TaxTMI 
TaxTMI 
2021 (2) TMI 598
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....gh, AOR in SLP 14929/2020 Mr. Ravindra Shrivastava,Sr.Adv. Mr. Arjun Garg,Adv. Mr. Abhinav Shrivastava, AOR Mr. Karan Kohli,Adv. in SLP 15205/2020 Mr. Puneet Jain,Adv. Mr. Harshit Khanduja,Adv. Mr. Harsh Jain,Adv. Mr. Akshat Maheshwari,Adv. Mr. Harshvardhan Sharma,Adv. Mr. Neeraj Sharma,Adv. Ms. Christi Jain, AOR in SLP 15008-15011/ Mr. Tushar Mehta,SG 2020 Mr. Pratap Venugopal,Adv. Ms. Surekha Raman,Adv. Mr. Akhil Abraham Roy,Adv. Mr. Vijay Valsan,Adv. For M/S. K J John And Co, AOR in SLP 15206/2020 Mr. Shivam Singh,Adv. Mr. Sahil Raveen,Adv. Mr. Jaideep Khanna,Adv. Mr. Manish Kumar, AOR For Respondent(s) Mr. Tushar Mehta,SG SEBI Mr. Arvind P.Datar,Sr.Adv. Mr. Pratap Venugopal,Adv. Ms. Surekha Raman,Adv. Mr. Akhil Abraham Roy,Adv. Mr. Vijay Valsan,Adv. For M/S. K J John And Co, AOR For UOI Mr. Tushar Mehta,SG Mr. Rajat Nair,Adv. Ms. Garima Prasad,Adv. Ms. Priyanka Das,Adv. Mr. Arvind Kumar Sharma, AOR Mr. Harish Salve,Sr.Adv. Dr. Abhishek Manu Singhvi,Sr.Adv. Mr. Ashish Bhan,Adv. Mr. Mohit Rohatgi,Adv. Mr. Jasmeet Singh, AOR Mr. Rajendra Dangwal, Adv. Mr. Ashim Sood,Adv. Ms. Madhavi Khanna,Adv. Mr. Saif Ali,Adv. Ms. Meenakshi Arora,Sr.Adv. Mr. Nithyaesh Natraj,Adv. Mr. Vaibhav R.V....
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....under challenge substantially agrees with the unitholders, albeit SEBI in its appeal before this Court contests this interpretation as erroneous. In other words, SEBI propounds that clause (a) of sub-regulation (2) to Regulation 39 is a standalone provision and the unitholders' consent is not required when the trustees upon happening of an event form an opinion that the mutual fund scheme is to be wound up. 3. The objecting unitholders'^3 (also referred to as objectors) primary grievance relates to allegations of gross mismanagement, failure and dereliction of duty by the Asset Management Company ('AMC') and Franklin Templeton Trustee Services Private Limited ('trustees' or 'board of trustees'); violation of the Securities and Exchange Board of India Act, 1992 ('SEBI Act'); Mutual Fund Regulations; SEBI harmonization norms; investment horizon profiles; manipulation of Net Asset Value (NAV); disgorgement of wrongful payments etc. In particular, it is alleged that more than Rs. 15,000 crores were withdrawn from the six schemes two weeks prior to the decision for winding up. Objecting unitholders submit that a finding of fraud, on the part of the trustees and AMC, would entitle the....
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.... Rs. 9,122 crores amongst the unitholders, which, it has been directed would be in proportion to the unitholders' respective interest in the assets of the scheme, as suggested by SEBI. It is obvious that this disbursal to unitholders is possible only when we accept that the six schemes should be wound up. 6. Before we advert to the order passed by this Court for eliciting consent/approval from the unitholders, we deem it appropriate to first reproduce sub-regulation (15) to Regulation 18 of the Mutual Fund Regulations, which reads as under: "Regulation 18: Rights and obligations of the trustees xx xx xx (15) The trustees shall obtain the consent of the unitholders - a) whenever required to do so by the Board in the interest of the unitholders; 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." 7. Interpreting the term 'consent' with reference to clause (c) of subregulation (15) to Regulation 18, the judgment under challenge holds: "221. Obviously, there can be a 'con....
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....e of clause (c) to subregulation (15) of Regulation 18. 8. However, we begin by rejecting the argument raised by some of the objecting unitholders that consent would be binding only on those who have consented to winding up of the mutual fund schemes and cannot be imposed on others. The word 'consent', in the context of the clause, clearly refers to 'consent of the majority of the unitholders', and not consent given by individual unitholders who alone would be bound by their consent, that is, it excludes unitholders who are not agreeable. To accept the second or contra view, as pleaded by some of the objecting unitholders, would be to negate the very object and purpose of clause (c) to sub-regulation (15) of Regulation 18. In fact, the submission, if accepted, will make the Mutual Fund schemes and the winding up provisions in the Mutual Fund Regulations unworkable as there would be two different classes of unitholders - one bound by the consent, and others who are not bound by consent. Consequently, the scheme would not wind up. The intent behind the provision is to bind even those who do not consent. 9. Black's Law Dictionary (10th Edition) defines the word 'consent' as "a v....
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....at has been historically associated with the quorum can be traced to the problem of simply determining just what is meant by a quorum. "From the very earliest times it has been recognised as a general rule that a majority of a group is necessary to act for the entire group." In the case of a public body, the power or authority which establishes the body may also determine what constitutes a quorum. Sturgis states that common parliamentary law fixes the quorum as a "majority of the members". The constitution of the United States sets the quorum requirement in the House of Representatives at a majority of the membership. But to state that a quorum is a majority of the membership opens the way to potential conflict; which is precisely what has happened on numerous occasions." After examining the various definitions of the term quorum, the author observes that the definitions by themselves give no key as to how to determine what is minimum number or what constitutes majority. The expression 'majority' can mean - (i) majority of total membership list; (ii) exclude or include delinquent members; (iii) members present and voting; or (iv) those present, voting and not voting. Different ....
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....other words, in the absence of special custom or of special provision of the constitution, the major part must be present at the meeting, and of that major part there must be a majority in favour of the act or resolution contemplated. Where, therefore, a corporation consists of thirteen members, there ought to be at least seven present to form a valid meeting, and the act of the majority of these seven or greater number will bind the corporation. In considering whether the requisite number is present, only those members must be included who are competent to take part in the particular business before the meeting. The power of doing a corporate act may , however, be specially delegated to a particular number of members, in which case, in the absence of any other provision, the method of procedure applicable to the body at large will be applied to the select body. If a corporate act is to be done by a definite body along, or by definite body coupled with an indefinite body, a majority of the definite body must be present. Where a corporation is composed of several select bodies, the general rule is that a majority of each select body must be present at a corporate meeting; b....
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....ipate. Consent of majority of all unitholders of the scheme with further prescription that 'fifty percent of all unitholders' shall constitute a quorum is clearly a practical impossibility and therefore would be a futile and foreclosed exercise. 17. Conscious of the problem of quorum and majority in indefinite electorate, 1st Edition of Halsbury's Laws of England on the question of quorum and meetings, had referred to the following principles: "791. Where a corporation consists of a definite number of corporate electors, a majority of that number must be present in order to constitute a valid election. But where a corporation consists of an indefinite number of corporate electors, a majority only of those existing at the time of the election need be present. When an election is to be made by a definite body only, or the electoral assembly is to consist of a definite and an indefinite body, the majority of the definite body must, as a general rule, be present in order to render the election legal. It is not necessary that a majority of the indefinite body should be present so long as there is majority of the definite body. If a constituent part of a corporation ....
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....common persons. It would be wrong to expect that many amongst these unitholders would have definitive opinion required and necessary voting in a poll on winding up of a mutual fund scheme. Such unitholders, for varied reasons, like lack of understanding and expertise, small holding etc., would prefer to abstain, leaving it to others to decide. Such abstention or refusal to express opinion cannot be construed as either accepting or rejecting the proposals. Keeping in view the object and purpose of the Regulation with the language used therein, we would not accept a 'construction' which would lead to commercial chaos and deadlock. Therefore, silence on the part of absentee unitholders can neither be taken as an acceptance nor rejection of the proposal. Regulation 18(15)(c), upon application in ground reality, must not be interpreted in a manner to frustrate the very law and objective/purpose for which it was enacted. We would rather accept a reasonable and pragmatic 'construction' which furthers the legislative purpose and objective. The underlying thrust behind Regulation 18(15)(c) is to inform the unitholders of the reason and cause for the winding up of the scheme and to give them....
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....lders, for or against the winding up of the six schemes. The unitholders participating in the meeting could opt to vote on 29th December, 2020, in the duration starting with the commencement of the meeting till the conclusion of fifteen minutes after the closure of the meeting. 21. By order dated 9th December, 2020, this Court had directed SEBI to appoint an Observer for the e-voting by the unitholders scheduled between 26th and 29th December, 2020. However, it was clarified that the trustees were undertaking the exercise of e-voting and that SEBI would appoint an Observer in terms of our directions. The results of the e-voting, it was directed, would not be declared and would be produced before this Court in a sealed cover along with the report of the Observer appointed by SEBI. 22. SEBI, vide its letter dated 18th December, 2020, had appointed Mr. T.S. Krishnamurthy, former Chief Election Commissioner of India, to act as the Observer 'regarding e-voting of the unitholders' of the six schemes. A Technical Assistance Team was also constituted by SEBI to assist Mr. T.S. Krishnamurthy. The Technical Assistance Team comprised the following persons: (i) Mr. B.N. Sahoo, C....
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....s sent to 10,548 unitholders where no email addresses were available. However, delivery of 1,766 SMSs failed. Accordingly, the report observes that login IDs and passwords were communicated to 3,09,052 unitholders amounting to 97.92% of the total number of unitholders. 26. M/s. J. Sagar Associates, a law firm, was appointed as the Scrutiniser for the e-voting process, its role being to oversee the conduct of e-voting for all the six schemes in a fair and transparent manner. On 9th January, 2021, the Scrutiniser had submitted its report to the Observer setting out the final results. The Observer in paragraph 36 of his report has reproduced the results as set out in the Scrutiniser's report, in a tabular form, which is as under: S. No. Scheme Total valid votes Voted For Voted Against Number % Number % 1. Franklin Templeton Ultra Short Bond Fund 53805 52075 96.78% 1730 3.22% 2. Franklin Templeton Low Duration Fund 16920 16452 97.23% 468 2.77% 3. Franklin Templeton Dynamic Accrual Fund 7550 7370 97.62% 180 2.38% 4. Franklin Templeton Credit Risk Fund 11634 11398 97.97% 236 ....
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.... based upon the number of units gives more accurate and precise results. Majority consent of the investors/unitholders should depend upon the number of units held by them- Sections 107 to 110 of Companies Act, 2013 are express provisions and will accordingly apply in case of meeting of shareholders.. (ii) Polls are akin to election. Poll results like the election results are not to be lightly interfered with. More so, when it is fault of a third party and not of the proposer/successful candidate. Poll results like election results are not to be regarded as vitiated by breach of rules or mistake, until and unless the breach or mistake, it is proved has materially affected the result of the poll. This general principle may be deviated from only when poll/election is conducted so badly that it is not substantially in accordance with law as to elections, in which case it would not matter whether the result was affected or not. - See Morgan v. Simpson [1975] QB 151 (iii) When the poll or voting is on issues or choices of commercial nature, normally it is not a part of the judicial process for the court to ferret out flaws by examining merits or wisdom of the unitholders who have vote....
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....t detail. As already held above, the unitholders were given a chance and option to vote and about 38% of the unitholders in numerical terms and 54% in value terms had exercised their right to give or reject consent to the proposal for winding up. In the absence or need for minimum quorum, which is not provided or stipulated in the Regulations nor mandated under law, the e-voting result cannot be rejected on the ground that 38% of the unitholders in numerical terms and 54% in value terms, even if we do not account for the rejected votes, had participated. This cannot be a ground to reject and ignore the affirmative result consenting to the proposal for winding up of the six mutual fund schemes. 32. Primary objection raised relates to appointment of M/s. KFin Technologies Pvt. Ltd. ('KFin Technologies') for providing e-voting platform services. The submission being that KFin Technologies is an associate/sister of M/s. Karvy Stock Broking Limited. This company, M/s. Karvy Stock Broking Limited, indicted by an adverse order dated 24th November, 2020 under Sections 11(1), 11(4) and 11B of the SEBI Act read with Regulation 35 of SEBI (Intermediary) Regulations, 2008, is barred from ac....
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....Votes as per transaction logs 1 Franklin India Credit Risk Fund 26 December 2020 0900 28 December 2020 1800 11795 11795 11795 2 Franklin India Dynamic Accural Fund 26 December 2020 0900 28 December 2020 1801 7680 7680 7680 3 Franklin India Income Opportunities Fund 26 December 2020 0900 28 December 2020 1759 5995 5995 5995 4 Franklin India Low Duration Fund 26 December 2020 0900 28 December 2020 1800 17122 17122 17122 5 Franklin India Short Term Income Plan 26 December 2020 0900 28 December 2020 1800 19897 19897 19897 6 Franklin India Ultra Short Bond Fund 26 December 2020 0859 28 December 2020 1803 54247 54247 54247 Total 116736 116736 116736 B. 0.5% of the above votes have been selected randomly; scheme wise and the same have been verified in the Master Database. The screen captures of the same are provided at Annexure I (Page Nos. 01 to 16). On verification the EVoting Logs m....
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....vided by the KFin Tech Pvt. Ltd. The analysis of these event logs reveals no abnormal events indicating the normal functionality of the systems. 4) The analysis of the E-Votes, Instapoll Votes cast on the basis of the IP Addresses indicate that there are instances of casting multiple votes from the same IP Address. The details are provided at Annexure I (Page Nos. 17 to 104). The customer details (scheme wise) wherein the same IP address has been logged for multiple E-Votes have been provided at Annexure I (Page Nos. 105 to 1988). On analysis it is observed that for many of the votes the IP Address captured is 10.41.3.252, which is the IP Address of the Load Balancing Server of KFin Tech. KFin Tech informed that the capturing of the public IP Addresses of the incoming requests for E-Votes was effective only after 26th December 2020 at 1231 Hrs. due to issues in implementing the configuration. The details of these E-Votes are provided at Annexure I (Page Nos. 1989 to 2928). 5) The complete Database Activity Monitoring Logs could not be provided by the KFin Tech Pvt. Ltd." 35. The trustees/AMC and KFin Technologies have disputed paragraph 5 of t....
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....two web servers no abnormal events were witnessed, indicating normal functionality of the system. We are satisfied with the explanation given by the trustees/AMC and KFin Technologies with reference to the observations in the report of the forensic experts from CFSL. 36. The third objection to the e-voting results emanates from the notice to the unitholders, which, it is inter alia submitted, misguides and effectively prompts and canvasses the unitholders to give their consent for winding up. Our attention was specifically drawn to the following paragraphs of the notice for e-voting and the meeting of the unitholders to highlight the aforesaid submission: "The Trustee has given due consideration to the judgment of the Hon'ble High Court and preferred an appeal to the Hon'ble Supreme Court of India on certain aspects of the judgement. However, with a view to proceed with orderly realization of value form Scheme assets and distribution to Unitholders at the earliest, the Trustee had sought permission of the Hon'ble Supreme Court to seek the approval of Unitholders for winding up the Schemes, which permission was granted by the Hon'ble Supreme Court on December 3, 2020 wit....
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....m, at regular intervals. (ii) This option will enable recovery of maximum value of securities held by the Scheme. (iii) The Authorised Person would be in a position to take the most appropriate action with regard to liquidation of each security as there will be no undue haste or selling pressure. (iv) The NAV would not be negatively impacted as liquidation would be orderly and there would be no need for distress sales. (v) Unitholders will not be required to apply for redemptions. Unitholders will receive regular prorate distributions of investment proceeds as assets are systematically liquidated by the Scheme. (i) The Scheme would be required to reopen immediately and may need an emergency liquidation of securities, if a high volume of redemption is received. (ii) This may entail distress sales of securities in order to meet the redemptions received. The market is unlikely to have the liquidity to absorb such large quantities of securities over a short period of time and it may not be possible to get bids at reasonable prices for all securities in such circumstances. iii) A distress sale of securities held in the portfolio could result in a rapid and steep decline in the NAV le....
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....re stress and it is no longer possible for certain schemes of Franklin Templeton to generate adequate liquidity to fund daily redemptions. Accordingly, we wish to inform you, that the Trustees of Franklin Templeton Mutual Fund in India have, after careful analysis and review of the recommendations submitted by Franklin Templeton AMC, and in close consultation with the investment team, voluntarily decided to wind up its suite of six yield-oriented fixed income funds, post cut-off time from April 23, 2020 (refer to Annexure I- Notice to Investors) as they are of the considered opinion that an event has occurred, which requires these schemes to be wound up. This decision has been taken in light of the severe market dislocation illiquidity caused by the Coid-19 pandemic, and in order to protect value for investors via managed sale of the portfolio. The list of schemes being wound up is as follows: 1. Franklin India Ultra Short Bond Fund (FIUBF) 2. Franklin India Short Term Income Fund (FISTIP) 3. Franklin India Credit Risk Fund (FICRF) 4. Franklin India Low Duration Fund (FILDF) 5. Franklin India Dynamic Accrual Fund (FIDA) 6. Frank....
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....fer Plans and Systematic Withdrawal Plans into and from the abovementioned funds stood cancelled post the cut off time from 23rd April, 2020. The notice had also furnished information and clarification regarding distribution of monies from the Fund Assets, inter alia stating that following the decision to wind up the six schemes, the trustees would proceed for orderly realization and liquidation of the underlying assets with the objective of preserving value for unitholders. Their endeavour would be to liquidate the portfolio holdings at the earliest opportunity, to enable an equitable exit for all investors in the 'unprecedented circumstances'. We do not think, in the facts of the present case, the notice for e-voting and the contents would justify annulling the consent given by the unitholders for the winding up of the six schemes. 38. We will now refer to and deal with some of the other objections to the consent/e-voting results which, in our opinion, are merely assertions, or at best minor irregularities, which do not have any substance. These contentions are: (i) Mr. T.S. Krishnamurthy's appointment as the Observer by SEBI vide its letter dated 18th December, 20....
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....ed. Missed calls were returned and answered. The Observer's report vide Annexure-10 refers to the complaints/calls made to Mr. T.S. Krishnamurthy and also records that these were redressed. No unitholder has expressed or stated that they could not vote or their queries were not answered. Absence or lack of digital signatures on the notice is a technical and not a substantive objection. Moreover, the trustees have explained that in view of the objection raised by the Technical Assistance Team, Mr. Alok Sethi had digitally signed a copy of the notice for the purpose of the record. This digitally signed notice was made available to the Technical Assistance Team. M/s. J. Sagar and Associates and KFin Technologies had been earlier appointed by the trustees possibly for compliance of clause (c) to Regulation 18(15) of the Regulations. Agreements earlier in point of time with KFin Technologies and M/s. J. Sagar and Associates would not, in any manner, be an irregularity. Further, Mr. T.S. Krishnamurthy was not to himself count the votes as this exercise had to be undertaken essentially by the Scrutiniser, M/s. J. Sagar and Associates. To conduct the e-voting, for the purpose of consent, t....
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....the unitholders would mean consent by majority of the unitholders who have participated in the poll, and not consent of majority of all the unitholders of the scheme. In view of the findings and reasons stated above, we reject the objections to poll results and hold that the unitholders of the six schemes have given their consent by majority to windup the six schemes. Winding up and disbursements would be in terms of our directions in earlier orders dated 2nd February, 2021 and 9th February, 2021 and paragraph 41 above. We, however, clarify that this order does not examine and decide other aspects and issues including the questions whether Regulation 18(15)(c) would apply when the trustee's form an opinion that the scheme should be wound up in accordance with Regulation 39(2)(a) and the contention of the objecting unitholders regarding misfeasance, malfeasances, fraud and the effect thereof. FOOTNOTE 1 Regulation 18: Rights and obligations of the trustees (15) The trustees shall obtain the consent of the unitholders - (a) whenever required to do so by the Board in the interest of the unitholders; or (b) whenever required to do so on ....