TMI Blog2020 (10) TMI 1228X X X X Extracts X X X X X X X X Extracts X X X X ..... n 18, a notice as required by clause (3) of Regulation 39 can be issued and published only after making compliance with the requirement of obtaining consent of the Unit-holders. Clause 15A of Regulation 18 of the Mutual Funds Regulations 1996 operates in a different field which has nothing to do with the process of winding up of a Scheme. Therefore, compliance with Clause 15A of Regulation 18 is not a condition precedent for winding up of a Scheme pursuant to sub-clause (a) of clause (2) of Regulation 39. Considering the duties of the Trustees under the Mutual Funds Regulations, they perform a public duty. Therefore, when it is found that the Trustees have violated the provisions of the SEBI Act or Mutual Funds Regulations, a Writ Court, in exercise of its jurisdiction under Article 226 of the Constitution of India, can always issue a writ of mandamus, requiring the Trustees to abide by the mandatory provisions of the SEBI Act or the Mutual Funds Regulations. In the facts of the case, for the reasons which we have recorded earlier, no interference can be made with the decision of the Trustees dated 23rd April 2020 of winding up of the said Schemes. However, the decision c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ril 2020 and 28th May 2020, till consent of the unit-holders by a simple majority to the decision of winding up is obtained by the Trustees in accordance with sub-clause (c) of Clause (15) of Regulation 18 of the Mutual Funds Regulations; iii) It will be open for the Trustees to obtain consent of the unit-holders as provided in sub-clause (c) of clause (15) of Regulation 18 and to take further steps in accordance with clause (3) of Regulation 39 of the Mutual Funds Regulations; iv) We hold that Regulations 39 to 41 of the Mutual Funds Regulations are legal and valid; v) We direct the Securities and Exchange Board of India to ensure that the Forensic Auditors submits their report in accordance with Regulation 64 at the earliest. After the report is submitted by the Forensic Auditor, the Securities and Exchange Board of India or its Chairman shall examine the report and shall take a decision on the question of taking action as provided in Regulation 65 of the Mutual Funds Regulations and under SEBI Act. The decision shall be taken within six weeks from the date of the receipt of the Forensic Audit Report; vi) We direct the Trustees to provide true copies of the Board Reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utual Fund: i) Franklin India Low Duration Fund (Number of Segregated portfolios-2) ii) Franklin India Ultra Short Bond Fund (Number of Segregated portfolios-1) iii) Franklin India Short Term Income Plan (Number of Segregated portfolios-3) iv) Franklin India Credit Risk Fund (Number of Segregated portfolios-3) v) Franklin India Dynamic Accrual Fund (Number of Segregated portfolios-3) vi) Franklin India Income Opportunities Fund (Number of Segregated portfolios-2) 2. There were three writ petitions filed in the High Courts of Delhi, Gujarat and Madras for challenging the action of winding up of the aforesaid six Schemes (for short the said Schemes ). A criminal petition was filed in Madras High Court seeking a writ of mandamus against the respondents therein for setting criminal law in motion against those who were allegedly responsible for the winding up of the said Schemes. 3. On 19th June, 2020, the Apex Court passed an order in Special Leave Petition (civil) No. 7553/2020 and Transfer Petition (civil) Nos. 663-664/2020), transferring the aforesaid four cases to this High Court. The order of the Apex Court reads thus: After hearing the learned senior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there are directions prayed for against the Securities and Exchange Board of India (for short, 'SEBI') established under the provisions of the Securities and Exchange Board of India Act, 1992 (for short 'SEBI Act'). In the writ petition filed before the Delhi High Court, there is also a challenge to the validity of the Regulations 39, 40 and 41 of the Mutual Funds Regulations. Crl. P. No. 8660/2020 has been filed in the Madras High Court, essentially seeking a relief of a writ of mandamus directing registration of First Information Report. Letters Patent Appeal (LPA) No. 311/2020 filed before the Gujarat High Court is an appeal directed against the interim order passed by the learned Single Judge of Gujarat High Court in Special Civil Application No. 7201/2020. As per the aforesaid order dated 19th June 2020, the Apex Court transferred the aforesaid cases to this High Court. The same were registered and renumbered in this High Court. After registration in this Court, the following corresponding new numbers have been assigned: 5. Presumably, due to the situation created by pandemic COVID -19, there was some delay in receiving the files from the High Courts. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the submissions made across the Bar, it will be necessary for us to briefly narrate the few factual aspects set out in the pleadings filed on record. The factual aspects are common in all these petitions and, therefore, we are adverting to the facts of the case stated in W.P. No. 8545/2020 (Delhi Petition). FACTS OF THE CASE: IN WRIT PETITION No 8545 OF 2020: 9. It is pointed out that 6th respondent - Franklin Templeton Trustee Services Private Limited (the Trustees), entered into business of Mutual Funds in India in the year 1996. It is a company covered by definition of Trustee within the meaning of clause (g) of Regulation 2 of the Mutual Funds Regulations. The 5th respondent is an Asset Management Company (for short 'AMC') within the meaning of clause (d) of Regulations 2 of the Mutual Funds Regulations. The 8th respondent-Franklin Resources Inc, is a USA based company of which, the 7th respondent-Templeton International Inc is a subsidiary company. The 7th respondent is a sponsor within the meaning of clause (x) of Regulation 2 of the Mutual Funds Regulations. It is pointed out in the petition that on 4th January, 1996, the Franklin Templeton Mutual Fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to AMC that its request for enhancement to 40% in case of Franklin India Short Term Income Fund and Franklin India Income Opportunities Fund was granted subject to conditions mentioned therein. In case of Franklin India Credit Risk Fund, the borrowing limit was enhanced to 30% subject to conditions. The condition of using the incremental borrowing limit only for redemption was incorporated in the said letter. On 14th April 2020, AMC addressed e-mail to SEBI. In the said e-mail, it was mentioned that as a last resort, the Mutual Fund may be required to resort to suspension of redemption as permitted under the Regulations and a request was made for removing the restriction of being able to suspend the redemptions only for a period of 10 days out 90 days. After few days i.e., on 20th April, 2020, the Trustees submitted a proposal to SEBI for winding up of the said Schemes and Franklin India Dynamic Accrual Fund. By the said letter, while seeking permission to wind up, forbearance on the proposal for winding up was sought from SEBI. 12. On 23rd April, 2020 the Trustees issued the impugned notice informing that they have decided to wind up the said Schemes mentioned in paragraph 1 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition was to declare Regulations 39, 40 and 41 of the Mutual Funds Regulations as ultra vires SEBI Act, 1992. A prayer was also made for quashing the impugned notices dated 23rd April 2020 and 28th May 2020. Another prayer was for directing the respondents to refund the money invested by the petitioner in the Franklin Templeton Short Term Income Plan or to allow the petitioner to redeem the Units. A writ of mandamus is sought directing SEBI to conduct an investigation into the affairs of FTMF as contemplated under Regulation 61 of the Mutual Funds Regulations. Another prayer was made seeking a writ of mandamus against the 4th respondent Serious Fraud Investigation Office to register FIR and to conduct investigation into the affairs of Trustees and AMC. 15. Before we go to the reply/response filed by the 3rd respondent - SEBI and the other companies, it is necessary for us to refer to the facts of other petitions and prayers made therein. IN WRIT PETITION NO. 8644 OF 2020 AND WRIT APPEAL NO. 399 OF 2020 16. Now we come to writ petition No. 8644/2020. The petitioners in this writ petition filed before the Gujarat High Court are claiming to be the investors in the said Scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CONTENTIONS IN THE STATEMENT OF OBJECTIONS FILED BY SEBI, AMC AND TRUSTEES: 19. Now we are referring to the statement of objections/response/counter filed by the contesting respondents. 20. In W.P. No. 8545/2020, the 3rd respondent-SEBI has contended that though the petitioner has contended that the Regulations 39, 40 and 41 are ultra vires and unconstitutional as well as violative of Article 14 of the Constitution of India, the petitioner has not explained how Article 14 has been violated. It is contended that Regulation 39(2) has to be read with the Regulation 41 of the Mutual Funds Regulations. It is contended that Regulation 41 only deals with the procedure and the manner of the winding up process. It is contended that Regulation 39 (2) only states that a Scheme can be wound up after repaying the amount due to the unit-holders but the manner in which the repayment is to be made is provided under Regulation 41. It is contended that under Regulation 41, the approval of the unit-holders is needed only for authorizing the Trustees or any other person to take steps for winding up of a Scheme, consequent upon the decision of winding up of the Scheme. It is submitted that Regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a Forensic Audit/inspection with regard to the said Schemes under winding up. It is contended that vide letter dated 27th May, 2020, the Forensic Audit/inspection of the books of accounts and other records and documents of the FTMF, AMC and Trustees has already been initiated. If any violation is found, appropriate action will be taken under the law and that said inspection process should not be linked with the decision of the Trustees to voluntarily winding up the said six Schemes. 23. Reliance is placed on the circulars dated 23rd March 2020 and 30th April, 2020 by which, the timelines fixed in the earlier circulars was extended. It is further submitted that sub-clause (a) of clause (2) of Regulation 39 confers finality on the decision of the Trustees. It is contended that in view of Regulation 40 read with sub-clause (b) of clause (3) of Regulation 39, the decision to wind up of a Scheme automatically takes effect. 24. Referring to press release dated 7th May, 2020 relied upon by the petitioners, it is submitted that said press release is only an advisory to the FTMF to focus on returning the money of the investors as soon as possible. It is submitted that if in the Fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... frain from interfering in respect of the said matter. It is pointed out that SEBI has already taken action by appointing a Forensic Auditor. It is stated that both the companies are cooperating with the Auditor. 30. It is submitted that the petitioners have not exhausted the efficacious remedies available to them by approaching the Securities Appellate Tribunal. It is submitted that they have approached SEBI by filing complaints for redressal of their grievances, which are already registered on SEBI's Complaints Redress System (SCORES). It is pointed out that the petitioners, in the petition filed before the Gujarat High Court have filed two complaints with SCORES. But, without awaiting the response from SCORES, within 30 days thereafter, the writ petitions have been filed and therefore, two parallel remedies have been adopted for the same cause of action. 31. It is also contended that these writ petitions involve various complex and disputed questions of fact and there is an alternate efficacious mechanism in law to thoroughly examine and deal with such factual allegations. It is submitted that considering the fact that SEBI, being a specialized sectoral regulatory autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f amounts due by issuers in certain cases. The third source of redemption payment is the sale of investments in the portfolio of Non Convertible Debenture/Bonds (for short, 'NCDs') in the secondary market. It is submitted that the net result for the Schemes due to COVID-19 pandemic and associated market dislocations was a massive and sustained liquidity crisis. Due to liquidity crisis, on one hand, the investors in large numbers suddenly sought redemption and on the other hand, the market for assets meant to fund such redemptions (i.e. corporate bonds) completely seized up. 35. It is pointed out that the said Schemes have been successful over a sustained period of time and have successfully navigated stressed market cycles in the past. The long and successful track record of the Schemes is placed on record. The various facts and figures have been set out. 36. It is pointed out that the impact of COVID -19 pandemic is not a unique to the Indian Corporate bond markets. It is pointed out that the United States Corporate bond market seized up on account of COVID-19 and related market disruptions. It is pointed out that in European market, at least 76 funds managing assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. The alternative would have been a disorderly liquidation by forced sale of sound assets in a hasty and disorganized manner at discounted valuations in adverse market conditions, which would have caused value losses to the entire body in particular, small and retail unit-holders. It is submitted that the decision of winding up was taken specifically with a view to protect the best interests of the unit-holders of the Scheme. 40. The events subsequent to the decision of the winding up have also been set out. It is pointed out that the net asset value (NAV) of each Schemes is being published on daily basis. Details about the cash realized by these six Schemes on account of winding up since the winding up and up to 27th July, 2020 have been set out. 41. It is submitted that the decision of winding up of the said Schemes and decisions regarding investments are taken in accordance with SEBI Regulations and investment objectives of the respective Schemes as set out in the Scheme document. It is contended that the Trustees and AMC have exercised requisite care and diligence at all times. It is pointed out that the Board of Directors of the Trustees and AMC had also put in place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out to substantiate the challenge to constitutional validity of Regulations 39 to 41. It is submitted that the Trustees is not a public authority or agency or instrumentality of the State. It is urged that the petitions ought not to be entertained. 45. As far as two foreign entities are concerned, a contention has been raised that no jurisdiction lies with the Court to deal with the foreign private entities. 46. There are rejoinders filed by the petitioners to the statement of objections which are merely argumentative in nature. SUMMARY OF SUBMISSIONS OF THE PETITIONERS 47. As directed by this Court, submissions of the learned Senior Counsel appearing for the petitioner in the petition filed before the Delhi High Court (W.P. No. 8545/2020) were heard first, as there is a challenge therein to the validity of Regulations 39 to 41 of the Mutual Fund Regulations. 48. Shri. Ravindra Srivastava, the learned Senior Counsel appearing for the petitioners in writ petition No. 8545/2020 has taken us through the various provisions of SEBI Act and the Mutual Funds Regulations. He invited our attention to the objects and reasons of SEBI Act. He submitted that SEBI Act has been en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that sub-clause (a) of clause (2) of Regulation 39 needs to be read down as the consent provided in sub-clause (c) of clause (15) of Regulation 18 will have to read into it. He urged that both the provisions must be construed harmoniously and it must be held that the powers under sub-clause (a) cannot be exercised without complying with the requirement of obtaining the consent of the unit-holders. He submitted that there is no material placed on record to show that the Trustees have complied with the requirement of obtaining the consent of the unit-holders and the requirement of sub-clause (b) of clause (3) of Regulation 39 of publishing the notice disclosing the circumstances leading to the winding up of the Scheme in two daily newspapers having circulation all over India and one vernacular newspaper having circulation at the place where the Mutual Fund is formed. He submitted that these two statutory compliances have not been made. He urged that the investors stand to lose substantially, inasmuch as firstly, the assets of the said Schemes will be sold and only after clearing the liabilities, remaining amount, if any, will be made available for distribution to the unit-holders. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral measures for improving the liquidity. He urged that SEBI, being a statutory authority has not at all gone into the question of genuineness of the reasons put forth by the Trustees for winding up of the said Schemes. He submitted that SEBI, which is the protector of the unit-holders/investors has failed to discharge its statutory duties. He also relied upon the articles published in the newspapers, magazines etc., and publication of certain information about the said Schemes. 52. Coming to the challenge to the validity of the Regulations 39 to 43 of the Mutual Funds Regulations. He submitted that firstly, the provisions are discriminatory and violative of Article 14 of the Constitution of India. He submitted that his second challenge is on the ground of manifest arbitrariness. His third ground of challenge is that the provisions violate the fundamental rights conferred under Article 21 of the Constitution of India. Lastly, he urged that the said Regulations are ultra vires the statutory provisions of SEBI Act. 53. He invited our attention to the powers conferred on SEBI under Section 11-A which are conferred only for protection of investors. He also pointed out that the po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he investors. But, the impugned Regulations provide for Trustees taking arbitrary action, which will be against the interests of the investors. He submitted that as per sub-clause (a) of clause (2) of Regulation 39, an unfettered power has been conferred on the Trustees without authorizing any statutory authority including SEBI to go into the question as to whether the opinion of the Trustees regarding happening of any event is lawful and within the four corners of law. He submitted that in view of clause (a) of Regulation 40, once a notice as required by sub-clause (3) of Regulation 39 is published, the Mutual Fund shall cease to carry on any business activities in respect of the said Scheme. Therefore, from the moment the notice as contemplated under clause (3) of Regulation 39 is published, in view of the express provisions of clause (a) and (c) of Regulation 40, the business of the concerned Scheme comes to an end and the units cannot be redeemed by the investors. 55. He submitted that in view of Regulation 41, firstly the Trustees of the Scheme are required to dispose of the assets of the Scheme in the best interests of the unit-holders of that Scheme. The proceeds of sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd duties of the Trustees' provides that it is the obligation and duty of the Trustees to obtain consent of the unit-holders of the Scheme, if majority of the Directors of the Trustee company decide to wind up of the Scheme. He pointed out that the offer document contains a clause consistent with the Regulations which provides that the Trustees shall be accountable for their acts, and be the custodian of the funds and property of the Scheme and shall hold the same in trust for the benefit of the unit-holders in accordance with SEBI Regulations and the provisions of the trust deed. He pointed out that there is a specific provision in the offer document regarding the procedure and the manner of winding up. He submitted that it is specifically stated that the Scheme may be wound up if there are changes in the capital markets and fiscal laws or legal system or any event or series of events occurs, which, in the opinion of the Trustees, requires the Scheme to be wound up. Thus, he submitted that the contingencies under which the winding up can take place are specifically mentioned and, therefore a recourse cannot be taken to sub-clause (a) of clause (2) of Regulation 39 unless such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present SEBI Regulations permit suspension of redemptions for a maximum period of 10 working days in every 90 days. Therefore, a request was made to SEBI to remove the restriction on the period of suspension of redemption. He also pointed out that on 20th April, 2020, the Trustees submitted a proposal to SEBI for winding up of the said Schemes. From the said proposal letter, he pointed out that the net outflow for the quarter period of 1st June-30th September 2019 of the said Schemes was ₹ 1,855.39 crores which jumped to ₹ 8,697.53 crores in the immediate next quarter. He, therefore, pointed out that the redemption pressure started increasing much before the onset of COVID 19 pandemic. He pointed out that in the said proposal letter, the Trustees pointed out the present scenario of the economy and that the said Schemes are anticipating the continued liquidity stress. 61. The learned Senior Counsel further invited our attention to the letter dated 14th April, 2020 and pointed out that in the said letter, the stand of AMC was that the last resort was the suspension of redemption. He pointed out that within six days thereafter, by another letter dated 20th April, 2020 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wspapers which are on record wherein the large number of violations made by the Trustees and AMC were pointed out. 63. He submitted that the challenge to the Regulations 39 to 41 is firstly on the ground that the same are ultra vires the statutory provisions of SEBI Act. Secondly, the same offend the rights conferred on the unit-holders under Article 14 of the Constitution of India, as it seek to bring about discrimination and arbitrariness. He submitted that moreover, there is a violation of fundamental rights under Article 21 of the Constitution of India as well, which is vested in the unit-holders. 64. He invited our attention to the decision of the Apex Court in the case of Securities and Exchange Board of India vs. Rakhi Trading Private Limited (2018) 13 SCC 753 and submitted that as held by the Apex Court, the main function of SEBI is to make enquiry and investigation and to give appropriate directions to the Trustees and AMC to promote the orderly and healthy growth of the securities market. He submitted that on the contrary, the stand taken by SEBI in its statement of objections is disappointing. The confidence reposed on it by the unit-holders has been shaken by such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter the formation of the opinion by the Trustees. He submitted that the Regulations do not confer any power on SEBI to supervise the exercise of the power under sub-clause (a) of clause (2) of Regulation 39. He submitted that Regulation 40 is completely arbitrary, inasmuch as, it comes into operation from the moment the compliance is made by the Trustees with clause (3) of Regulation 39. Even if the action taken under sub-clause (a) of clause (2) of Regulation 39 is illegal and arbitrary, Regulation 40 operates. Coming to Regulation 41, he submitted that the Scheme is peculiar, inasmuch as, it provides that either Trustees themselves act as liquidators or their nominee can act as a liquidator. Thus, the result is that the Trustees themselves liquidate the Schemes thereby giving scope for collusive sales. As there is no machinery available for taking corrective measures, Regulation 41 becomes absolutely arbitrary. Moreover, there are no timelines provided therein. He submitted that the provisions of Regulations 39 to 41 are manifestly arbitrary and ultra vires the provisions of SEBI Act. He submitted that the provisions of Regulation 41 discriminate between two types of investors, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15 of the decision of the Apex Court in the case of State of Tamil Nadu and another vs. P. Krishnamurthy and others (2006) 4 SCC 517. He urged that when provisions of subordinate legislation are directly inconsistent with the mandatory provisions of the parent statute, such a subordinate legislation can be held to be invalid. He submitted that in the present case, the Regulations under challenge can be held to be invalid, inasmuch as, the same are manifestly unjust, oppressive or outrageous. Thereafter, the learned Senior Counsel has taken us through another decision of the Apex Court in the case of Harakchand Ratanchand Banthia and others vs. Union of India and others (1969) 2 SCC 166. He submitted that the Regulation 39 of the Mutual Funds Regulations contains the provisions which are uncertain, directionless, unjustifiable and unintelligible. He submitted that if a Regulation does not contain any principles or standard for exercise of power, the same will have to be held as arbitrary. He placed reliance on the decision of the Apex Court in the case of Air India vs. Nergesh Meerza and others (1981) 4 SCC 335. He would therefore, submit that the impugned Regulations are violative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. He submitted that before the Trustees take action under sub-clause (a) of clause (2) of Regulation 39, they are required to obtain consent of the unit-holders, as provided under sub-clause (c) of clause (15) of Regulation 18. He submitted that if such interpretation is not accepted, firstly, sub-clause (c) of clause (15) of Regulation 18 will become redundant. Secondly, if such interpretation is accepted, it may save the provisions of sub-clause (a) of clause (2) of Regulation from vice of unconstitutionary. 70. He submitted that the decision of the Trustees of winding up of an open ended Scheme which was taken under Regulation 39 takes away the fundamental rights of the unit-holders of redemption and, therefore, the open ended Scheme becomes a close ended Scheme. He submitted that it also amounts to change in the fundamental attributes of the Scheme, as can be seen from the contents of offer document itself. He also relied upon the master circular for Mutual Funds issued by SEBI on 10th July, 2018 and clause 1.12 thereof and submitted that clause 1.12 specifically records that types of Schemes such as 'open ended' or 'close ended' are fundamental attributes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as any material available with the Trustee and whether there were reasons recorded for formation of an opinion by the Trustees. He submitted that the Court can also look into the question whether the reasons recorded have any rational relationship with the formation of an opinion by the Trustees. 73. Thereafter, the learned Senior Counsel has taken us through the decision of the Apex Court in the case of 63 Moons Technologies Ltd., (formerly known as financial technologies India Ltd.,) and others vs. Union of India and others. He also relied upon the decision of the Apex Court in the case of Barium Chemicals Ltd., and another vs. Company Law Board and others 1966 Supp SCR 311 : AIR 1967 SC 295. He relied upon a decision of the Apex Court in the case of Rampur Distillery Co. Ltd., vs. Company Law Board and another (1969) 2 SCC 774. 74. He submitted that large number of requests for redemption has nothing to do with the spread of COVID-19. He submitted that there are several other 'open ended Schemes' of various Mutual Funds and none of them have gone for winding up due to COVID-19. He again invited our attention to e-mail dated 14th April 2020 of AMC to SEBI in which, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to be reinterpreted and recast and the task of a Judge is to mould the law so as to serve the needs of the time. Thereafter, he relied upon a decision of the Apex Court in the case of Rohtas Industries Ltd. and another vs. Rohtas Industries Staff Union and others (1976) 2 SCC 82 and pointed out by relying upon paragraph 9 of the said decision that the expansive and extraordinary power of the High Court under Article 226 of the Constitution of India is of a widest amplitude and the language goes to indicate that it can be exercised even against a private individual and is available in a case where another remedy exists. He pointed out that in the said decision, the Apex Court held that an award made by an Arbitrator under Section 10-A of the Industrial Disputes Act, 1947 can be interfered with under Article 226 of the Constitution of India. Thereafter, he relied upon a decision of the Apex Court in the case of Zee Telefilms Ltd. and another vs. Union of India and others (2005) 4 SCC 649 and submitted that with the opening up of economy and globalization, more and more governmental functions are being performed and allowed to be performed by private bodies. When the functions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel relied upon a decision of the learned Single Judge of the Delhi High Court in the case of M/S. Narinder Batra vs. Union of India which reiterates that the powers of the High Court under Article 226 of the Constitution of India are plenary and it constitutionally empowers a High Court to issue writs to any person not only for enforcement of fundamental rights but also for any purpose. 80. He submitted that the 6th respondent Trustee is appointed with the prior approval of SEBI, a statutory body, as required by Regulation 17 of the Mutual Funds Regulations. He submitted that if the object of establishment of SEBI is considered and the entire Scheme of the Mutual Funds Regulations is considered, Section 11-B of SEBI Act will have to be read with Regulation 39 of the Mutual Funds Regulations and, therefore, for the purposes of issuing directions under Section 11-B of SEBI Act, SEBI will have to go into the question whether the circumstances, as contemplated by sub-clause (a) of clause (2) of Regulation 39 indeed existed. 81. He submitted that even the terms of reference given to the Auditors/Forensic Auditors are not at all placed on record. He submitted that no one knows wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are also not placed on record. He submitted that in the letter to investors issued by FTMF which is placed on record, it is merely mentioned that in view of the recommendations of AMC, the Trustees were of the opinion that an event has occurred which required the Schemes to be wind up. He stated that the role played by AMC in the decision of the winding up of the Schemes is on record. He invited our attention to the letter dated 20th April, 2020 of the Trustees addressed to SEBI and submitted that the net outflow, as stated in the said letter for the period between first October 2019 to 31st December 2019 shows that there were large number of requests for redemption during the said period. In the said quarter, the net outflow was ₹ 8,697.53 crores and whereas, in the immediate earlier quarter, the net outflow was ₹ 1,855.39 crores. He would, therefore, submit that the reason for increase in the demand for redemption was not at all on account of COVID-19. He pointed out the contents of the circular dated 31st May, 2016 issued by SEBI which provided for imposing restrictions on redemption for a specific period of time not exceeding ten working days in ninety days. He subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uary, 2020. He submitted that the said e-mail shows that the decision to winding up of the said Schemes is by AMC and not by the Trustees. He pointed out that there was a direct involvement of AMC in the decision making process. 86. He submitted that there is a material on record to show that the Trustees have delegated their power to AMC despite the fact that there was no such provision in the Trust Deed. He relied upon the interpretation put by the Calcutta High Court in the case of Shri. Mahadeo Jew and another vs. Balkrishna Vyas and another AIR 1952 Cal 763 in particular, what is held in paragraphs 22 and 23. He submitted that it is well settled law that a Trustees cannot transfer his duties, powers and obligations to some other body or person and thereby surrender his own conscience. He submitted that the Trustees cannot transfer their duties unless it is specifically provided in the Trust Deed. He submitted that the draft of the Trust Deed, as contemplated by Mutual Funds Regulations does not provides for insertion of any such clause in the trust deed, empowering the Trustees to delegate their powers to any other person or body. In this behalf, he relied upon a decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted out the specific provision of the Regulations that the Trustees hold the assets of a Scheme in trust and for the benefit of the unit-holders. He submitted that each Scheme of a Mutual Fund being a trust, the same cannot be revoked without prior consent of the beneficiaries/unit-holders, as required under Section 78 of the Trusts Act. He submitted that winding up of an individual Scheme amounts to revocation of trust which cannot be made in violation of the statutory provisions of the Trusts Act. 89. He relied upon a decision of the Apex Court in the case of Commissioner of Income Tax Andhra Pradesh vs. The Trustees of H.E.H. The Nizam's Family Trust (1986) 4 SCC 352. He pointed out that in the said decision, it was found that one deed of trust executed by Nizam provided for a number separate and distinct trusts. He pointed out clause (8) of Regulation 18. The code of conduct mentioned in the fifth schedule to the Mutual Funds Regulations clearly supports his case that each Scheme constitutes a separate trust within the larger trust of a Mutual Fund. He relied upon the observations made by the Apex Court in the case of Commissioner of Income Tax, Bombay City I, Bombay vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said Scheme, inasmuch as, there is no opportunity for the unit-holders to exit by taking the NAV after the date of the decision. Therefore, the decision for winding up of the said Schemes is completely illegal. 91. Learned senior counsel appearing for the petitioner relied upon a decision of the Delhi High Court in the case of Mahanagar Telephone Nigam Ltd. and etc., vs. Telecom Regulatory Authority of Delhi and etc., and contended that what cannot be done directly cannot also be done indirectly. Relying upon the very same decision, he submitted that the provisions of Regulation 39 will have to be read harmoniously with the provisions of clauses (15) and (15A) of Regulation 18. He submitted that the action of winding up of the Schemes is an action in rem which should be taken as a last resort. In support of his submission, he placed reliance on the decisions of the Apex Court in the case of Hind Overseas Pvt. Limited vs. Raghunath Prasad Jhunjhunwalla and another (1976) 3 SCC 259 and Swiss Ribbons Private Limited and another vs. Union of India and others (2019) 4 SCC 17. He submitted that recourse to winding up of the Scheme can be taken only as a last resort. For the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and on the other hand, they continued to request SEBI for extension of limit of borrowing. The learned counsel has invited our attention to the fact that the progress of the Forensic Audit of the said Schemes is not brought on record and in fact, in the statement of objections, SEBI has categorically stated that it is an internal document of SEBI. Referring to the averments made in paragraphs 29 and 30 of the statement of objections filed by the Trustees and AMC, he submitted that there is no clarity as to whether the Forensic Audit is ordered or an inspection has been ordered. He submitted that SEBI must explain and must place before this Court the report of the Forensic Audit. 94. About the issue of maintainability, the learned Senior Counsel relied upon a decision of the Apex Court in the case of Marwari Balika Vidyalaya vs. Asha Srivastava and others. He submitted that the jurisdiction to issue writs under Article 226 of the Constitution of India is not confined only to the statutory agencies/authorities and instrumentalities of the State. The directions can be issued to any other person or body, performing a public duty. He submitted that if the nature of the duties impos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of notice under sub-clause (3) of Regulation 39, no redemption could have been made. He submitted that mandate of clause (15A) of Regulation 18 was not complied with by obtaining consent of the unit-holders or by providing them exit option. The learned counsel invited our attention to Section 11 of SEBI Act and in particular, sub-section (1) which lays down that the duty of the Board is to protect the interests of the investors in securities and to take measures for that purpose. He invited our attention to sub-section (4) of Section 11 which confers wide powers on SEBI to take various measures provided therein either pending investigation/inquiry or on completion of such investigation or inquiry. He also invited our attention to Section 11B which confers wide power on SEBI to issue directions to any company, in respect of the matters specified in Section 11A. 97. He submitted that in view of clause (2) of Regulation 44, a Mutual Fund is not entitled to borrow more than 20% of the net assets of the Scheme and the duration of such a borrowing cannot exceed a period of more than six months. He submitted that SEBI does not have power to enhance the limit of borrowing to more t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on record. 102. He submitted that on the issue of maintainability, a very elitist stand has been taken by SEBI. He submitted that Rupees twenty five lakhs crores is the total investment made in the Mutual Funds and therefore, element of public interest is certainly involved. 103. Now turning to the Criminal Petition No. 3206/2020, he submitted that the first respondent, the Economic Offence Wing of SEBI is a police station within the meaning of sub-clause (s) of Section (2) of the Code of Criminal Procedure, 1973 (for short, 'the Cr.P.C.'). He pointed out that in the complaint made by the petitioner, the allegation against AMC and the Trustees and their Directors was of commission of the offences under the provisions of the Tamil Nadu Protection of Interest of Investors (in financial establishments) Act, 1970 (for short, 'the Tamil Nadu Act') as well as the offences punishable under the provisions of the Indian Penal Code. He submitted that despite such a complaint, no action was taken by the respondents on the basis of the said complaint. We must note here that during the course of hearing, it was pointed out that on the basis of the complaint of the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned counsel appearing for the applicants in IA No. I and II of 2020 in writ petition No. 8748/2020 made submissions contending that there is no enquiry made by SEBI about the legality of the decision of the Trustees. He also invited our attention to various provisions of SEBI Act. He submitted that sub-clause (c) of clause (15) of Regulation 18 will apply to winding up of the Scheme under sub-clause (a) of clause (2) of Regulation 39 and, therefore, without the consent of the unit-holders, the winding up could not have proceeded. He also pointed out the correspondence between AMC and SEBI and Trustees and SEBI. SUBMISSIONS OF SEBI 107. Shri. Arvind Datar, learned senior counsel appearing for SEBI also made detailed submissions. At the outset, he submitted that the criticism made by the petitioners about the inaction on the part of SEBI is un-called for, inasmuch as, every possible action which could be taken under SEBI Act and the Mutual Funds Regulations has been initiated by SEBI. He submitted that in the year 2011, the total investment in the Mutual Funds was of Rupees ten lakh crores which has gone up to Rupees twenty seven lakh crores in the year 2020. He submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent of unit-holders is required, the Regulations specifically provide for it. He submitted that sub-clause (c) of clause (15) of Regulation 18 comes into operation only after the Trustees decide that a Scheme should be wound up in accordance with sub-clause (a) of clause (2) of Regulation 39. He pointed out that only under sub-clause (1) of Regulation 41, an approval of the unit-holders by simple majority is contemplated for authorising the Trustees or any other person to take steps for winding up of the Scheme. He submitted that consent referred in sub-clause (c) of clause (15) of Regulation 18 is referable to approval under clause (1) of Regulation 41. 110. He submitted that clause 15A of Regulation 18 will have no application to winding up, as it applies only when the Trustees want to make a change in the fundamental attributes of any Schemes or any other change which amounts to the modification of the Scheme and affects the interest of the unit-holders. He urged that clause 15A of Regulation 18 operates in a totally different field. 111. He submitted that the Trustees always act in fiduciary capacity and therefore, they are in best position to take a decision on the exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aintainable. He submitted that the Public Interest Litigation should be dismissed with costs. He submitted that while dealing with the case of the investors, it must be also remembered that investment in market is always involves a risk and, therefore, the investment made in the Mutual Funds is also subject to risks. He submitted that if the entire Scheme of the Mutual Funds, as envisaged by the Mutual Funds Regulations is considered, the unit-holders are not entitled to refund of their investment and they will get the returns as per the provisions of the Scheme. He submitted that under the Mutual Funds Regulations, SEBI is the regulator and in fact, the running of a Mutual Fund is highly regulated. He submitted that SEBI had initiated action by ordering Forensic Audit and after receiving the final report, SEBI is bound to take action in accordance with the Regulations and SEBI Act. He submitted that a perusal of the said Regulations will show that the same were brought into force with effect from 9th December, 1996 and thereafter, several amendments thereto have been made from time to time. Inviting our attention to the averments made in the writ petitions filed in Delhi and Madra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable to this Court. He submitted that the Court can always go through the report which will be filed in the Court in a sealed cover without making it public. He urged that the Court can go through the report and decide whether it should be made available to the petitioners. At this stage, learned Senior Counsel appearing for the petitioners in Delhi petition submitted that the report cannot be withheld in such a manner from the petitioners. Shri. Janak Dwarakadas, the learned Senior Counsel appearing for AMC and the Trustees submitted that he has a strong objection for SEBI filing the report in sealed cover and for this Court going through the said report even for a limited purposes of deciding the contention of SEBI that under any circumstances, the said report should not be made public. 115. Shri. Arvind Datar, learned Senior counsel relied upon a decision of the Apex Court in the case of G. Veerappa Pillai, Proprietor, Sathi Vilas Bus Service, Porayar, Tanjore District, Madras vs. Raman and Raman Limited, Kumbakonam, Tanjore District and three others AIR 1952 SC 192. He also relied upon a decision of the Apex Court in the case of Board of Control for Cricket in India vs. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o will guarantee the returns and the manner in which the guarantee is to be met is specifically mentioned in the offer document. He submitted that unless the Scheme is governed by Regulation 38 where the returns are guaranteed, there is an inherent risk in the Mutual Fund transactions. 119. He submitted that the nature of winding up of a Scheme and the nature of winding up of a company are completely different and in fact, winding up of a Scheme is not in that sense winding up, but it is winding down. On the interplay between clauses 15(c) and 15A of Regulation 18 and sub-clause (a) of clause (2) of Regulation 39, he heavily relied upon sub-clause (d) of clause (15) of Regulation 18 which was omitted by an amendment with effect from 22nd May 2000. He submitted that sub-clause (c) of clause (15) of Regulation 18 operates post the decision of winding up and therefore, the consent mentioned in sub-clause (c) has a direct co-relation with the approval under clause (1) of Regulation 41. He submitted that there is no difference between the word approval and consent. He urged that clause (15A) of Regulation 18 operates in a different sphere. 120. He reiterated that the decision of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He pointed out that in the e-mail it was specifically mentioned that the moratorium will create significant stress on non-banking financial corporations. It was mentioned in the said e-mail that in case of said Schemes, the maturities of ₹ 4,500/- crores were stipulated per quarter and continued liquidity stress was anticipated for the reasons stated in the said e-mail. He pointed out that it was stated therein that in view of the circular dated 1st October 2019 issued by SEBI, unlisted convertible debentures become illiquid and untradeable. He pointed out that a request was made by e-mail to grant permission to the Mutual Funds to trade unlisted papers for a temporary period of one year. It was also requested that non-banking financial corporations be permitted to avail moratorium on payments to banks. It was requested that SEBI may consider of removing restrictions by allowing postponement of redemption for forty days out of every ninety days. He pointed out that a request was also made through e-mail to SEBI to take proactive and urgent steps to help the industry. He submitted that there was no response from SEBI to this e-mail. He submitted that SEBI did not come out wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence between Regulation 39 (2) (a) and Regulation 39 (2) (b) will be completely obliterated. Moreover, Regulation 40 does not provide that the restrictions thereunder will be triggered only on the unit-holders consenting for winding up as contemplated by sub-clause (a) of clause (2) of Regulation 39. In fact, the restrictions imposed by Regulation 40 trigger immediately after compliance with clause (3) of Regulation 39. He submitted that sub-clause (d) of clause (15) of Regulation 18 which provided for consent of the unit-holders has been deleted. He submitted that superimposition of sub-clause (c) of clause (15) of Regulation 18 on sub-clause (a) of clause (2) of Regulation 39 is not at all called for. He submitted that sub-clause (c) of clause (15) of Regulation 18 refers to a decision already taken by the Trustees for winding up and therefore, what is contemplated by sub-clause (c) of clause (15) of Regulation 18 is nothing but an approval under clause (1) Regulation 41. He submitted that there is no difference between the meaning of the words 'approval' and 'consent'. He submitted that if textual interpretation is given to the provisions of the Regulations, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on 1st March 2020 are considered, it is apparent that between 1st March, 2020 till 20th April 2020, the redemption amounts are 1/3rd or more than 1/3rd of AUM as on 1st March, 2020. He invited our attention to the provisions of the Trusts Act and submitted that winding up of a Scheme does not amount to revocation of the Trust and in fact, it is an execution of the Trust. 128. He, submitted that the prayer made in the writ petition for investigation will not survive for consideration, inasmuch as, the Forensic Auditor has been appointed by SEBI to investigate in accordance with Regulation 66. 129. He, thereafter, invited our attention to a written note by which, a reference has been made to the factual allegations in the petitions filed in three High Courts. He submitted that the allegations of violation of Mutual Funds Regulations are not at all substantiated by the petitioners. Thereafter, he invited our attention to relevant allegations in the petitions and the response of AMC and the Trustees in their statement of objections. He submitted that each and every factual allegation has been specifically dealt with in the statement of objections filed by AMC and the Trustees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... belonging to the sphere of the economic policy and therefore, the scope of judicial review is considerably narrow. In support of his submissions, he relied upon the law laid down by the Apex Court in the case of Swiss Ribbon Private Limited (supra) and in particular, the decision of justice Holmes quoted therein. He also relied upon a decision of the Apex Court in the case of Bhavesh D. Parish and others vs. Union of India and another (2000) 5 SCC 471. He submitted that the Mutual Funds Regulations constitute the Regulations framed by an expert body like SEBI dealing with the Mutual Funds. He submitted that the laws relating to economic activities are required to be viewed with greater latitude by the Courts than the laws touching the civil rights. He relied upon a decision of the Apex Court in the case of R.K. Garg vs. Union of India and others (1981) 4 SCC 675. He submitted that when it comes to a petition involving challenge to economic and fiscal regulatory measures, the Courts will have to show restraint, as the Judges are not experts in the field. He submitted that it is not the case of the petitioners that SEBI lacks the competence to frame the Mutual Funds Regulations. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions giving freedom to the Trustees to wind up the said Schemes is manifestly arbitrary. He relied upon a decision of the Apex Court in the case of Joseph Shine vs. Union of India (2019) 3 SCC 39. He submitted that the provisions can be manifestly arbitrary, only when something is done by the Legislature capriciously, irrationally and in disproportionate manner. He submitted that this type of manifest arbitrariness is not attracted in these petitions. He submitted that the same is the test laid down by the Apex Court in the case of Shayara Bano vs. Union of India and others (2017) 9 SCC 1. 133. He submitted that as far as violation of Article 14 is concerned, mathematical nicety or perfect equality are not required under Article 14, as held by the Apex Court in the case of Kedar Nath Bajoria, Son of Ramjidas Bajoria vs. State of West Bengal 1954 SCR 30. He submitted that it is not the requirement of Article 14 of the Constitution of India that classification should be scientifically perfect. He relied upon a decision of the Apex Court in the case of Venkateshwara Theatre vs. State of Andhra Pradesh and others (1993) 3 SCC 677. He submitted that the provisions of the Regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Apex Court in the case of Director of Supplies and Disposals, Calcutta vs. Member, Board of Revenue, West Bengal, Calcutta AIR 1967 SC 1826 and in the case of Girdharilal Jivanlal Maheswari vs. The Assistant Commissioner of Sales Tax, Nagpur (1957) 59 Bom LR 710. He submitted that on 24th April 2020, only one borrowing was made. He also pointed out from the affidavit filed on 18th September 2020 the circumstances under which the borrowings were made. 138. He invited our attention to clause (12) and (25) of Regulation 18. He submitted that it is the duty of the Trustees to ensure that the Trust properties are properly protected, held and administered by a proper person. He invited our attention to key information memorandum of the said Schemes and submitted that there was no investment made after 23rd April 2020, in view of clause (a) of Regulation 40, as making investment of the funds will amount conducting business activity. He submitted that for protecting the interest of the unit-holders and for meeting the demand by the creditors, such steps were required to be taken by making borrowings. He submitted that the disclosure of the said fact has been made in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the averments made therein are not tenable. He also invited our attention to paragraph 32 of the Statement of objections filed in the said writ petition. He invited our attention to Regulations 16, 18 and 49R and submitted that there is adequate system of internal control and risk management in AMC. He submitted that AMC is strictly maintaining the books of accounts, records and the documents, as required by Regulation 50. REJOINDER OF THE PETITIONERS: 141. Shri. Ravindra Srivatsava, the learned Senior Counsel appearing for the petitioners in W.P. No. 8545/2020 gave a brief rejoinder and submitted that the requirement of obtaining consent of the unit-holders is not only found in sub-clause (c) of clause (15) of Regulation 18 but it is very much a part of the Scheme document. He invited our attention to the statement of additional information and in particular, page 714 of the common compilation and submitted that the requirement of obtaining consent of the unit-holders is accepted by FTMF itself, as the statement of additional information is issued by it. He submitted that some meaning will have to be assigned to the consent referred in sub-clause (c) of clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery Scheme of the Mutual Funds Regulations regarding functional and decisional separation between AMC and the Trustees in the matter of a winding up decision. He submitted that the deliberations recorded in the minutes on the adverse impact of COVID 19 cannot be a ground for winding up. Relying upon a decision of the Apex Court in the case of Commissioner of Police, Bombay vs. Gordhandas Bhanji AIR 1952 SC 16, he submitted that though the Trustees could have taken factual inputs from AMC, the Directors of AMC could not have been a part of the decision making process of AMC. He submitted that on careful scrutiny of the minutes of meeting dated 20th April 2020 and 23rd April 2020, it is apparent that the decision of Mr. Sanjay Sapre, head of AMC carried the day. 144. He submitted that the minutes show that some officers of SEBI were interacting with AMC and the Trustees and there appears to be a tacit approval to the decision of winding up by SEBI. He submitted that surprisingly, SEBI has not at all placed on record any documents to show the action taken by SEBI on the basis of the letter of AMC dated 14th April 2020 of AMC and the letter dated 20th April 2020 of the Trustees. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Trustees have an unfettered discretion to take a decision of winding up is completely fallacious, as can be seen from paragraph 23 of a decision of the Apex Court in the case of Delhi Transport Corporation vs. D.T.C. Mazdoor Congress and others 1991 Supp (1) SCC 600. He submitted that the arguments canvassed by the petitioners about the arbitrariness of the decision have not been rebutted by any of the respondents. 148. He submitted that the argument that the petitioners want to compel the Trustees to run the Scheme is completely unfounded. He submitted that the petitioners being the unit-holders are entitled to seek the relief of quashing of the illegal decision taken by the Trustees. He submitted that the argument of AMC and the Trustees that there is nothing wrong in the investments made is only based on the document of a Scheme which does not pertain to the Scheme in which the petitioner has made investment. He submitted that the petitioner is concerned only with the Short Term Income Mutual Fund which is a debt Scheme and in the document relating to the said Scheme, it is specifically mentioned that the investments objective is to seek stable returns and no inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndicate that by simply placing reliance on the fact that the Forensic Audit was ordered, SEBI wanted the Court to throw out the petition. He submitted that the affidavit of SEBI also shows that the summary of the complaints of the investors was forwarded to the Forensic Auditors which includes the complaints made by the petitioners and other investors. 151. Shri. Adithya Sondhi, learned Senior Counsel submitted that the report on Forensic Audit is not an evidence and therefore, privilege cannot be claimed. In any case, the privilege has to be specifically claimed. He relied upon the decisions of the Apex Court in the case of State of Punjab vs. Sodhi Sukhdev Singh AIR 1961 SC 493 and Reserve Bank of India vs. Jayantilal N. Mistry (2016) 3 SCC 525. He invited attention of the Court to the provisions of Section 179 and 180 of the Companies Act to contend that the borrowing is a part of day to day business of a company. He relied upon a decision of the Apex Court in the case of Official Trustee of Tamil Nadu vs. Udavumkarankal and others AIR 1993 SC 1472=1993 Supp (3) SCC 509. He submitted that the fact that four Schemes out of six Schemes under winding up have become cash rich sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, whether this Court in exercise of its writ jurisdiction under Article 226 of the Constitution of India, can go into the merits of the decision of the Trustees to wind up the said Schemes? Whether the notices dated 23rd April, 2020 and 28th May, 2020 are valid and legal? vi) Assuming that the decision of winding up is valid, whether the Trustees have established that they have complied with sub-clauses (a) and (b) of clause (3) of Regulation 39? vii) Assuming that the decision of the Trustees of winding up is lawful, whether AMC could have lawfully made the borrowings after 24th April 2020 for the purposes for meeting the demands for redemption and for the purposes of repaying the outstanding loans notwithstanding the provision of clause (a) of Regulation 40? Whether AMC could have lawfully paid the redemption amount after 24th April, 2020 in case of redemption requests received prior to 24th April, 2020? viii) Whether the petitioners are entitled to have a copy of report of the Forensic Auditor which is produced on record by SEBI in a sealed envelope and whether any privilege can be claimed in respect of the said document by SEBI, AMC and Trustees? ix) Whether the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely with all matters relating to capital market. As Parliament was not in session, and there was an urgent need to instill a sense of confidence in the public in the growth and stability of the market, the President promulgated the Securities and Exchange Board of India Ordinance, 1992 (Ord. No. 5 of 1992) on 30th January, 1992. The Bill seeks to replace the aforesaid Ordinance . (Underline supplied) 157. As can be seen from the preamble of SEBI Act, the same has been enacted to provide for the establishment of a Board (SEBI) to protect the interests of investors in securities and to promote the development of and to regulate the securities market and for matters connected therewith or incidental thereto. 158. Section 3 of SEBI Act provides for establishment of SEBI. Chapter-IV of the said Act deals with the powers and functions of SEBI. Section 11 of SEBI Act is relevant which read thus: 11. Functions of Board - (1) Subject to the provisions of this Act, it shall be the duty of the Board 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. (2) Without preju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch authority with the prior approval of the Central Government; (j) performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), as may be delegated to it by the Central Government; (k) levying fees or other charges for carrying out the purposes of this section; (l) conducting research for the above purposes; (la) calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions; (m) performing such other functions as may be prescribed. (2-A) Without prejudice to the provisions contained in sub-section (2), the Board may take measures to undertake inspection of any book, or register, or other document or record of any listed public company or a public company (not being intermediaries referred to in Section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market. (3) Notwit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided further that only property, bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached. (f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation: Provided that the Board may, without prejudice to the provisions contained in sub-section (2) or sub-section (2-A), take any of the measures specified in clause (d) or clause (e) or clause (f), in respect of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market: Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Contracts (Regulation) Act, 1956. Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 defines the securities which include the units or any other instruments issued to the investors under any Mutual Fund Scheme. 160. Section 11-B of SEBI Act provides for vesting of plenary powers in SEBI to issue directions. Section 11-B reads thus: 11B. Power to issue directions and levy penalty - (1) Save as otherwise provided in Section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary-- (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the interests of investors or securities market; or (iii) to secure the proper management of any such intermediary or person, it may issue such directions,-- (a) to any person or class of persons referred to in Section 12, or associated with the securities market; or (b) to any company in respect of matters specified in Section 11-A, as may be appropriate in the interests of investors in securities and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions on the activities of AMCs. The minimum penalty prescribed is of Rupees one lakh. Section 15HB provides for imposition of penalty on whoever fails to comply with any provision of SEBI Act, the Rules and Regulations made thereunder or the directions issued by SEBI, for which, no separate penalty has been specifically provided. Such person shall be liable to a penalty which shall not be less than Rupees one lakh but it may extend to Rupees one crore. The procedure for imposing penalties is laid down under Section 15-I. 163. Another relevant provision of SEBI Act is Section 30 which confers powers to make Regulations, which reads thus: 30. Power to make regulations - (1) The Board may, by notification, make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely:-- (a) the times and places of meetings of the Board and the procedure to be followed at such meetings under sub-section (1) of Section 7 including quorum necessary for the transaction of business; (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esting in securities including money market instruments or gold or gold related instruments or real estate assets. Provided that infrastructure debt fund Schemes may raise monies through private placement of units, subject to conditions specified in these regulations; Provided further that Mutual Fund Schemes investing in exchange treaded commodity derivatives may hold the underlying goods in case of physical settlement of such contracts. (underlines supplied) 167. The word sponsor is defined in clause (x) of Regulation 2 which reads thus: (x) sponsor means any person who, acting alone or in combination with another body corporate, establishes a Mutual Fund; There are three other relevant definitions of 'Trustees', 'unit' and 'unit-holder' under clause (y), (z) and z (i) of Regulation 2 which read thus: (y) Trustees mean the Board of Trustees or the Trustee Company who hold the property of the Mutual Fund in trust for the benefit of the unit-holders;] (z) unit means the interest of the unit-holders in a Scheme, which consists of each unit representing one undivided share in the assets of a Scheme; (z)(i) unit ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Thus, a Mutual Fund is a trust within the meaning of the Trusts Act. The contents of the deed should be as provided in the Third Schedule. 171. In view of clause (y) of Regulation 2, the Trustees within the meaning of the Mutual Funds Regulations will be either a Board of Trustees or a Trustee Company. The Trustees within the meaning of Regulation 2(y) have fiduciary relationship with the unit-holders of the Mutual Fund. As per Regulation 17, the appointment of a Trustee can be made only with the prior approval of SEBI. As far as the duties, responsibilities and obligations of the Trustees are concerned, we are discussing the same at a subsequent stage. The appointment of the Trustees is to be made by the sponsor with the prior approval of SEBI. After the Trust Deed is executed under the Indian Registration Act in accordance with the Regulation 14, the Trustees and AMC are required to execute an investment management agreement containing the clauses as provided in the fourth schedule to the Mutual Funds Regulations. The investment management agreement is required to be executed with the prior approval of SEBI. 172. As per Regulation 19, an application for approval of As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;, 'capital protection oriented Schemes' and 'real estates Mutual Fund Schemes' etc. Chapter VI-A is a chapter which deals with the 'Real Estate Mutual Funds Schemes'. 177. From the Mutual Funds Regulations, it appears that a Mutual Fund can have one or more Scheme. The monies collected from the investors/unit-holders under a Mutual Fund Scheme can be invested by Mutual Fund in accordance with Regulation 43 in (i) securities, (ii) money market instruments, (iii) privately placed debentures, (iv) securitized debt instruments, which are either asset backed or mortgage backed securities, (v) gold or gold related instruments, or (vi) real estate assets as defined in clause (a) of regulation 49A or (vii) infrastructure debt instruments and assets as specified in clause (1) of regulation 49L. The investments so made under Regulation 43 are subject to restrictions specified in the Eighth Schedule. Regulation 48 is about computation of NAV of each Scheme to be made by a Mutual Fund. Under the Scheme of the Regulations, AMC, by exercising due diligence and care, is required to take decisions regarding investments by a Mutual Fund. The Code of Conduct prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of default. The defaults for which action can be taken have been set out in Regulation 68. Other defaulters are laid down in Regulation 75A. Regulation 76 is relevant which reads thus: 76. Adjudication, etc..--The Board may for the offences specified in sections 15A to 15E of the Act initiate action under section 15-I of the Act and in case of violation of any of the provisions of the Act or the regulations, initiate action under section 11, 11B or section 24 of the Act. (2) The Board may in addition to suspension or cancellation of certificate, order suspension of launching of any scheme of a mutual fund for a period not exceeding one year for violation of any of the provisions of these regulations after following procedure under this Chapter. (3) The Board may during the pendency of any proceeding of suspension or cancellation under this Chapter also order suspension for launching of any scheme not exceeding three months without following procedure under this Chapter: Provided that no order shall be passed without giving an opportunity of hearing. 179. Before we deal with the specific submissions made across the Bar, we must elaborately consider the rol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal acquisition of shares, voting rights or representation on the board of the asset management companies or trustee companies, this regulation shall be complied with within a period of one year of coming into force of such an arrangement. 180. The Regulation 7B ensures that there is no conflict of interest. Therefore, the Regulation 7B provides that a sponsor of a Mutual Fund and even its associate and group companies including AMC of the fund through the Schemes of Mutual Fund cannot have 10% or more shareholding or voting rights in AMC or Trustee company or any other Mutual Fund. Similarly, the sponsor or its associates or group of companies cannot have the representation on the board of AMC or Trustee company or any other Mutual Fund. A trust deed, as contemplated by Regulation 14 has to be registered as an instrument of trust executed by the sponsor in favour the Trustees or Trustee company. The third schedule lays down the mandatory clauses to be incorporated in the trust deed. One of the most important clauses therein is clause (3) which requires that the trust deed must provide that the Trustees shall take into their custody, or under their control, all the property of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t duty of the Trustees, as they hold the assets of the Schemes in fiduciary capacity. Sub-clauses (i) and (ii) of clause (2) of Regulation 15 make it clear that by making a provision in the trust deed, the liabilities and obligations of the Trustees to any Mutual Fund cannot be limited or extinguished. Sub-clause (ii) clause (2) of Regulation 15 clearly indicates that the Trustees or AMC are responsible for any loss or damage caused to the unit-holders by their acts of negligence or acts of commission or omission. The reason is that it is provided that there cannot be a clause indemnifying the Trustees for such a loss or damage. There is a salutary provision in the third schedule in the form of clause 17 which lays down that the trust deed shall contain a clause to the effect that no amendment to the trust deed shall be carried out without the prior approval of SEBI and unit-holders. Thus, amendment to the trust deed is impermissible without the prior approval of the unit-holders. 183. Before we go into the provisions contained in Regulation 18 which lay down the rights and obligations of the Trustees, there is one more clause in the third schedule which is clause 12 which also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with those of any other Scheme or of other activities of the asset management company. (9) The Trustees shall ensure that all the activities of the asset management company are in accordance with the provisions of these regulations. (10) Where the Trustees have reason to believe that the conduct of business of the Mutual Fund is not in accordance with these regulations and the Scheme they shall forthwith take such remedial steps as are necessary by them and shall immediately inform the Board of the violation and the action taken by them. (11) Each trustee shall file the details of his transactions of dealing in securities with the Mutual Fund on a quarterly basis. (12) The Trustees shall be accountable for, and be the custodian of, the funds and property of the respective Schemes and shall hold the same in trust for the benefit of the unit-holders in accordance with these regulations and the provisions of trust deed. (13) The Trustees shall take steps to ensure that the transactions of the Mutual Fund are in accordance with the provisions of the trust deed. (14) The Trustees shall be responsible for the calculation of any income due to be paid to the Mutual Fund a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reflected from the contents of the fourth schedule. What is important is clause (20) of the Regulation 25 which reads thus: (20) The asset management company and the sponsor of the Mutual Fund shall be liable to compensate the affected investors and/or the Scheme for any unfair treatment to any investor as a result of inappropriate valuation. The said clause means that if any investor gets unfair treatment as a result of inappropriate valuation, AMC and sponsor of the Mutual Fund are liable to pay the compensation to the investors. Regulation 26 provides for Mutual Fund appointing a custodian to carry out the custodial services for the Schemes of the said fund. Regulation 27 provides that Mutual Fund is required to enter into a custodial agreement with the custodian with the prior approval of the Trustees. 189. Now, we come to the provisions of the Mutual Funds Regulations which lay down the procedure for launching the Schemes. The procedure for launching the Schemes of a Mutual Fund is laid down in Chapter-V. Regulation 28 makes it clear that no Schemes can be launched by AMC unless it is approved by the Trustees and a copy of offer document is filed with SEBI. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of the Trustees to safeguard the interests of the investors in the Scheme, as the assets of a Scheme are held by the Trustees in trust for the benefit of the investors. 192. Various provisions of the Regulations contemplate that there should not be any conflict of interest amongst key players and therefore, it is provided that no AMC or its Directors, Officers, or employee of any AMC shall be eligible to be appointed as a Trustee of any other Mutual Fund. It is also provided that no person who is appointed as a Trustee of a Mutual Fund shall be eligible to be appointed as a Trustee of any other Mutual Fund. It is provided that two third (2/3rd) of the Trustees shall be independent persons and they shall not be associated with the sponsors. If a trustee company is appointed as a trustee, its directors cannot act as a Trustee of any other Trustee company unless the object of the Trust is not in conflict of interest with the object of the Mutual Fund. It is also provided that the Trustee company and AMC cannot have the same Auditor. 193. Before we turn to the interpretation of the relevant provisions of the Mutual Funds Regulations, it is necessary to summarize the obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (xiii) To take into custody or under their control all the property of the Schemes of the Mutual Fund and hold it in trust for unit-holders [clause (3) of Third Schedule]; (xiv) To act in the interest of the unit-holders [clause (5) of Third Schedule]; (xv) To dismiss AMC under specific events with the approval of SEBI [clause (9) of Third Schedule]; (xvi) To appoint a custodian and shall remain responsible for the supervision of its activities in relation to the Mutual Fund and to enter into an agreement with the custodian [clause (10) of Third Schedule]; (xvii) To perform the duties as specified in Regulation 49-I of the Mutual Funds Regulations (applicable to real estate Mutual Fund Scheme); and (xviii) To produce to the inspecting officer such books of accounts, records and other documents and to furnish such statements and information relating to the activities of the Mutual Fund in its custody or control [Regulation 63 (1)]. B. Obligations of the AMC: i) To invest the funds raised under various Schemes in accordance with the provisions of the Trust Deed and Regulations [ clause (iii) of fourth Schedule]; ii) Not to acquire any of the assets out of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egarding winding up of Schemes. The specific provisions regarding winding up of a Scheme are contained in Regulations 39 to 42 which read thus: 39. Winding up.--(1) A close-ended Scheme shall be wound up on the expiry of duration fixed in the Scheme on the redemption of the units unless it is rolled over for a further period under sub-regulation (4) of regulation 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 unit-holders. (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. 40. Effect of winding up.--On and from the date of the publication of notice under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is whether for winding up a Scheme, the requirement of obtaining the consent of the unit-holders, as provided in clause (15) of Regulation 18 can be read into sub-clause (a) of clause (2) of Regulation 39. Another issue is regarding interplay between, clause (15A) of Regulation 18 and sub-clause (a) of clause (2) of Regulation 39. For the sake of convenience, we are reproducing herewith both clauses (15) and (15A) of Regulation 18 which read thus: (15) The Trustees shall obtain the consent of the unit-holders-- (a) whenever required to do so by the Board in the interest of the unit-holders; 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. (d) [* * *] (15A) The Trustees shall ensure that no 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 and affects the interest of unit-holders, shall be carried out unless,-- (i) a written communication about the proposed change is sent to each unit holder and an advertisement is gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcept when compliance is made with the provisions of Regulation 38, the investment in Mutual Fund never has guaranteed returns and the investment in the Mutual Fund is always subject to risks. Those investors who wants fixed returns normally take recourse to safe investments like Government securities, bank deposits etc. Moreover, it was argued that the Trustees cannot be forced to continue to run the Schemes. One of the arguments made was that on the one hand, the petitioners have made very serious allegations against the Trustees and AMC of mismanaging the funds of not acting in fiduciary capacity in the interest of the unit-holders etc, and on the other hand, by filing these writ petitions, they want to force the Trustees and AMC to run the said Schemes. An argument is also canvassed by the respondents that the Trustees and AMC were never put to notice that even for winding up of the Schemes under sub-clause (a) of clause (2) of Regulation 39, consent of the unit-holders will be required. If they were made aware of the said position, they would not have floated the said Schemes at all. It was also submitted that the consent referred in sub-clause (c) of clause 15 of Regulation 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded to protect the interests of investors in the Securities Market which has seen substantial growth in tune with the parallel developments in the economy. Investors' confidence in the capital/securities market is a reflection of the effectiveness of the regulatory mechanism in force. All such measures are intended to pre-empt manipulative trading and check all kinds of impermissible conduct in order to boost the investors' confidence in the capital market. The primary purpose of the statutory enactments is to provide an environment conducive to increased participation and investment in the securities market which is vital to the growth and development of the economy. The provisions of the SEBI Act and the Regulations will, therefore, have to be understood and interpreted in the above light . (emphasis added) 200. Regulation 18 is titled as Rights and Obligations of the Trustees which is a part of Chapter-III titled as Constitution and management of Mutual Fund and operation of Trustees etc . Regulation 18 sets out several obligations of the Trustees. In clause (15), the word 'shall' has been used. When Regulation 18 contains several obligations of the Tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no provision made in the Mutual Funds Regulations for winding up of a Mutual Fund. As stated earlier, sub-clause (c) of clause (15) of Regulation 18 applies to a decision to wind up or a decision to prematurely redeem the units. The word 'unit' as defined in clause (z) of Regulation 2 to mean the interest of the unit-holders in a Scheme. Thus, the decision of majority of the Trustees to redeem the units is a decision to redeem units in a particular Scheme. This indicates that sub-clause (c) deals with a Scheme of a Mutual Fund. On the one hand, there is no specific provision incorporated in the Mutual Funds Regulations for winding up of a Mutual Fund and on the other hand, there is a specific provision for winding up of a Scheme. Therefore, there is no manner of doubt that sub-clause (c) of clause (15) of Regulation 18 refers to a decision of majority of the Trustees to wind up a Scheme. No other winding up is contemplated by the Regulations. As per the definition of 'Trustees' contained in clause (y) of Regulation 2, the Trustees can be a Board of Trustees or a Trustee Company. In this case, the Trustees are a Trustee Company. Therefore, in this case, the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to take steps for winding up of the Scheme: Provided that a meeting of the unit-holders shall not be necessary if the Scheme is wound up at the end of maturity period of the Scheme. 204. The approval contemplated by clause (1) of Regulation 41 is for limited purposes of authorizing either the Trustees or any other persons to take steps for winding up of the Scheme. Thus, clause (1) of Regulation 41 comes into picture only after a valid decision is taken to wind up a Scheme in accordance with one of the three sub-clauses (a), (b) and (c) of clause (2) of Regulation 39 and after due compliance is made with clause (3) of Regulation 39. The approval contemplated by said provision is not to the decision of the winding up of a Scheme. The approval is only on the issue who will take steps for winding up of the Scheme. Whether the Trustees will take steps or any other person. The approval under clause (1) of Regulation 41 has nothing to do with the decision to wind up a Scheme. The approval is only for authorising the Trustees or any other person to take steps for actual winding up. 205. Coming back to sub-clause (c) of clause (15) of Regulation 18, the consent of the unit- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more of them. An isolated consideration of a provision leads to the risk of some other inter-related provision becoming otiose or devoid of meaning. xxxx (emphasis added) Therefore, the provision of sub-clause (c) of clause (15) of Regulation 18 cannot be read in isolation. We have to consider the entire Scheme of the Mutual Funds Regulations for assigning meaning to the consent contemplated by sub-clause (c) of clause (15) of Regulation 18. 207. In the case of Hardeep Singh (supra), in paragraph 44 of the said decision, the Apex Court held thus: 44. No word in a statute has to be construed as surplusage. No word can be rendered ineffective or purposeless. Courts are required to carry out the legislative intent fully and completely. While construing a provision, full effect is to be given to the language used therein, giving reference to the context and other provisions of the statute. By construction, a provision should not be reduced to a dead letter or useless lumber . An interpretation which renders a provision otiose should be avoided otherwise it would mean that in enacting such a provision, the legislature was involved in an exercise in futility and the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Scheme is to be wound up as provided in clause (3) of Regulation 39. It is only after obtaining such consent that recourse to clause (3) of Regulation 39 can be taken. 209. Obviously, there can be a 'consent' of the unit-holders to a proposed of winding up of a Scheme only if the majority of the unit-holders give consent to do so. Sub-clause (c) of clause (15) of Regulation 18 is silent on the nature of majority. Obviously, it is not a specific majority like three-fourth majority. Wherever three-fourth majority of the unit-holders was intended, the Mutual Funds Regulations say so. For example, sub-clause (b) of clause (15) of Regulation 18 and sub-clause (b) of clause (2) of Regulation 39. Therefore, it has to be a simple majority. For this purpose, we must make a reference to a decision of a Full Bench of the Allahabad High Court in the case of Wahid Ullah Khan vs. District Magistrate, Nainital and others. In paragraph 32, the Allahabad High Court held thus: 32. The word majority speaks of greater number out of the total number which cannot be a fixed number. In fact, the starting point of majority is more than half, but any number more than half still conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion (SAI) clause (b) is relevant which reads thus:- b) The Trustee 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) If a majority of the directors of the Trustee company decide to wind up the Scheme(s) or prematurely redeem the units. (underlines and emphasis added) Neither the Trustees nor AMC have disowned the above clause which is in their own statement of Additional Information. They have not placed on record any material to show that the above clause was subsequently modified. Sub-clause (iii) above is very specific which refers to a contingency when majority of the directors of the Trustee company decide to wind up Scheme(s). In such a case, as laid down by clause (b) above, the Trustees are under a mandate to obtain consent of the unit-holders. This is how FTMF has read sub-clause (c) of clause (15) of Regulation 18. What is stated in SAI is a part of the Scheme information. Thus, even in the additional information published by FTMF itself, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... majority. Under clause (a), the proposal of winding up must come from the Trustees. Under clause (b), winding up can start even when the Trustees are not willing to wind up a Scheme. In case of sub-clause (b), seventy five percent of the unit-holders must agree for winding up. When the winding up is proposed by the Trustees in accordance with sub-clause (a), it will require consent of unit-holders by a simple majority. The majority need not be of seventy five percent of the unit-holders. It will be a simple majority of the unit-holders. Sub-clauses (a) and (b) of clause (2) of Regulation 39 will operate in different contingencies even if our interpretation is correct. 214. On behalf of SEBI, it was canvassed that reading the word 'consent' of the unit-holders contained in sub-clause (a) will have disastrous consequences. As held earlier, it is the obligation of the Trustees to take consent of the unit-holders when the Board of Directors of the Trustee company, by majority, take a decision to wind up a Scheme or prematurely redeem the units in a Scheme. As the Mutual Funds Regulations lay down that this is the obligation of the Trustees, the argument that not giving freed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 unit-holders 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) (ii) the unit-holders 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 unit-holders are given an option to exit at the prevailing Net Asset Value without any exit load. Explanation: For the purposes of this clause fundamental attributes means the investment objective and terms of a Scheme. It must be noted here that sub-clause (d) was deleted by the SEBI (Mutual Funds) (Second Amendment) Regulations, 2000 with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any Scheme or the trust or fees and expenses payable or any other change which would modify the Scheme, affecting the interest of the unit-holders. The effect of winding up of a Scheme is that after following the procedure under Regulations 39 to 41, the Scheme comes to an end and it is completely wiped out. In case of winding up of a Scheme, after distribution of money to the unit-holders in accordance with Regulation 41, the Scheme ceases to exist. Even if the changes, as contemplated by clause (15A) of Regulation 18 are brought about, the Scheme continues to exist. 219. In case of winding up of an 'open ended Scheme', in view of Regulation 40, the unit-holders cannot seek redemption and they are entitled to receive money on pro rata basis, remaining available after sale proceeds of the assets of the Scheme are applied for clearing all the liabilities of the Scheme. In case of winding up of an 'open ended Scheme', the right of redemption of the unit-holders is completely taken away due to winding up and not due to change of fundamental attributes. The act of change of fundamental attributes is completely different from the action of winding up of a Scheme ina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the winding up. The balance amount is to be paid to the unit-holders in proportion to their respective interest in the assets of the Scheme as on the date when the decision for winding up is taken. Therefore, the repayment of the amount due to the unit-holders, as provided in clause (2) of Regulation 39 is the amount payable to the unit-holders in accordance with sub-clause (b) of clause (2) of Regulation 41. In case of winding up of a Scheme, the amount due to the unit-holders is the one which is payable as per sub-clause (b) of clause (2) of Regulation 41. If the argument that the amount due and payable as per the Scheme to the unit-holders must be paid before taking a decision for winding up is accepted, it will completely defeat the Scheme of Regulations 40 and 41. It will completely defeat the very object of providing for winding up of a Scheme. Therefore, once the process of winding up as per clause (2) of Regulation 39 commences, the unit-holders are entitled to claim the amounts payable only as per sub-clause (b) of clause (2) of Regulation 41. COMPLIANCE WITH CLAUSE (3) OF REGULATION 39 (Issue No (vi): 221. It must be noted here that though the case of AMC and Trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;). This borrowing was for funding redemption received up to 23rd April 2020. As the loan through TREPS was a temporary facility, it was replaced by amount advanced by AMC of ₹ 363 crores on 27th April 2020. It is pointed out that the loan from Bank of Baroda of ₹ 1000 crores (utilised to meet the redemptions) was up for repayment on 20th May 2020. Though, moratorium was sought from Bank of Baroda, the same was denied. To avoid any action by Bank of Baroda, a loan of ₹ 900 crores was taken through TREPS and an amount of ₹ 100 crores was advanced by AMC. It is stated that on 8th September 2020, the amount borrowed from TREPS was repaid by availing loan of ₹ 900 crores from JP Morgan. This is the factual position which will have to be kept in mind in the context of the stand of the Trustees that the provisions of clause (3) of Regulation 39 were complied with on 24th April 2020. 223. For the sake of convenience, we are again reproducing the Regulation 40 which reads thus: 40. Effect of winding up.--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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of sale and supply of agricultural produce. It was held that as the assessee who is the owner of the property is entitled to earn an income therefrom, and merely because he has engaged himself in certain activities which enable him to earn income, it cannot be said that he has engaged himself in a particular business. These are the decisions rendered specifically under the Taxation laws. The rules of interpretation of Taxing statutes require that if two interpretations of a provision are possible, the one which is favourable to the assessee is required to be accepted. 225. But, in the context of the Scheme of the Mutual Funds Regulations, this Court will have to consider the meaning of 'business activities'. As stated in the earlier part of our discussion, a Scheme is launched by AMC with the approval of the Trustees. There are different categories of Schemes in which the investments are made by the members of the public. From plain 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a part of business of a Scheme. In view of clause (2) of Regulation 44, a Mutual Fund can borrow only for the purposes of meeting temporary liquidity needs for the purpose of repurchase, redemption of units, payment of interests or dividend to the unit-holders. For example, if there are large number of requests for redemption of units by the unit-holders in respect of 'open ended Scheme', a Mutual Fund may face temporary liquidity crunch. In such a situation, it is permissible for a Mutual Fund to make borrowings only for payment of redemption amount. Therefore, borrowings made as specified in clause (2) of Regulation 44 will certainly amount to 'business activities' of a Mutual Fund or a Scheme, inasmuch as, such borrowings are made for the purpose of meeting demand for redemption which is a part of business of the Scheme. 227. Regulation 40 is interlinked with Regulation 41. In view of Regulation 40, the moment compliance is made 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o any of the clauses in Regulation 40. It is obvious that such a failure to dispatch the redemption or repurchase proceeds due to applicability of provision of Regulation 40 cannot be termed as a failure within the meaning sub-clause (c) of Regulation 53. Therefore, the consequences such as payment of interests and penalty as provided in clause (d) of Regulation 53 may not follow. Re. Issue No. (iv)- maintainability: 229. Now, we must deal with the issue of maintainability of the writ petitions. This issue must be dealt with in two parts. The first part is whether this Court is powerless to issue a writ under Article 226 of the Constitution of India, even if there is a specific breach of statutory provisions of the Mutual Funds Regulations and the provisions of the SEBI Act, by AMC or the Trustees. The second part will be whether in writ jurisdiction under Article 226 of the Constitution of India, this Court should interfere with the decision of the Trustees of winding of the said Schemes. 230. Now, coming to the first part of the issue of maintainability, various decisions have been relied on by the rival parties. The first decision is in the case of Rohtas Industries (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a general power said Bruce, J. in R. v. Lawisham Union [(1897) 1 QB 498, 501] to enforce the performance of their statutory duties by public bodies on the application of anybody who chooses to apply for a mandamus. It has always required that the applicant for a mandamus should have a legal and a specific right to enforce the performance of those duties . Therefore, the condition precedent for the issue of mandamus is that there is in one claiming it a legal right to the performance of a legal duty by one against whom it is sought. An order of mandamus is, in form, a command directed to a person, corporation or an inferior tribunal requiring him or them to do a particular thing therein specified which appertains to his or their office and is in the nature of a public duty. It is, however, not necessary that the person or the authority on whom the statutory duty is imposed need be a public official or an official body. A mandamus can issue, for instance, to an official of a society to compel him to carry out the terms of the statute under or by which the society is constituted or governed and also to companies or corporations to carry out duties placed on them by the statutes auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise and the source of such power is immaterial, but, nevertheless, there must be the public law element in such action. Sometimes, it is difficult to distinguish between public law and private law remedies. According to Halsbury's Laws of England, 3rd Edn., Vol. 30, p. 682, 1317. A public authority is a body, not necessarily a county council, Municipal Corporation or other local authority, which has public or statutory duties to perform and which perform those duties and carries out its transactions for the benefit of the public and not for private profit. There cannot be any general definition of public authority or public action. The facts of each case decide the point. 30. A contract would not become statutory simply because it is for construction of a public utility and it has been awarded by a statutory body. But nevertheless it may be noticed that the Government or government authorities at all levels are increasingly employing contractual techniques to achieve their regulatory aims. It cannot be said that the exercise of those powers are free from the zone of judicial review and that there would be no limits to the exercise of such powers, but in normal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s against a private school receiving grant-in-aid to the extent of dearness allowance. In paragraph 15, the Apex Court held thus: 15. Writ application was clearly maintainable in view of aforesaid discussion and more so in view of the decision of this Court in Ramesh Ahluwalia v. State of Punjab (supra) in which this court has considered the issue at length and has thus observed: 13. in the aforesaid case, this Court was also considering a situation where the services of a Lecturer had been terminated who was working in the college run by the Andi Mukti Sadguru Shree Muktajee Vandas Swami Suvarna Jayanti Mahotsav Smarak Trust. In those circumstances, this Court has clearly observed as under: (V.R. Rudani case, SCC PP. 700-701, paras 20 22) 20. The term 'authority' used in Article 226, in the context, must receive a liberal meaning unlike the term in Article 12. Article 12 is relevant only for the purpose of enforcement of fundamental rights under Article 32. Article 226 confers power on the High Courts to issue writs for enforcement of the fundamental rights as well as non-fundamental rights. The words 'any person or authority' used in Article 226 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jayanti Mahotsav Smarak Trust and another vs. V.R. Rudani and another (1989) 2 SCC 691. 235. In the case of Zee Telefilms Ltd., vs. Union of India (supra), the issue was whether the Board of control for Cricket in India can be subjected to a writ jurisdiction under Article 226 of the Constitution of India. In paragraphs 31 to 33, the Apex Court held thus: 31. Be that as it may, it cannot be denied that the Board does discharge some duties like the selection of an Indian cricket team, controlling the activities of the players and others involved in the game of cricket. These activities can be said to be akin to public duties or State functions and if there is any violation of any constitutional or statutory obligation or rights of other citizens, the aggrieved party may not have a relief by way of a petition under Article 32. But that does not mean that the violator of such right would go scot-free merely because it or he is not a State. Under the Indian jurisprudence there is always a just remedy for the violation of a right of a citizen. Though the remedy under Article 32 is not available, an aggrieved party can always seek a remedy under the ordinary course of law or by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorporated under the Companies Act, other than a Government company. This was a case where the Apex Court was dealing with an order passed by the High Court, by which, in a writ petition challenging the order of dismissal of a Manager of Federal Bank, it was held that the writ petition was maintainable. The entire law on the subject was considered in some detail by the Apex Court. Paragraphs 18, 26 and 27 of the judgment are relevant which read thus: 18. From the decisions referred to above, the position that emerges is that a writ petition under Article 226 of the Constitution of India may be maintainable against (i) the State (Government); (ii) an authority; (iii) a statutory body; (iv) an instrumentality or agency of the State; (v) a company which is financed and owned by the State; (vi) a private body run substantially on State funding; (vii) a private body discharging public duty or positive obligation of public nature; and (viii) a person or a body under liability to discharge any function under any statute, to compel it to perform such a statutory function. (emphasis added) 26. A company registered under the Companies Act for the purposes of carrying on any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence to such fiscal discipline, if need be, at times even the management of the company can be taken over. Nonetheless, as observed earlier, these are all regulatory measures to keep a check and provide guidelines and not a participatory dominance or control over the affairs of the company. For other companies in general carrying on other business activities, maybe manufacturing, other industries or any business, such checks are provided under the provisions of the Companies Act, as indicated earlier. There also, the main consideration is that the company itself may not sink because of its own mismanagement or the interest of the shareholders or people generally may not be jeopardized for that reason. Besides taking care of such interest as indicated above, there is no other interest of the State, to control the affairs and management of the private companies. Care is taken in regard to the industries covered under the Industries (Development and Regulation) Act, 1951 that their production, which is important for the economy, may not go down, yet the business activity is carried on by such companies or corporations which only remains a private activity of the entrepreneurs/companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 11. Judicial review is designed to prevent the cases of abuse of power and neglect of duty by public authorities. However, under our Constitution, Article 226 is couched in such a way that a writ of mandamus could be issued even against a private authority. However, such private authority must be discharging a public function and the decision sought to be corrected or enforced must be in discharge of a public function. The role of the State expanded enormously and attempts have been made to create various agencies to perform the governmental functions. Several corporations and companies have also been formed by the Government to run industries and to carry on trading activities. These have come to be known as public sector undertakings. However, in the interpretation given to Article 12 of the Constitution, this Court took the view that many of these companies and corporations could come within the sweep of Article 12 of the Constitution. At the same time, there are private bodies also which may be discharging public functions. It is difficult to draw a line between public functions and private functions when they are being discharged by a purely private authority. A body is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or enforcement of a public duty. We have already quoted paragraph 29 of the above decision, in which it was held that if a private body is discharging a public function and the denial of any right is in connection with the public duty imposed on such body, the public law remedy can be enforced. A body can be said to be performing a public function when it seeks to achieve some collective benefits for the public or a section of the public and is accepted by the public or section of the public having authority do so. 238. In the case of Ramakrishna Mission and another vs. Kago Kunya and others (2019) 16 SCC 303 the Apex Court has dealt with the question whether Ramakrishna Mission is a State, within the meaning of Article 12 of the Constitution of India. In paragraph 32, the Apex Court held thus: 32. Before an organisation can be held to discharge a public function, the function must be of a character that is closely related to functions which are performed by the State in its sovereign capacity. There is nothing on record to indicate that the hospital performs functions which are akin to those solely performed by State authorities. Medical services are provided by private as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution of India can be invoked. A body is said to be performing a public function or duty when it seeks to achieve collective benefit to the general public or a section of the public and it is accepted by the public or a section of the public having authority to do so. Moreover, a writ may be issued to a private body or private person when they fail to comply with the provisions of any statute which need to be complied with by all concerned, including a private company. This is so because of the language used by Article 226 of the Constitution of India which shows that a writ can be issued to any person or authority. Applying these principles, it can very well be said that a writ of mandamus can be issued against a private body which is not State within the meaning of Article 12 of the Constitution provided the above tests are satisfied. Hence, the High Court under Article 226 of the Constitution can exercise power of judicial review of the action of such a body. 241. There cannot be any difficulty in holding that a writ of mandamus can be issued against SEBI, as it can be said to be an agency and instrumentality of the State. The question is whether a writ of man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accordance with the provisions of the Mutual Funds Regulations. These are the duties and obligations of the Trustees to public or a section of public who invest money in Mutual Fund. Any member of public can become a unit-holder. In case of the Trustees of a Mutual Fund, they do not have the choice of selecting beneficiaries. As is clear from the Mutual Funds Regulations, object of said Regulations is to protect the investors and to regulate Mutual Funds. The investors are public or a section of public. The Regulations is a piece of a delegated legislation under SEBI Act. The object of SEBI Act is to protect the investors and to regulate securities market. It is a Welfare Legislation. A very important duty of looking after and protecting the interest of the unit-holders who are members of public or a section of public has been entrusted to the Trustees. Therefore, it can be said that Trustees perform a public duty or discharge a public function qua large number of investors/unit-holders. The Trustees seek to achieve some collective benefits for a section of the general public namely, the unit-holders. Thus, it can be safely concluded that that the Trustees, while exercising power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Trustees of winding up of the Schemes, at the outset, it must be noted that along with the statement of objections, neither AMC nor the Trustees have placed on record the resolution passed by the Trustees for winding up of the said Schemes. Even SEBI did not produce the resolution passed by the Trustees. In fact, when this Court made a query about the resolution, Shri. Arvind Datar, the learned senior counsel appearing for SEBI stated that the same will be produced by the Trustees. Only during the course of arguments made by Shri Harish Salve, learned Senior Counsel appearing for AMC and the Trustees, the minutes of the meeting of the Board of Directors of the Trustee company held on 20th April 2020 and 23rd April 2020 were placed on record along with an affidavit of 17th September 2020. The contention raised in this affidavit is that the grievance regarding the non production of minutes was not at all raised in the pleadings in the writ petition and the same was made for the first time during the course of oral arguments made in Writ Petition No. 8545/2020 and 8644/2020. Surprisingly, in paragraph five of the said affidavit, a specific contention was raised contending that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the interest of the unit-holders. Thus, if such an important decision is taken by the Trustees of winding up of a Scheme which affects the interest of unit-holders, they are entitled to know the reasons for the decision. If the Trustees withhold the reasons contained in the Board resolution from the affected unit-holders, they will be committing a breach of their duties under the Regulations and also a breach of trust. Hence, it is the duty and obligation of the Trustees to disseminate information by providing a copy of the resolution recording a decision to wind up a Scheme. 250. Another relevant provision is clause (6) of Third Schedule which reads thus: (6). The Trust Deed shall provide that it is the duty of Trustees to provide or cause to provide information to unit-holders and board as may be specified by the board. Hence, there is a statutory obligation on the part of the Trustees to furnish the information to the unit-holders, as may be specified by SEBI. This is over and above clause (2) above. Unfortunately, SEBI did not exercise its statutory power. However, the obligation to maintain the minutes of the meetings and obligation to disseminate information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enable an orderly and equitable exit to all the investors. It also records that formation of the said opinion is after careful analysis and review of the recommendations of AMC and in close consultation with the investment team. However, in the Resolution of the Board dated 23rd April 2020, it is recorded that apart from the Directors of the Trustees, two independent Directors of AMC, the President of AMC were invited to attend the meeting. Certain explanation was sought from the President of AMC. It further records that the President stated that number of engagements had taken place with SEBI on the need to wind up the Schemes and SEBI has confirmed informally that they will kindly look into the forbearance sought vide letter dated 20th April 2020. It also records that the President stated that SEBI has indicated that it shall be considerate in procedural forbearances. Ultimately, it is stated in the resolution recorded in the minutes that based on a review of the material placed before it and recommendations of the Board of AMC, winding up of the Schemes is the only viable mode of preserving value for investors and an event has occurred, which requires the Scheme to be wound up. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition to the above said six Schemes. The minutes records a decision to exclude the said Fund of Fund Scheme from winding up. Various queries made by the Board of Directors of the Trustee Company to Mr. Sanjay Sapre are referred in the minutes. Mr. Sanjay Sapre clarified that SEBI Regulations allow AMC and Trustees to impose restrictions on redemptions for a period of ten working days in ninety days and even during said period of ten days, the Scheme is under obligation to honour redemptions requests up to ₹ 2 lakhs. It is recorded that the Schemes have more than three lakhs investors in aggregate and, therefore, the Schemes do not have ability to generate adequate cash through sale of assets to honour redemptions requests made by unit-holders/investors. It is recorded that the news regarding imposition of restrictions on redemptions may accelerate redemption demands which may further intensify the liquidity issue. It is noted that on the reopening after ten days period of redemption restrictions, there will be significant increase in the redemptions which will exceed the capacity of the said Schemes to generate liquidity through sale of assets. It is, therefore, stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hedule, the AMC is under an obligation to prepare an annual report and statement of accounts of each Schemes in respect of each financial year. There is a right vested in the Trustees of obtaining the information from AMC concerning the various Schemes of the Mutual Funds and to ensure that the activities of AMC are conducted in accordance with the provisions of the Regulations. AMC acts as a fund manager as well. The investments are made by AMC and in case of open ended Scheme, the redemptions are also dealt with by AMC. Naturally, AMC consists of experts in the field who have intricate knowledge of capital and securities market and various financial aspects. It is the obligation of AMC to report to the Trustees on various aspects of the functioning of the Schemes and from what has been recorded in the minutes of the meeting held on 20th April 2020 and 23rd April 2020, it can be seen that there was a discussion between the Board of Directors of the Trustees and the President of AMC and other persons associated with AMC on the four options which have been noted in the minutes dated 20th April 2020. In the said meetings, certain queries were made by the Board of Directors of the Tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MC participated in both the meetings. However, the ultimate formation of opinion is of the Board of Directors of the Trustee Company. 258. Now, coming back to sub-clause (a) of clause (2) of Regulation 39, the Trustees can decide to wind up a Scheme of a Mutual Fund on the happening of any event which, in the opinion of the Trustees, requires the Scheme to be wound up. The 'happening of any event' is not specifically defined in the Mutual Funds Regulations. The event should be such that it requires winding up of a Scheme. 'Happening of an event' means existence of a factual situation or circumstance, which, in the opinion of the Trustees, warrant a decision to be taken to wind up a Scheme. The 'event' referred in sub-clause (a) is nothing but a factual situation arising which requires a drastic decision of winding up of a Scheme to be taken. As the Trustees are holding the assets of the Schemes in fiduciary capacity and as the unit-holders are the beneficiaries of the Trust, the decision under sub-clause (a) of clause (2) of Regulation 39 has to be taken in the best interests and for benefit of the unit-holders. The question raised is whether an event had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have been drastically reduced. In fact, this was the main contention raised by SEBI also. Whether a situation was created requiring winding up of the said Schemes is a very complex and complicated issue to decide. A very large number of factors are required to be considered by the Trustees who have in their fold, experts in the field. The question whether the decision of winding up of the said Schemes will be ultimately beneficial to the investors/unit-holders or whether it will be detrimental to the interest of the investors/unit-holders can be dealt with only by the experts in the field. It is not possible for a Writ Court to decide whether the impugned decision is beneficial to the unit-holders or it is detrimental to their interest. We do not possess expertise to decide whether the decision of winding up was in the best interest of the unit-holders/investors, inasmuch as, basically, the decision of winding up of the said Schemes is a commercial decision. It cannot be said that the factors which are set out in the minutes of the meetings dated 20th April 2020 and 23rd April 2020 were irrelevant or extraneous. The commercial viability of the decision to wind up cannot be dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f SEBI Act, apart from protecting the interest of the investors is to regulate the securities market while promoting the development thereof. Therefore, one of the objects of the SEBI Act is to promote development of Mutual Funds and to regulate the same. Therefore, the Mutual Funds Regulations make elaborate provisions for creating a three-tier system consisting of 'sponsor', 'AMC' and the 'Trustees'. There are stringent provisions which regulate the activities of AMC and Trustees. The restrictions on their powers have been well defined in the Mutual Funds Regulations. Their rights and obligations have been expressly laid down. In fact, all the activities of the Mutual Funds including management of the Schemes floated by Mutual Funds are highly regulated by virtue of various provisions of the Mutual Funds Regulations which we have already elaborately discussed in the earlier part of this Judgment. Considering the specific object of the SEBI Act, as found in its preamble, it cannot be disputed that the Regulations of Mutual Funds and its development are the objects of the SEBI Act. On plain reading of sub-section (1) of Section 30, it is crystal clear that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Therefore, a Scheme can be wound up only if the unit-holders, by a simple majority, approve the action of formation of the opinion by the Trustees that an event has occurred which requires the Scheme to be wound up. In absence of such consent of the unit-holders to the decision of the Trustees of winding up, the Scheme cannot be wound up. Thus, the opinion of the Trustees as contemplated by Regulation 39 (2) (a) gets translated into actual winding up provided that there is a consent of the unit-holders as aforesaid. The obligation of obtaining consent of the unit-holders incorporated in sub-clause (c) of clause (15) of Regulation 18 acts as a major safeguard against arbitrary and/or colourable exercise of power by the Trustees. They cannot take any such decision as per their whims and fancies as the same is subject to consent of the unit-holders. Therefore, there are sufficient safeguards and safety rails provided. The vice of arbitrariness is not attracted by Regulation 39 (2) (a). 267. The prayer in the petition filed before Delhi High Court is to strike down Regulations 39 to 41. If the activity of winding up of the Scheme is not regulated by introducing the stringent prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may by adopting the process of winding up. Except in case of a Scheme to which Regulation 38 is applicable, there is no right vested in unit-holders to get a particular return. When such being the case, we fail understand as to how the unit-holders' right guaranteed by Article 21 of the Constitution of India is violated by winding up of a Scheme. Therefore, the said argument is deserves to be rejected. In our considered view, the challenge to constitutional validity of Regulations 39 to 42 must fail. In any case, we are dealing with a legislation in the sphere of economic policy which requires a greater latitude. Re. Issue No. (ix): - power of SEBI under Section 11B: 270. Another question is about the powers of SEBI under Section 11B of the SEBI Act. We have already held that the power to issue directions under Section 11B (1) can be exercised to issue directions to AMC and the Trustees. The said direction can be issued when SEBI, after making or causing to be made an enquiry, is satisfied that (a) it is necessary to issue directions in the interest of investors or orderly development of securities market; (b) to prevent the affairs of any intermediary or other persons re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bide by the provisions of the SEBI Act and the Mutual Funds Regulations. As stated in the statement of objects and reason, the confidence of investors in capital market can be sustained by ensuring that the interest of the investors is protected. The very Scheme of the SEBI Act suggests that SEBI has to act as a watchdog to protect the interests of the investors. 272. Coming back to the facts of the case, as noted in the earlier part of the Judgment, SEBI was not even possessing a copy of the resolution dated 23rd April 2020 passed by the Board of Directors of the Trustees providing for winding up. SEBI did not respond to the e-mail dated 14th April 2020 sent by AMC. SEBI failed to reply to the letter dated 20th April 2020 addressed by the Trustees, in which, permission and guidance of SEBI was sought for winding up of the Schemes. In response to a specific query made by the Court, the learned Senior Counsel appearing for SEBI has stated that SEBI was not aware whether compliance of sub-clauses (a) and (b) clause (3) of Regulation 39 was made by the Trustees. It is an admitted position that this was perhaps the first case in the history where Regulation 39(2)(a) was invoked. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppointed to conduct Forensic Audit/Inspection of FTMF, AMC and the Trustee Company in respect of the said Schemes which were ordered to be wound up on 23rd April 2020 and Fund of Fund Scheme. The terms of reference have been annexed to the said letter. The terms of reference are very wide which include checking the exposure of unlisted securities in the wound up Schemes, examining the investment rationale and checking whether due diligence was shown at the time of making investments. The Auditors are also required to check whether adequate effort was made by AMC to sell the unlisted securities. Investigation is also ordered under the said order about the investments made by AMC. The Forensic Auditor is also required to check whether any exit was given to corporates, HNIs or related parties before the decision to wind up. The Forensic Auditor is also required to enquire into whether any money has been siphoned off. The Auditor is also required to go into the issues raised in various complaints received by SEBI regarding said Schemes under winding up and to find out the lapses committed by AMC. It is stated in the affidavit that various documents were forwarded to the Forensic Audito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Act and these regulations are being complied with by the Mutual Fund, the Trustees and asset management company; (c) to ascertain whether the systems, procedures and safeguards followed by the Mutual Fund are adequate; (d) to ascertain whether the provisions of the Act or any rules or regulations made thereunder have been violated; (e) to investigate into the complaints received from the investors or any other person on any matter having a bearing on the activities of the Mutual Funds, Trustees and asset management company; (f) to suo motu ensure that the affairs of the Mutual Fund, Trustees or asset management company are being conducted in a manner which is in the interest of the investors or the securities market. 276. Regulation 61 contemplates SEBI appointing a person as inspecting officer for the purposes set out in clause (1) thereof. The procedure to be followed in inspection and investigation is also mentioned in Chapter-VIII. Under Regulation 64, the inspecting officer is under an obligation to submit a report on completion of the inspection or investigation. SEBI has power to direct the inspecting officer to file interim report. It is provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed upon Shri Arvind Datar, the learned Senior Counsel representing Securities and Exchange Board of India (for short SEBI ) to make the stand of SEBI very clear on production of the report of the Forensic Audit. Accordingly, SEBI has filed an affidavit of Shri Lamber Singh S/o Shri Hansraj Singh. The contention raised in the affidavit is that the report will have to be treated as a confidential document. In paragraph 15 of the affidavit, it is stated thus: In view of the foregoing, I most respectfully pray, the Hon'ble Court may be pleased not to direct SEBI to make the aforesaid Audit Report public. I further pray that in the event the Hon'ble Court passes a direction to SEBI to submit the said Forensic Report for the consideration of the Court, the said Report may be permitted to be placed in a sealed envelope/cover and marked as 'confidential' in the interest of justice. (underline supplied) 2. Today, we have heard the submissions of Shri Arvind Datar, the learned Senior Counsel appearing for SEBI in support of what is pleaded in the aforesaid affidavit. Notwithstanding the statement made in paragraph 15 of the affidavit, he states that SEBI will p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid issues. 5. We, however, reiterate that no party will be entitled to a copy of the said report unless there is a specific order passed by this Court after hearing the learned counsel for the parties. 279. As noted in the order dated 18th September 2020, the Registrar (Judicial) was directed to produce the report of the Forensic Audit filed in a sealed cover as well as the copies of the minutes in the sealed cover which were kept in his safe custody. Accordingly, as noted in the detailed order dated 22nd September 2020, the Registrar (Judicial) appeared before the Court and produced both the sealed covers which were opened in open Court in presence of the Advocates representing AMC and Trustees and the Advocates for petitioners in W.P. No. 8545/2020 and 8644/2020. The said Advocates were permitted to physically appear before the Court. After opening both the sealed covers, notes were taken by one of us (Chief Justice) consisting of two sheets. Thereafter, both the covers were again resealed by the Registrar (Judicial) in open Court and took the same into his custody. The three Advocates who were physically present before the Court have countersigned on resealed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees are left blank, because, so far, the responses have not been considered by the Forensic Auditors. Thus, it cannot be termed as a report of the Auditors in terms of Regulation 64, as the audit findings mentioned therein are not final and they are subject to modifications, based on the responses sought. Further, it is not even an interim report, as there was no such direction issued by SEBI in terms of proviso to Regulation 64. Only on the basis of the final inspection or investigation report that SEBI or its Chairman are required to take action in terms of Regulation 65. Thus, the report produced before the Court in a sealed cover can at best described as a tentative report. In our view, the report of the Auditor being tentative and subject to modifications, it is not a relevant document which can be considered by this Court for the purposes of deciding the issues involved in these petitions. If this report is made public, it will adversely affect further investigation considering the fact that it will go viral on social and other media. A writ of mandamus has not been sought by any of the petitioners for production of the report of the Forensic Auditors. Therefore, the only que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... academic, as the prayers which are made in the said petition need not be granted, in view of the consideration of the prayers made in the petition filed in Delhi and Gujarat High Courts. 284. Based on the provisions of the Trusts Act, an argument was canvassed that every Scheme under a Mutual Fund constitutes a trust within a trust and hence, winding up of a Scheme amounts to revocation of the trust. The argument was that a revocation of trust which is created otherwise than under a Will can be made only in accordance with Section 78 of the Trusts Act. However, in view of the findings which we have recorded on the question of interplay between sub-clause (c) of clause (15) of Regulation 18 and sub-clause (a) of clause (2) of Regulation 39, it is unnecessary to go into the issues raised based on the Trusts Act. AVAILABILITY OF EFFICACIOUS REMEDIES 285. One of the argument canvassed was that alternative efficacious remedies are available to the petitioners under the SEBI Act. An argument was canvassed that complaints have been filed by the petitioners with SEBI. It is urged that SEBI has power to impose penalty for violation of the Mutual Funds Regulations. Another argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustees under sub-clause (c) of clause (15) of Regulation 18, a notice as required by clause (3) of Regulation 39 can be issued and published only after making compliance with the requirement of obtaining consent of the Unit-holders. Issue No. (ii) is answered accordingly; iii) Clause 15A of Regulation 18 of the Mutual Funds Regulations 1996 operates in a different field which has nothing to do with the process of winding up of a Scheme. Therefore, compliance with Clause 15A of Regulation 18 is not a condition precedent for winding up of a Scheme pursuant to sub-clause (a) of clause (2) of Regulation 39. The issue No. (iii) is answered accordingly; iv) Considering the duties of the Trustees under the Mutual Funds Regulations, they perform a public duty. Therefore, when it is found that the Trustees have violated the provisions of the SEBI Act or Mutual Funds Regulations, a Writ Court, in exercise of its jurisdiction under Article 226 of the Constitution of India, can always issue a writ of mandamus, requiring the Trustees to abide by the mandatory provisions of the SEBI Act or the Mutual Funds Regulations. Issue No. (iv) is answered accordingly; v) In the facts of the case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el appearing for the respective parties. Considering the fact that in the city of Bengaluru, from the end of July 2020, positive cases of COVID-19 kept on rapidly increasing, the hearing of this group of petitions was conducted from 12th August, 2020 in the afternoon session through video conferencing. The hearing concluded on 24th September 2020. The cases were heard on 29th August 2020 and 19th September 2020 which were the Court holidays. As additional affidavits were produced by AMC and the Trustees, with a view to bring the same to the notice of the other parties, the matters were again listed on 5th October 2020. We must note here that perhaps, this must be the one of the longest hearing conducted through video conferencing. The hearing through video conferencing was conducted on 25 working days for total 61 hours. What is more important is that hearing went on very smoothly without any major glitch. It enabled the learned members of the Bar to appear from London, New Delhi, Chennai, Mumbai and Bengaluru. Only once an issue of connectivity of internet was faced for a brief period of ten minutes just before the submissions of learned Solicitor General of India were heard. Duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the impugned notices dated 23rd April 2020 and 28th May 2020, till consent of the unit-holders by a simple majority to the decision of winding up is obtained by the Trustees in accordance with sub-clause (c) of Clause (15) of Regulation 18 of the Mutual Funds Regulations; iii) It will be open for the Trustees to obtain consent of the unit-holders as provided in sub-clause (c) of clause (15) of Regulation 18 and to take further steps in accordance with clause (3) of Regulation 39 of the Mutual Funds Regulations; iv) We hold that Regulations 39 to 41 of the Mutual Funds Regulations are legal and valid; v) We direct the Securities and Exchange Board of India to ensure that the Forensic Auditors submits their report in accordance with Regulation 64 at the earliest. After the report is submitted by the Forensic Auditor, the Securities and Exchange Board of India or its Chairman shall examine the report and shall take a decision on the question of taking action as provided in Regulation 65 of the Mutual Funds Regulations and under SEBI Act. The decision shall be taken within six weeks from the date of the receipt of the Forensic Audit Report; vi) We direct the Trustees to p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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