TaxTMI 
TaxTMI 
2021 (7) TMI 751
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....Ms. Supriya Juneja, AOR Mr. Aditya Singla, Adv. Ms. Aishwarya Reddy, Adv. Ms. Cheshta Jetly, Adv. Mr. Shivam Singh, Adv. Mr. Sahil Raveen, Adv. Mr. Jaideep Khanna, Adv. Mr. Vidur Diwedi, Adv. Mr. Manish Kumar, AOR 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 Mr. Dheeraj Nair, AOR Mr. Kumar Kislay, Adv. Mr. Angad Baxi, Adv. Mr. Rajat Nair, Adv. Ms. Priyanka Das, Adv. Mr. Arvind Kumar Sharma, AOR Mr. Sanjay Kapur, AOR Mr. V.M.Kannan, Adv. Ms. Megha Karnwal, Adv. Mr. Arjun Bhatia, Adv. Mrs.Shubhra Kapur, Adv. Mr. Lalit Rajput, Adv. CIVIL APPEAL NO. 502 OF 2021 CIVIL APPEAL NO. 503 OF 2021, CIVIL APPEAL NOS. 504-507 OF 2021 CIVIL APPEAL NO. 508 OF 2021 , CIVIL APPEAL NO. 509 OF 2021 SPECIAL LEAVE PETITION (CIVIL) NO. 1486 OF 2021 AND SPECIAL LEAVE PETITION (CIVIL) NO. ______ OF 2021) (ARISING OUT OF DIARY NO. 1563 OF 2021) ORDER SANJIV KHANNA, J. By the order dated 12th February 2021, interpreting Regulation 18(15)(c) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (hereafter referred to as 'Regulations') and accepting the ....
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....he board of trustees or the trustee company, and the asset management company (the AMC). The sponsor, as defined by Regulation 2(x), means a person who, acting alone or in combination with another body corporate, establishes a mutual fund. For this purpose, the sponsor is required to make an application to the Securities and Exchange Board of India (hereinafter referred to as the 'SEBI') in the prescribed form for registration of the mutual fund. Chapter II of the Regulations spells out the eligibility criteria and requirements for registration of a mutual fund. 5. The term 'trustees' has been defined in Regulation 2(y) to mean the board of trustees or the trustee company who hold the property of the mutual fund in trust for the benefit of the unitholders. The expression 'unit' has been defined in Regulation 2(z) to mean the interest of the unitholders in the scheme, which consists of each unit representing one undivided share in the assets of the scheme, and the term 'unitholder' has been defined in Regulation 2(z)(i) to mean a person holding a unit in the scheme of a mutual fund. 6. The AMC is a company, approved by SEBI under Regulation 21(2), which undertakes business activit....
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....gement agreement with the prior approval of SEBI. Such an agreement must contain clauses mentioned in the Fourth Schedule and other clauses as are necessary for the purpose of making investments. The sub-regulations enumerate the requirements to be satisfied before a scheme is launched by the AMC. They obligate that the trustee shall ensure that the AMC has been diligent in empanelling the brokers, and in monitoring securities transactions with the brokers and in avoiding undue concentration of business with any broker. The trustees have to also ensure and check that the AMC has not given any undue or unfair advantage to any associates or dealt with any of its associates in any manner detrimental to the interest of the unitholders and that the transactions entered into by the AMC are in accordance with the regulations and the scheme. The trustees are entitled to call for details of transactions in securities by the key personnel of the AMC in their own name or on behalf of the AMC and report the same to SEBI, as and when required. The sub-regulations require the trustees to carry out quarterly reviews of all transactions between the mutual funds, the AMC and its associates. The tru....
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.... and the responsibilities of the AMC, which include taking reasonable steps and exercising due diligence to ensure that the investment of funds pertaining to any scheme is not contrary to the provisions of the regulations and the trust deed. The AMC is responsible for the acts of commission or omission by its employees, or persons whose services have been procured by the AMC. Sub-regulation (6) states that the AMC and its directors, notwithstanding any contract or agreement, shall not be absolved of the liability to the mutual fund for their acts of omission and commission, while holding such position or office. 10. There are a number of stipulations and restrictions to ensure objectivity, fidelity and transparency in business transactions by the AMC and compliance with the Regulations. A system of regulation involving checks, responsibility and power of free decision is envisaged. The Chief Executive Officer, by whatever name called, is mandated by sub-regulation (6A)- SEBI (Mutual Funds) (Second Amendment) Regulations, 2020, w.e.f. 29.10.2020 to Regulation 25 to ensure that the mutual fund complies with all the provisions of the Regulations, guidelines and circulars issued in re....
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....o to sub-regulation (3), difference between the repurchase price and the sale price of the unit shall not exceed 7% calculated on the sale price. - Post amendment w.e.f. 5.3.2021 Regulation 49(3) states that the repurchase price of units of an open-ended scheme shall not be lower than 95 % of the NAV. There is no stipulation in the Regulations regarding the sale price. 13. Regulations 54 and 55 relate to the annual report and the auditor's report respectively. Regulation 56 requires providing a copy of the annual report and the summary thereof to the unitholders. Regulation 58 mandates periodic and continual disclosures by the AMC, the trustee, the sponsors, and the custodians, requiring them to make such disclosures and submit such documents as may be provided by SEBI and comply with sub-regulations (2) and (3). Regulation 59 deals with half-yearly disclosures. Regulation 60 imposes a general obligation to disclose information and, being of some importance, is reproduced below: "Disclosures to the investors 60. The trustee shall be bound to make such disclosures as are essential in order to keep them informed about any information which may have an adverse bearing on their in....
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....t 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 unitholders. (3) Where a scheme is to be wound up under sub-regulation (2), the trustees shall give notice disclosing the circumstances leading to the winding up of the scheme: "(a) to the Board; and (b) in two daily newspapers having circulation all over India, a vernacular newspaper circulating at the place where the mutual fund is formed. Effect of winding up 40. On and from the date of the publication of notice under clause (b) of sub-regulation (3) of regulation 39, the trustee or the asset management company as the case may be, shall- "(a) cease to carry on any business activities in respect of the scheme so wound up; (b) cease to create or cancel units in the scheme; (c) cease to issue or redeem units in the scheme. Procedure and manner of winding up 41. (1) The trustee shall call a meeting of the unitholders to approve by simple majority of the unitholders present and voting at the meeting resolution for authoris....
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....lation 39, as the heading states, relates to 'winding up' of a scheme of a mutual fund. Sub-regulation (1) to Regulation 39 applies to close-ended schemes and is accordingly not relevant as the six schemes in question are open-ended schemes. Regulation 2(f) - "close-ended scheme" means any scheme of a mutual fund in which the period of maturity of the scheme is specified. 18. Sub-regulation (2) to Regulation 39 uses the expression 'a scheme of a mutual fund,' and accordingly applies to both open-ended and close-ended schemes. Regulation 2(s) - "open-ended scheme" means a scheme of a mutual fund which offers units for sale without specifying any duration for redemption. It is an undisputed position that sub-regulation (2) to Regulation 39 applies to the six schemes. In terms of sub-regulation (2) to Regulation 39, a scheme of a mutual fund can be wound up: (a) on the happening of any event, which, in the opinion of the trustees, requires the scheme to be wound up; (b) if 75% of its unitholders-2(z)(i) of SEBI (Mutual Fund) Regulation 1996, "unit holder" means a person holding unit in a scheme of mutual fund. pass a resolution for winding up of the scheme; or (c) SEBI directs windin....
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....en the decision for winding up was taken. The clause differentiates between the creditors whose liability is due and payable, and the unitholders. Payment of the amount due and payable to the creditors is prioritised and takes precedent. Thereafter, appropriate provision is required to be made for expenses connected with the winding up. The balance amount is payable to the unitholders. 23. In terms of Regulation 42(2), the unitholders are to be paid in proportion to their respective interest in the assets of the scheme. The interest of the unitholders in the assets of the scheme as mentioned in Regulation 42(2) is computed on the basis of the date when the decision for winding up of the scheme was taken. As per Regulation 41(3), on completion of winding up, the trustees have to forward to SEBI and to the unitholders a report on the winding up containing particulars such as circumstances leading to the winding up, the steps taken for disposal of the assets for winding up, expenses for winding up, net assets available for distribution to the unitholders and a certificate from the auditors. Sub-regulation (4), a non-obstante provision, states that the requirement in respect of disclo....
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.... a scheme. Their decision is final and binding on the unitholders. It is submitted: "a) Regulation 18(15)(c) requires Trustees to obtain consent of Unit holders "when the majority of the Trustees decide to wind up". It is thus very clear that consent is required when Trustees decide to wind up the scheme(s) and when read together with Regulation 41, makes it amply clear that the consent is for the purpose of Regulation 41 i.e. to authorize the Trustee or any other person to dispose of the asset of scheme(s), in the interest of the unit holders. (b) The consent envisaged under Regulation 18(15)(c) is a general "rights and obligations" of the Trustees and that the said consent shall be read as approval required under Regulation 41(1). (c) It is submitted that in the event consent under Regulation 18(15)(c) is interpreted to mean that prior consent of unitholders is required before a scheme is wound up pursuant to a decision taken by the Trustees, the provisions of Regulation 39(2)(b) to be rendered otiose as under the said Regulation, a scheme may be wound up at the instance of Unit holders (upon 75% of the Unit holders of a scheme passing a Resolution for winding up). (d) Re....
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.... decision of the domain experts. Given the grave consequences for the sponsor, trustees and AMC, a decision to wind up a scheme is taken after in-depth analysis with great care and caution. Thus, the findings of the High Court to the contrary should be reversed. Interpretation of the term 'consent' in Regulation 18(15)(c) vide order dated 12th February, 2021 28. In our order dated 12th February 2021, we have interpreted Regulation 18(15)(c) and the word 'consent' therein in the following manner: "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 subm....
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.... the entire body of members required to be present to legally transact business. 11. Shackleton in the above quotation has referred to distinction between simple and special majority. More appropriate for our discussion is William Paul White's thesis 'History and Philosophy of the Quorum as a Device of Parliamentary Procedure' published in 1967, in which he elucidates: "Much of the controversy that 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 exami....
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....e held to be invalid." This decision had also relied on the exposition on the subject of quorum in the Halsbury's Laws of England, Third Edition (Vol. IX, page 48, para 95), which reads: "95. Presence of quorum necessary. The acts of a corporation, other than a trading corporation, are those of the major part of the corporators, corporately assembled. In 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 w....
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....rtise, commercial understanding, relatively small holding etc. may not like to participate. 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 ....
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....erred mode of investment for ordinary and 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....
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....an interpretation advancing the legislative intent without rewriting the provision. The legislative intent is gathered not by restricting it to the language of the provision, rather in the light of the object and purpose of the provision and the legislation. The courts do lean towards a pragmatic and purposive interpretation as there is an assumption that the draftsmen legislate to bring about a functional and working result. Harmonious interpretation of Regulation 18(15)(c) with Regulations 39 to 42 30. Regulation 39(2) under clause (a) vests the power of winding up of a scheme with the trustees, and with the unitholders under clause (b) and with the SEBI under clause (c), but under Regulation 18(15)(c), the trustees are required to seek consent of the unit holders, when they by majority decide to wind up a scheme. Regulation 18(15)(c) mirrored by use of the word 'shall' is couched as a command. Further, the expression 'when the majority of the trustees decide to wind up' in Regulation 18(15)(c) manifestly refers to clause (a) to Regulation 39(2) as this is the only Regulation which entitles the trustees to wind up the scheme. Regulation 18(15)(c), when it refers to trustees' de....
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....y scheme or the trust or fees and expenses payable or any other change which would modify the scheme or affect the interest of the unitholders 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 unitholders 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) the unitholders 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 unitholders are given an option to exit at the prevailing Net Asset Value without any exit load. Explanation: For the purposes of this clause "fundamental attribute....
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....tained clause (c) to 18(15), re-enforces its link with clause (a) to Regulation 39(2). Accordingly, the need to obtain consent of the unitholders is mandated under clause (c) to sub-regulation 15 to Regulation 18 when the trustees under clause (a) to Regulation 39(2) decide to wind up a scheme. 35. The argument that the unitholders are lay persons and not well-versed with the market conditions is to be rejected in light of the order dated 12th February 2021. Relevant portion of this order, at the risk of repetition, is being reproduced below: "18. Investment in share market, though beneficial and attractive, requires expertise in portfolio construction, stock selection and market timing. In view of attendant risks, diversification of portfolio is preferred but this consequentially requires a larger investment. Mutual funds managed by professional fund managers with advantages of pooling of funds and operational efficiency are the preferred mode of investment for ordinary and 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, ....
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....y to them. Thus, the contention that the trustees being specialists and experts in the field, their decision should be treated as binding and fait accompli has to be rejected not only in view of the specific language of Regulation 18(15)(c), but to be in concinnity with the objective and purpose of the Regulations. 36. A hypothetical submission that the unitholders may reject a valid and well-considered opinion of the trustees for winding up, and therefore Regulation 18(15)(c) is directory, should be rejected. Assumptions cannot be a ground to wrongly interpret Regulation 18(15)(c). Situations could arise when the trustees may err in their opinion, in which event the unitholders may correct them. Money and investment of the unitholders being at stake, a wrong decision would obviously have inimical impact on the unitholders themselves. We would brace the argument that a good and intelligible decision of winding up would invariably be accepted by the unitholders. 37. 'Consent' for the purpose of Regulation 18(15)(c) refers to the consent of the majority of the unitholders present and voting, and in case of a poll, the computation would be with reference to the number of units held ....
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....decision is binding on all, including those who do not vote. Where investor approval is required, the rights of investors should be clear from the termination plan. In particular, the termination plan should document how the interests of dissenting investors will be treated." Good practices, as recommended by IOSCO, commend the unitholders' right to vote/approve on matters of termination and liquidation. 39. On and from the date of publication of notices under Regulation 39(3), the cease and freeze effect of Regulation 40 applies. The words used in sub-regulation (3) to Regulation 39 are 'where a scheme is to be wound up in sub-regulation (2)', that is, a scheme is to be wound up in terms of clauses (a), (b) or (c) to Regulation 39(2). Sub-regulation (3) to Regulation 39 also mandates the trustees to disclose in the public notice the circumstances leading to winding up of the scheme. This obviously means that where the trustees form an opinion to wind up a scheme, they must disclose the reasons, and thereupon, the unitholders exercise their right to vote and give or deny consent. This is the true legal effect on harmonious reading of Regulation 18(15)(c) and Regulation 39(2)(a). ....
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....hether the trustees or any other person should take steps for winding up of the said scheme. One meeting in many a cases would suffice. 45. To complete interpretation of Regulation 18(15), we have to record that clause (a) applies and requires the trustees to obtain consent of the unitholders whenever required by SEBI in the interest of the unitholders. Clause (b) states that the trustees would obtain consent of the unitholders whenever required to do so on the requisition made by three-fourths of the unitholders of any scheme. Accordingly, clause (a) would apply whenever SEBI mandates and clause (b) applies whenever three-fourths of the unitholders of the scheme make a requisition. 46. The impugned judgment, from paragraph 211 onwards, specifically refers to the responsibilities and duties of the trustees incorporated in the statement of additional information published by the mutual fund, which reads: "(b) The Trustees 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) ....
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....one of the appellants, namely, Amruta Garg. The contentions forwarded can be summarised as under: (a) The expression 'happening of any event' in Regulation 39(2)(a) is unspecified and suffers from the vice of excessive delegation as it does not give any indication of the type of events which would be relevant for winding up of the scheme. It gives unbridled power to the trustees to wind up a scheme which, in the opinion of the trustees, should be wound up. (b) In comparison, vide clause (c) to Regulation 39(2), SEBI has been invested with the power to issue directions for winding up a mutual fund scheme only when it is in the interest of the unitholders. (c) Further, SEBI has not prescribed/issued guidelines or policy regarding formation of opinion by the trustees to wind up the scheme. (d) The opinion of the trustees is given paramountcy and is supreme. Even SEBI accepts that it has no role and cannot examine and set aside the decision of the trustees. Thus, SEBI, as per its own contention and submission, being bound by the opinion of the trustees, cannot interfere even when it is necessary to do so in the interest of unitholders or when the trustees have acted in their ow....
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.... Infrastructure Limited and Another v. Union of India and Others (2019) 8 SCC 416 where the home buyers have been held to be financial creditors under the Indian Bankruptcy Code. Principle of pari passu should be made applicable. (i) Regulation 42 is also manifestly arbitrary as SEBI is to perform only ministerial functions, much less than the functions of a regulator. Conspicuously, during the winding up process, SEBI has been given a minimalistic role which is contrary to the paramount object of the Act. 50. We would begin by referring to the provisions of the SEBI Act and by elucidating the powers of SEBI. Section 11 of the SEBI Act prescribes the functions of SEBI. Sub-section (1), in general terms, states that it will be the duty of SEBI to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market. SEBI is empowered to take measures in this regard as it thinks fit. Sub-section (2), without prejudice to the generality of sub-section (1), lists out as many as 17 specific clauses and states that SEBI is entitled to provide for measures relating to those clauses. Thereunder, Clause (e) relates to prohibiting fraud....
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....for a period not exceeding 90 days subject to conditions and for a further period beyond 90 days subject to confirmation by the special court, bank accounts and other properties of any intermediary or any person associated with the securities market in any manner involved in violation of the provisions of the SEBI Act, or Rules or Regulations made thereunder; direct any intermediary associated with securities market in any manner not to dispose of or alienate any asset forming part of any transaction under investigation subject to the condition that before or after passing such orders an opportunity of hearing shall be given to such intermediaries or persons concerned. Sub-section (4A) authorises SEBI to conduct an inquiry in the prescribed manner notwithstanding the provisions of sub-sections (1), (2), (2A), (3) and (4), Section 11B and Section 15-I by an order and for reasons to be recorded in writing levy penalty under Sections 15A, 15B, etc. Under sub-section (5), the amount disgorged pursuant to the directions issued under Section 11B of the Act or 12A of the Securities Contracts (Regulation) Act, 1956 etc. is to be credited to the Investor Protection and Education Fund establ....
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....ss of persons referred to in Section 12 or associated with the securities market, or (b) to a company in respect of the matters specified in Section 11A as may be appropriate, in the interest of the investors in securities and in the securities market. The explanation to the Section is important for it clarifies, by way of removal of doubt, that the directions under this Section shall include and shall always deem to include power to direct any person, who has made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of the Act, or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention. The provisions of Section 11B have been held to be procedural in nature and include not only an individual but also a company. Therefore, any person associated with the securities market who commits breach of the SEBI Act, Rules and Regulations, can be subjected to such directions and measures as may be imposed and issued by SEBI. Sub-section (2) to Section 11B states that SEBI may after holding an inquiry pass an order in writing, and, without prejudice to the provisions of Sectio....
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....quirements of sub-clause (a) and (b) of clause (3) of Regulation 39, SEBI can always issue a direction under Section 11B not to stop redemptions, unless compliance is made with clause (3) of Regulation 39. If it is found that the Trustees continue to carry on business activities of the Schemes even after action under clause (3) of Regulation 39 is taken, a direction under Section 11-B can be issued by SEBI to stop all business activities." 54. We have reservations on the said observations for the simple reason that if there is a violation of the regulations, i.e. clause (a) to Regulation 39(2), 39(3), 40, 41 or 42 by the trustees or the AMC, it is open to SEBI to proceed in accordance with law and in terms of Section 11 and 11B of the Act. It would be, therefore, incorrect to state that the decision of the trustees under clause (a) to Regulation 39(2) cannot be made subject matter of inquiry or investigation and therefore no directions or orders under Section 11 or 11B of the Act can be passed. No doubt, clause (a) to Regulation 39(2) gives primacy to the opinion of the trustees and does not require prior approval of SEBI, yet SEBI is entitled to conduct an inquiry and investigati....
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.... SEBI. As long as the power exercised under Section 11B is subject to the provisions of the SEBI Act and well within the legal and constitutional frame work, intended to achieve the purposes of the SEBI Act and subjecting the persons specified in the section, the power will sustain. The Appellate Tribunal called it a wholesome provision designed to achieve the objectives of the SEBI Act. 56. The Trustees and the AMC in their written submissions filed before the High Court interpreting the SEBI Act and the Regulations had conceded that SEBI has extensive powers with respect to the regulation of mutual funds including the trustee's decision to wind up a scheme of the mutual fund. Section 11(1) of the SEBI Act states that it is the duty of SEBI to protect the interest of investors in securities and to promote the development of, and to regulate the securities market, by "such measures as it thinks fit". Under Section 11B of the SEBI Act, SEBI has broad powers to issue appropriate directions if it is satisfied after inquiry that such directions are necessary in the interest of investors or for orderly development of securities market or to prevent the affairs of any intermediary being....
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.... first portion of this order, we have elaborately referred to the Regulations which thereby create a three-tier system of the sponsor, the AMC and the trustees. There are stipulations regulating the activities of the trustees and the AMC whose powers, obligations and rights have been expressly laid down. The power to regulate mutual funds, once accepted, would include the power to make regulations for winding up of a scheme of the mutual fund. Not framing any regulation in this regard would have amounted to dereliction of duty on the part of SEBI and subjected it to adverse comments. 58. It cannot be accepted that the trustees under clause (a) to Regulation 39(2) have been given absolute and unbridled power to wind up a scheme. Language of clause (a) to Regulation 39(2) states that the trustees must form an opinion on the happening of any event which requires the scheme to be wound up. Further, as per Regulation 39(3), the trustees are bound to give notice disclosing the circumstances leading to the winding up of the scheme. These notices along with the reasons have to be communicated to SEBI and made known to the unitholders by publication in two daily newspapers having circulati....
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....lations, the relevant portion of which is extracted below: "VI. DURATION OF THE SCHEME AND WINDING UP xx xx xx However, in terms of the SEBI Regulations, the Scheme may be wound up if: i. There are changes in the capital markets, fiscal laws or legal system, or any event or series of events occurs, which, in the opinion of the Trustee, requires the Scheme to be wound up; or xx xx xx " 60. We have agreed with the High Court that the opinion of the trustees under clause (a) to Regulation 39(2), therefore, must be consented to by the unitholders in terms of the mandate of Regulation 18(15)(c). In view of this interpretation, the argument challenging constitutional validity of the Regulations on the ground that they give unbridled and absolute power to the trustees loses much of its sting and force. There are, therefore, sufficient guidance and safeguards in the Regulations itself on the power of the trustees to decide on winding up of the fund. 61. The Regulations, in our opinion, rightly draw the distinction between creditors and the unitholders. The unit holders are investors who take the risk and, therefore, entitled to profits and gains. Having taken the calculated ri....
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....her the creditors or the home buyers will be unsound and incongruous. 62. The expression 'due and payable' with reference to the liabilities is significant. The words 'due and payable' have to be interpreted with reference to the context in which the words appear. B.K. Educational Services Private Limited v. Parag Gupta and Associates, (2019) 11 SCC 633. In the context in question they refer to the present liabilities which may be in praesenti or in futuro. There must be an existing obligation though the appointed date of payment may not have arrived. 'Payable', in this context, means capable of being paid, suitable to be paid and legally enforceable. It would exclude labilities that are time barred or those not payable in facts or in law. Union of India v. Raman Iron Foundry, (1974) 2 SCC 231 In case of any dispute a summary but thorough inquiry may be made to ascertain whether the liability is due and payable. Regulations do not bar civil remedy Obviously, the liabilities which are not due and payable would not get preferential treatment, thereby reducing the amounts payable to the unitholders. 63. Since the Regulations are in the nature of economic regulations, while exercisin....
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....arry on any business activity in respect of the scheme so wound up. 65. Issue in question would, therefore, arise whether the AMC or the trustees are bound to honour and pay the redemption or repurchase proceeds for requests received before the date of publication of notice in terms of Regulation 39(3). Interpreting the word 'business' in clause (a) of Regulation 40, the Division Bench of the High Court has held that this expression refers to business activity and, therefore, would include payment of redemption proceeds to the unitholders, which would include the request for redemption received prior to the date of publication under Regulation 59(3). The High court has, accordingly, held: "228. As regards redemption requests received prior to compliance with clause (3) of Regulation 39, the argument of AMC and the Trustees was that in view of clause (d) of Regulation 53, the redemption or repurchase proceeds are required to be dispatched within ten working days from the date of redemption notwithstanding the decision of winding up. As held earlier, the dispatch of redemption proceeds or repayment of redemption proceeds is also a part of business activity of a Scheme which is com....
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....odes to the unit-holders/investors. The returns can be in the form of repurchase of the units, redemption of units, payment of interest or dividend to the unit-holders, as the case may be, depending upon the nature of the Scheme. Making such returns is certainly a business activity of a Scheme. The income so generated by investments made in accordance with Regulation 43, can also be invested by AMC. Clause (3) Regulation 44 provides that save as otherwise expressly provided, a Mutual Fund shall not advance any loans for any purposes. However, clause (4) of Regulation 44 provides that a Mutual Fund may lend and borrow securities in accordance with the framework relating to short selling and securities lending and borrowing specified by SEBI. The provisions of Mutual Funds Regulations are intended to regulate activities of Mutual Funds for promoting its healthy growth and for protecting interest of unit-holders. In a case of Taxation law, the rules of interpretation applicable provide that if there are two interpretations possible, the one in favour of assessee will have to be preferred. In case of Mutual Funds Regulations, a construction needs to be adopted which will subserve the o....
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....lity. That is the reason why the redemption must immediately cease. Therefore, it must be held that the borrowings made by AMC, in terms of clause (2) of Regulation 44, are business activities' of a Scheme within the meaning of clause (a) of Regulation 40. If borrowings are made in accordance with clause (2) of Regulation 44, the act of replacement of the borrower, as done by the AMC and the Trustees in the present case, will have to be also held to be a part of business activities in respect of the Scheme." 67. The case set up by some parties is at variance with the dictum pronounced by the High Court. They have submitted that the mutual fund must honour the request for redemptions received on or before the date of publication of notice under Regulation 39(3). In other words, Regulation 53(b) must be honoured and complied with even if the time of payment of redemption, the 10 days period stipulated therein, would fall after the date of publication of the notice under Regulation 39(3). They are of the opinion that it would be illegal not to honour the valid redemption requests. They are also of the opinion that the AMC should be allowed and permitted to borrow money within the....