AI Drafter 
TaxTMI 
TaxTMI 
2021 (7) TMI 751
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....d Co, AOR Mr. Paritosh Gupta, Adv. 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 referr....
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....e Regulations envisage a three-tier structure for mutual funds in the form of the sponsor, the 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. ....
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....ub-regulations. The trustees and the AMC, as per Regulation 18(1), can enter into an investment management 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....
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....cifies the restrictions on the business activities of the AMC. Regulation 25 specifies the obligations 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 th....
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.... Net Asset Value and the sale price is not higher than 107% of the Net Asset Value. As per the second proviso 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 dis....
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....tion 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 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 red....
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....ade by three-fourths of the unitholders of any scheme; or (c) when the majority of the trustees decide to wind up or prematurely redeem the units." Interpretation of Regulations 39 to 42, their interplay and harmonious construction with Regulation 18(15) (c) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. 17. Regulation 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 o....
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....(2) to Regulation 41, states that the sale proceeds shall be first utilised towards discharge of liabilities due and payable under the scheme. Secondly, appropriate provision is to be made for meeting the expenses connected with the winding up. The balance amount shall be paid to the unitholders in proportion to their respective interests in the scheme as on the date when 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 unitholde....
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....solution by 75% of the unitholders is mandated. The need to obtain the consent of the unitholders vide Regulation 18(15)(c) refers to the procedure and the manner for winding up as mandated by Regulation 41(1). To put it differently, the unitholders do not come into the picture when the trustees and SEBI, under clauses (a) and (c) respectively of Regulation 39(2), decide to wind up 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 ....
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....fire-sale of sound assets in a hasty and disorganised manner at discounted valuations in adverse market conditions. The trustees who stand in a fiduciary capacity as domain experts, as mandated by clause (a) to Regulation 39(2), act for and in the interest of the unitholders. The unitholders, a large and disparate body of lay persons without domain expertise, have been erroneously conferred the right to veto and overrule the 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 ....
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....ve consent to winding up by 'the majority of the unitholders'. Conversely, consent is denied when 'majority of the unitholders' do not approve the proposal to wind up the scheme. 10. However, the question which still remains to be answered is whether 'consent' would mean majority of the unitholders who exercise their right in the poll, or majority of all the unitholders of the scheme. Connected with the question is the concern of quorum, which means the minimum number of members of 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 ....
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....the Companies Act, 2013 prescribes minimum quorum for shareholder meetings. 13. In Shri Ishwar Chandra v. Shri Satyanarain Sinha and Others, this Court on the question of quorum has held: "If for one reason or the other one of them could not attend, that does not make the meeting of others illegal. In such circumstances, where there is no rule or regulation or any other provision for fixing the quorum, the presence of the majority of the members would constitute it a valid meeting and matters considered there at cannot be 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 th....
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....fusion, which may, in addition, have adverse economic consequences. The legislator in the present case must, therefore, reflect and take remedial steps to bring about clarity and certainty in the Mutual Fund Regulations. 16. Reading prescription of a quorum as majority of the unitholders or 'consent' as implying 'consent by the majority of all unitholders' in Regulation 18(15)(c) of the Mutual Fund Regulations will not only lead to an absurdity but also an impossibility given the fact that mutual funds have thousands or lakhs of unitholders. Many unitholders due to lack of expertise, 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 ....
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....reject the proposal to wind up the mutual fund scheme. The unitholders who did not exercise their choice/option cannot be counted as either negative or positive votes as either denying or giving consent to the proposal for winding up. 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, 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....
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....with Regulation 18(15)(c). 29. The quotation highlights that interpretation is sometimes a three-stage process. At first, the words being interpreted should be understood according to their grammatical meaning in their literal and popular sense. In the second stage, we consider whether in the given context the plain meaning is obscure as the text gives rise to choice of more than one interpretation, or the propositional interpretation fails to achieve the manifest purpose of the legislation, reduces it to futility, is practically unworkable or even illogical. In such cases at the third stage, the court applying interpretative tools selects or blue-pencils 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) ....
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....ntirety, a situation covered by Regulation 39(2)(a). To ignore the mandate of Regulation 18(15)(c) would nullify the legislative intent by resorting to a rather disordered and knotted argument that Regulations 18(15)(c) and 41(1) are identical and serve the same purpose. Clause (c) to Regulation 18(15) does not duplicate sub-regulation (1) to Regulation 41. 33. Similarly, omission of clause (d) to Regulation 18(15) and insertion of 18(15A) with effect from 22nd May 2000 by SEBI (Mutual Funds) (Second Amendment) Regulations, 2000 is inconsequential. Prior to its omission, clause (d) to Regulation 18(15) read: "(d) when any change in the fundamental attributes of any scheme or the trust or fees and expenses payable or any other change which would modify the scheme 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....
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.... cases under clause (a) to Regulation 39(2) the unitholders have no right or option to exit or not exit the scheme and are paid in terms of Regulation 41. Regulation 18(15A) gives the option to the unitholders to exit at the prevailing 'Net Asset Value' without any exit load or continue with the altered/modified scheme. Under the omitted clause (d) to Regulation 18(15), consent of three-fourths of the unitholders for fundamental changes to the scheme was sometimes necessary. This is not necessary under Regulation 18(15A). Omission of clause (d) to sub-regulation 18(15) and insertion of sub-regulation (15A) to Regulation 18, as observed above is inconsequential and not relevant to the present dispute. If anything, the draftsmen having retained 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 Feb....
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....d be transparent. Summary reports, periodic and continual statements, annual reports, audit reports, etc., mentioned in paragraph 11 above are intended to reveal the current status of the investments, future prospects, risks and factors that may have bearing on the returns to enable the unitholders to take deliberative decisions, be it purchase, redemption or exercise of the right to vote. The unitholders, when in doubt, as prudent investors may be advised to abstain, but they are not placid onlookers, impuissant and helpless when the trustees decide to wind up the scheme in which they have invested. The stature and rights of the unitholders can co-exist with the expertise of the trustees and should not be diluted because the trustees owe a fiduciary duty 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 fo....
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....nd on the legal structure of the investment fund and whether voting rights are attributed to shares / units. 29. Investment in an investment fund usually carries with it the right to vote on certain matters and the voting requirements for the approval of investors on, inter alia, liquidations and terminations are generally prescribed in the constitutional documents and the prospectus / offering document of the investment fund, or legal and regulatory regime of the national regulator, or both. The termination plan should set out the process for obtaining investor approval, where required. 30. Where investor approval is required and investors are asked to vote on the decision to terminate with the outcome achieving the minimum voting requirements for approval, the 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....
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....ation takes care of the apprehension expressed by SEBI, the trustees and AMC that delay or time gap between a decision of the trustees under clause (a) to sub-regulation (2) to Regulation 39 and publication of notice under sub-regulation (3) to Regulation 39 would postpone the cease-and-freeze effect of Regulation 40. 44. We have referred to Regulation 41(1) and that it requires calling of a meeting of the unitholders for authorising the trustees or any other person to take steps for winding up of the scheme. In case where the scheme is being wound up under Regulation 39(2)(a), it is possible to hold a meeting of the unitholders under the said provision where if the resolution for winding up is passed, the unitholders can also decide by simple majority of the unitholders present and voting whether 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 ....
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.... per which the trustees have the option to suspend redemption of units for a period of 10 days in a period of 90 days. The relevant portion of the said circular reads as under: "b. Restriction on redemption may be imposed for a specified period of time not exceeding 10 working days in any 90 days period" SEBI has taken the stand that the benefit of this circular should not be taken when the question of winding up is pending consideration before the trustees. The position not being ironclad, SEBI may re-examine whether the trustees/AMC can be permitted to take similar benefit pending the decision on the question of winding up, when they face frightful redemption pressure. Challenge to the constitutional validity of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 49. This challenge has been raised by 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 sc....
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.... first discharged for such liabilities as are due and payable under the scheme and only the balance amount shall be paid to the unitholders in proportion to their respective interests in the assets of the scheme as on the date of the decision for winding up was taken. Regulation 41 does not prescribe any mechanism or manner in which the authorised person or the AMC can ascertain the liabilities which are due and payable under the scheme. Secondly, the unitholders have been placed below the creditors of the scheme and would therefore receive only the leftover. This undermines the paramount place and position of the unitholders. Further, the SEBI has failed to protect the interest of the unitholders who are not only financial creditors but, as explicitly provided in Regulation 18(12), their money is held in the mutual fund in trust and for their benefit. Reliance is placed upon Pioneer Urban Land and 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 ....
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....n a civil court under the Code of Civil Procedure while trying a suit in respect of discovery and production of books of account and other documents, summoning and enforcing attendance of persons and examining them on oath, inspection of any books, registers and documents of any person referred to in Section 12, inspection of any book, or register, or document, or record of a company, and issuing commissions for examination of witnesses or documents. Sub-section (4) states that without prejudice to the provisions contained in sub-section (1), (2), (2A) and (3) and Section 11B, SEBI may, by an order in writing in the interest of the investors or securities market, take the measures stipulated thereunder either pending investigation or inquiry or upon completion of investigation or inquiry. These include suspension of trading of any security; restraining any person from accessing security markets; attaching, 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 viol....
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....under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention." 52. As the heading of Section 11B states, the provision empowers SEBI to issue directions and levy penalty. It stipulates that such powers can be exercised if and after making or causing any inquiry SEBI is satisfied that it is necessary - (i) in the interest of the investors or orderly development of the securities market, (ii) to prevent affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the interest of the investors or securities market; or (iii) to secure proper management of such intermediary or person. SEBI may issue directions to - (a) any person or class 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 investo....
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....Before imposing penalty, adjudication as contemplated by Section 15-I is required to be made. There is no provision made in SEBI Act for issuing a notice of the proposed direction under Section 11B and hearing the Trustees or AMC before issuing the direction. No adjudication is contemplated before issuing the directions. Therefore, it is not possible for this Court to accept the contention of the petitioners, AMC as well as the Trustees that by exercising power under Section 11B, SEBI has power to adjudicate upon the correctness of the decision taken by the Trustees to wind up a Scheme. However, when SEBI finds that the Trustees or AMC are not abiding by the specific provisions of the Mutual Funds Regulations, the power to issue directions can be exercised by SEBI. By way of illustration, we refer to hypothetical cases. After invoking the provisions of Regulation 39(2)(a), if the Trustees stop redemption the units by taking recourse to Regulation 40 without complying with the mandatory requirements 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 Regula....
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....fter it is satisfied about the conditions referred to in the provision, as a result of making or causing to be made an enquiry - which necessarily implies a pre-decisional hearing. Similar view was subsequently expressed in Nikhil T. Parikh v. Union of India (2014) 2 GLH 582 , wherein the same High Court was of the view that Section 11B, being an enabling provision, must be so construed as to subserve the purpose for which it has been enacted. As the term 'measure' is not defined in the SEBI Act, the High Court gave it a meaning prescribed in general parlance, as incorporating anything desired or done with a view to the accomplishment of a purpose, a plan or course of action intended to obtain some object, any course of action proposed or adopted by a Government. The Securities Appellate Tribunal in Sterlite Industries (India) Ltd. v. SEBI, 2001 SCC OnLine SAT 28 has given an expansive interpretation to Section 11 and Section 11B of the SEBI Act, observing that they give enormous authority to 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....
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....fere in a winding up decision by a trustee under Regulation 39(2)(a) including the reasons submitted by SEBI in its affidavit such as the fact that reversal of a decision to wind up a mutual fund scheme would likely cause a run on the scheme as well as severe market contagion (Reference is made to Paras 18,19 at Pg. 6 and 7 of the Delhi Reply; Paras 34 and 35 at Pg. 11 and 12 of the Gujrat Reply; and Paras 11 and 12 at Pgs. 5 and 6 of the Madras Reply); however, on a reading of the scheme of the SEBI Act and regulations as a whole, it is submitted that it is clear that such a power does exist." 57. However, we agree with the High Court that the Regulations have been framed in exercise of power conferred by Section 30 of the SEBI Act which authorises them to make regulations consistent with the provisions of the SEBI Act to carry out the purpose of the SEBI Act. The very object of the SEBI Act is to preserve confidence of the investors and to regulate the capital market, including mutual funds. In the 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 stipulation....
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.... transcending into realm of arbitrariness, on the other hand, the pre-requisite statutory mandate is clear. This is not a case of excessive delegation wherein the legislative function has been abdicated and passed on to the trustees who can act as per their whims and fancies. The essential legislative function is the determination of legislative policy and its formulation as a rule of conduct. In commercial matters varied and different situations can arise which may warrant winding up. Complexities in matters of business and commerce can be bafflingly intricate and riddled with urgencies and difficulties. Therefore, there is need for flexibility. Otherwise, the trustees would be compelled to first take the approval of SEBI, which may have its own consequences. 59. The Statement of Additional Information dated 30th June, 2019 issued by Franklin Templeton Mutual Fund, under Heading VI - 'Duration of the Scheme and Winding Up', provides a general indication as to when a scheme can be wound up under the Regulations, 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 Regulation....
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....chanism under the Companies Act, or the Indian Bankruptcy Code, gives primacy to the dues of the creditors over the shareholders. Identical is the position of the unitholders. In fact, the argument that the unitholders should be treated pari passu with the creditors is farfetched. Similarly, the contention that unitholders are identically placed as home buyers under the Indian Bankruptcy Code is equally frail and a weak argument. Home buyers pay money to the builder and enter into a contract for purchase of immovable property. Home buyers are not risk or partakers in gains or losses like investors in a mutual fund. Home buyers under the Bankruptcy Code are treated as creditors till the ownership rights in the immovable property are transferred to them, but they do not take the risks and are not entitled to benefit of profits or suffer losses, as are taken by the unitholders who invest in the mutual funds without any guarantee of returns and know that the investment, including the principal, are subject to market risks. To equate the unitholders with either the creditors or the home buyers will be unsound and incongruous. 62. The expression 'due and payable' with reference to the....
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....he dividend; (b) despatch the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase; (c) in the event of failure to despatch the redemption or repurchase proceeds within the period specified in sub-clause (b), the asset management company shall be liable to pay interest to the unitholders at such rate as may be specified by SEBI for the period of such delay; (d) notwithstanding payment of such interest to the unit-holders under sub-clause (c), the asset management company may be liable for penalty for failure to despatch the redemption or repurchase proceeds within the stipulated time. Clause (b) to Regulation 53 requires that the AMC shall despatch the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase. Regulation 40, as noticed above, states that on or from the date of publication of notice under Regulation 39(3)(b), the trustees of the AMC, as the case may be, shall cease to cancel or create units of the scheme; cease to issue or redeem units of the scheme; and cease to carry on any business activity in respect of the scheme so wound up. 65. Issue in ques....
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....in reading of the provisions of Regulation 43, it is clear that the money received from the unit-holders and investors is required to be invested by AMC strictly in accordance with Regulation 43. The investments are to be made subject to investment restrictions specified in the seventh schedule. As far as borrowings are concerned, clause (2) of Regulation 44 provides that the Mutual Fund shall not borrow except to meet temporary liquidity needs of the Mutual Fund for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit-holders. The proviso to clause (2) of Regulation 44 clearly provides that a Mutual Fund shall not borrow more than twenty percent (20%) of the net assets of the Scheme and the duration of such borrowing shall not exceed a period of six months. Thus, in short, the business of a Mutual Fund consists of (i) launching Schemes, (ii) receiving the investments from the unit-holders/investors, (iii) investing the money so collected from the unit-holders/investors in accordance with Regulation 43 and other relevant Regulations and (iv) paying the returns in various modes to the unit-holders/investors. The returns can be in the form of ....
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....de with clause (3) of Regulation 39, the 'business activities' of the Scheme of a Mutual Fund must stop. The creation or cancellation of units and issue or redemption of the units of the said Scheme must also cease. The reasons is, as required by sub-clause (a) of clause (2) of Regulation 41, all the assets of the Scheme under winding up are required to be disposed of in the best interest of unit-holders and thereafter, as per sub-clause (b) of clause (2) of Regulation 41, the proceeds of the sale are required to be applied firstly towards discharge of liabilities of the Scheme. Secondly, the expenses in connection with the winding up are required to be set apart and thirdly, the balance amount remaining after clearing the liabilities has to be distributed to the unit-holders in proportion to their respective interest in the assets of the Scheme. The object of Regulation 40 of the Mutual Funds Regulation is to ensure that the moment compliance is made with clause (3) of Regulation 39, the assets available at that point of time should be made available for sale. The assets cannot be allowed to be depleied by creating more liability. That is the reason why the redemption must immedia....