Franklin Templeton : Consent Of Majority Shareholders Needed For Winding Up Funds After Publication Of Notices, Says Supreme Court

The Supreme Court on Wednesday delivered the judgment in a batch of special leave petitions filed by Franklin Templeton against a judgment of the Karnataka High Court which had restrained Franklin Templeton from winding up the debt funds without obtaining the consent of investors. The Supreme Court has agreed with the views of the High Court. However, it said that the requirement for consent of majority of shareholders will be post the publication of notices. The Court further stated that it has upheld the validity of the regulations, and while doing so, they have held that in case trustees wrongfully seek winding up, SEBI will have the power to intervene in the same. It has also been clarified that one of the reasons that the judgement was withheld for short while was because the Supreme Court did not want to prejudice the proceedings. Therefore, the facts in the case have not been examined at all and have been left open.A bench comprising Justices S Abdul Nazeer and Sanjiv Khanna pronounced the verdict. Justice Khanna, who authored the judgment, informed the Counsels present that the matter will now be taken up in October, and if required, the Counsels had the liberty to file an application for early hearing. Before concluding, Justice Khanna said, "This is basically a theoretical exercise of interpretation. We have not touched upon the facts at all". WHAT DID THE COURT SAY? 1. Trustees are required to seek consent of unit holders under Regulation 18(15)(c) The Court held that when the trustees decide to wind up a scheme by majority, they are required to seek consent of the majority of the unit holders, present and voting, under Regulation 18(15)(c). The use of the word "shall" in the provision is couched as a command. A harmonious construction of Regulation 18(15)(c) read with Regulations 39 to 42, would showcase that the even though the "opinion" of the trustees would stand, the consent of the unit holders would be a pre-requisite for winding up. "…Regulation 18(15)(c) applies only when majority of the trustees form an opinion and decide to wind up or prematurely redeem the unity in entirety, 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." 2. Argument that Unit holders are lay persons and not well-versed with market conditions is rejected It was held that, in light of the 12th February 2021, the arguments that the unit holders are lay person and not well-versed with market conditions was to be rejected. "Investments by the unitholders constitute the corpus of the scheme. To deny the unitholders a say, when Regulation 18(15)(c) requires their consent, debilitates their role and right to participate. It is an in-contestable position that unitholders exercise informed choice and discretion when they invest or redeem the units". The judgment goes on to state that the Regulations may not envision unit holders as domain experts, but as discerning investors who are perceptive and prudent, and therefore, the trustees are commanded to inform them and be transparent. "The unit holders, 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 unit holders can co-exist with the expertise of the trustees and should not be diluted because the trustees owe a fiduciary duty to them". 3. Trustees are mandated to disclose reasons for winding up a scheme in a public notice With regard to Regulations 39 to 42 and 18(15) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, which deal with the issue of winding up as well as rights and obligations of trustees, the Court held that when a scheme "is to be wound up" under sub-regulation (2), the trustees are required by Regulation 39(3) to issue a public notice in two daily newspapers having an all-India circulation and in a vernacular paper having circulation where the mutual fund is located. "The public notice should state the circumstances leading to winding up of the scheme. The trustees are also required to write to SEBI and disclose the circumstances leading to winding up of the scheme". The Court has further observed that the language of Regulation 39 does not envisage the involvement of unitholders till the publication of notices. Publication is even required when the unitholders vote for winding up of a scheme under Regulation 39(2)(b). Additionally, the publication should be instantaneous without any interstice between the decision of winding up by the trustees, by the unitholders or by SEBI. Any delay would hold up the cease and freeze effect of...

Franklin Templeton : Consent Of Majority Shareholders Needed For Winding Up Funds After Publication Of Notices, Says Supreme Court

Radhika Roy

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