pleased not to direct SEBI to make the aforesaid Audit Report public. I further pray that in the event the Hon'ble Court passes a direction to SEBI to submit the said Forensic Report for the consideration of the Court, the said Report may be permitted to be placed in a sealed envelope/cover and marked as 'confidential' 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 rep....
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....is Court after hearing the learned counsel for the parties." 279. As noted in the order dated 18th September 2020, the Registrar (Judicial) was directed to produce the report of the Forensic Audit filed in a sealed cover as well as the copies of the minutes in the sealed cover which were kept in his safe custody. Accordingly, as noted in the detailed order dated 22nd September 2020, the Registrar (Judicial) appeared before the Court and produced both the sealed covers which were opened in open Court in presence of the Advocates representing AMC and Trustees and the Advocates for petitioners in W.P. No. 8545/2020 and 8644/2020. The said Advocates were permitted to physically 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 whi....
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....ms of Regulation 64, as the audit findings mentioned therein are not final and they are subject to modifications, based on the responses sought. Further, it is not even an interim report, as there was no such direction issued by SEBI in terms of proviso to Regulation 64. Only on the basis of the final inspection or investigation report that SEBI or its Chairman are required to take action in terms of Regulation 65. Thus, the report produced before the Court in a sealed cover can at best described as a tentative report. In our view, the report of the Auditor being tentative and subject to modifications, it is not a relevant document which can be considered by this Court for 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 ....
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....jarat High Courts. 284. Based on the provisions of the Trusts Act, an argument was canvassed that every Scheme under a Mutual Fund constitutes a trust within a trust and hence, winding up of a Scheme amounts to revocation of the trust. The argument was that a revocation of trust which is created otherwise than under a Will can be made only in accordance with Section 78 of the Trusts Act. However, in view of the findings which we have recorded on the question of interplay between sub-clause (c) of clause (15) of Regulation 18 and sub-clause (a) of clause (2) of Regulation 39, it is unnecessary to go into the issues raised based on the Trusts Act. AVAILABILITY OF 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 Sec....
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....uirement of obtaining consent of the Unit-holders. Issue No. (ii) is answered accordingly; iii) Clause 15A of Regulation 18 of the Mutual Funds Regulations 1996 operates in a different field which has nothing to do with the process of winding up of a Scheme. Therefore, compliance with Clause 15A of Regulation 18 is not a condition precedent for winding up of a Scheme pursuant to sub-clause (a) of clause (2) of Regulation 39. The issue No. (iii) is answered accordingly; iv) Considering the duties of the Trustees under the Mutual Funds Regulations, they perform a public duty. Therefore, when it is found that the Trustees have 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 deci....
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....group of petitions was conducted from 12th August, 2020 in the afternoon session through video conferencing. The hearing concluded on 24th September 2020. The cases were heard on 29th August 2020 and 19th September 2020 which were the Court holidays. As additional affidavits were produced by AMC and the Trustees, with a view to bring the same to the notice of the other parties, the matters were again listed on 5th October 2020. We must note here that perhaps, this must be the one of the longest hearing conducted through video conferencing. The hearing through video conferencing 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....