More Clarity And Certainty Has To Be Brought In SEBI Mutual Fund Regulations: Supreme Court

The Supreme Court observed that more clarity and certainty has to be brought in the Mutual Fund Regulations. 

"We would neither hesitate in stating the obvious, that modern regulatory enactments bear heavily on commercial matters and, therefore, must be precisely and clearly legislated as to avoid inconvenience, friction and confusion, 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.", the bench comprising  Justices S. Abdul Nazeer and Sanjiv Khanna said in the judgment upholding the validity of e-voting process for winding up of six mutual fund schemes of Franklin Templeton

In this case, the Apex Court was interpreting the expression 'the consent of the unit holders' for the purpose of clause (c) to sub regulation (15) of Regulation 18 of the SEBI (Mutual Funds) Regulations. The issue considered was whether 'consent' would mean majority of the unit holders who exercise their right in the poll, or majority of all the unit holders of the scheme?

The court said that, 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. 

"The concept of 'absurdity' in the context of interpretation of statutes is construed to include any result which is unworkable, impracticable, illogical, futile or pointless, artificial, or productive of a disproportionate counter mischief. Logic referred to herein is not formal or syllogistic logic, but acceptance that enacted law would not set a standard which is palpably unjust, unfair, unreasonable or does not make any sense. When an interpretation is beset with practical difficulties, the courts have not shied from turning sides to accept an interpretation that offers a pragmatic solution that will serve the needs of society. Therefore, when there is choice between two interpretations, we would avoid a 'construction' which would reduce the legislation to futility, and should rather accept the 'construction' based on the view that draftsmen would legislate only for the purpose of bringing about an effective result. We must strive as far as possible to give meaningful life to enactment or rule and avoid cadaveric consequences.", the bench observed.

Answering the issue raised in the appeal, the Court held that, for the purpose winding up Mutual fund schemes, the 'consent of the unitholders' stipulated under Regulation 18(5)(c), would mean consent by majority of the unit holders who have participated in the poll, and not consent of majority of all the unitholders of the scheme.

CASE: FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED vs. AMRUTA GARG [C.A. 498-501 OF 2021]
CORAM: Justices S. Abdul Nazeer and Sanjiv Khanna
CITATION: LL 2021 SC 81

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