TMI Blog2021 (7) TMI 751X X X X Extracts X X X X X X X X Extracts X X X X ..... n, rather in the light of the object and purpose of the provision and the legislation. The courts do lean towards a pragmatic and purposive interpretation as there is an assumption that the draftsmen legislate to bring about a functional and working result. Harmonious interpretation of Regulation 18(15)(c) with Regulations 39 to 42 - Held that:- Consent for the purpose of Regulation 18(15)(c) refers to the consent of the majority of the unitholders present and voting, and in case of a poll, the computation would be with reference to the number of units held by the unitholder. In fact, in the course of hearing, it was conceded that majority of the unitholders belong to provident fund trusts or pension funds. The voting pattern referred to in our earlier order reflects that voting under Regulation 18(15)(c) is possible and can work smoothly without much difficulty. The apprehensions expressed, therefore, do not carry much weight. It is obvious that where the unitholders vote against winding up, consequences would follow and accordingly the scheme would not be wound up. This is a natural and normal consequence which will have to be given effect to. It would, as stated above, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the trustees must form an opinion on the happening of any event which requires the scheme to be wound up. Further, as per Regulation 39(3), the trustees are bound to give notice disclosing the circumstances leading to the winding up of the scheme. These notices along with the reasons have to be communicated to SEBI and made known to the unitholders by publication in two daily newspapers having circulation all over India and a vernacular newspaper having circulation at the place where the mutual fund is formed. We have agreed with the High Court that the opinion of the trustees under clause (a) to Regulation 39(2), therefore, must be consented to by the unitholders in terms of the mandate of Regulation 18(15)(c). In view of this interpretation, the argument challenging constitutional validity of the Regulations on the ground that they give unbridled and absolute power to the trustees loses much of its sting and force. There are, therefore, sufficient guidance and safeguards in the Regulations itself on the power of the trustees to decide on winding up of the fund. The Regulations, in our opinion, rightly draw the distinction between creditors and the unitholders. The unit h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and Exchange Board of India (Mutual Funds) Regulations, 1996 (hereafter referred to as Regulations ) and accepting the poll results, we have directed winding up of six mutual fund schemes: (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), and (vi) Franklin India Income Opportunities Fund (Number of Segregated portfolios 2). 2. We would now proceed to interpret Regulations 39 to 42 and their interrelation with Regulation 18(15)(c). We shall also examine and decide the challenge to the constitutional validity of Regulations 39 to 42. As elucidated in the course of hearings and reflected in the order dated 12th February 2021, it would be inopportune to decide and dispose of these appeals, as facts remain disputed and are sub-judice along with other substantive issues in the adjudication proceedings under the Securities a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a unit in the scheme of a mutual fund. 6. The AMC is a company, approved by SEBI under Regulation 21(2), which undertakes business activities in the nature of management and advisory services provided to the pooled assets. The services may be specified by SEBI from time to time. The AMC is forbidden by the Regulations from acting as a trustee of any mutual fund. 7. Chapter III relates to the constitution and management of mutual funds and operation of trustees etc. Regulation 14 stipulates that a mutual fund shall be constituted in the form of a trust and the instrument of the trust shall be in the form of a deed, registered under the provisions of the Indian Registration Act, 1908, executed by the sponsor in favour of the trustees. Regulation 15(1) requires that the trust deed shall incorporate such clauses as are mentioned in the Third Schedule of the Regulations, and such other clauses as are necessary for safeguarding the interests of the unitholders. Regulation 15(2) mandates that no trust deed shall contain a clause which has the effect of (a) limiting or extinguishing the obligations and liabilities of the trust in relation to any mutual fund or the unitholders; o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-regulations require the trustees to carry out quarterly reviews of all transactions between the mutual funds, the AMC and its associates. The trustees are to also review the net worth of the AMC on a quarterly basis. In case of any shortfall in net worth, the trustees were to ensure that the AMC makes up for the shortfall in terms of Regulation 21(1)(f).- The position post the SEBI (Mutual Funds) (Amendment) Regulations, 2021 with effect from 5th Marcch 2021 has not been examined. The trustees are to furnish to SEBI, on a half-yearly basis, a report on the activities of the mutual fund with certificates that there have been no instances of self-dealing or front running by any of the trustees, directors or key personnel of the AMC, and that the AMC has been managing the schemes independently of any other activities, and in case any activities of the nature referred to in Regulation 24(b) have been undertaken by the AMC, that it has taken adequate steps to ensure that the interests of the unitholders are protected. - Legal effect of Regulation 24 has not been examined. 9. Chapter IV of the Regulations relates to the constitution and management of the AMC and the custodian. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 020, w.e.f. 29.10.2020 to Regulation 25 to ensure that the mutual fund complies with all the provisions of the Regulations, guidelines and circulars issued in relation thereto from time to time and that the investments made by the fund managers are in the interest of the unitholders. This officer is responsible for the overall risk management function of the mutual fund. Sub-regulation (6B)- 4 Ibid. to Regulation 25 states that the fund managers, whatever be the designation, shall ensure that the funds are invested to achieve the objectives of the scheme and in the interest of the unitholders. 11. Chapter V deals with schemes of mutual funds and Regulation 28(1) thereunder states that no scheme shall be launched by the AMC unless it is approved by the trustees and a copy of the offer document has been filed with SEBI. Regulations 32 and 33 pertain to the listing and repurchase respectively of units in close-ended schemes, while Regulation 35 deals with the allotment of units and refunds of moneys. In terms of Regulation 38, guaranteed return is not to be provided in a scheme, unless such returns are fully guaranteed by the sponsor or the AMC, and a statement to that effect is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60. The trustee shall be bound to make such disclosures as are essential in order to keep them informed about any information which may have an adverse bearing on their investments. The trustees are mandated and bound to make such disclosures to the unitholders as are essential to keep them informed about any information that may have adverse bearing on their investments. 14. Chapter VIII relates to and empowers SEBI to authorise and conduct inspection and audit. SEBI, under Regulation 61(1), may appoint one or more persons as the inspecting officers to undertake inspection of the books of accounts, records, documents, and infrastructure, systems, and procedures or to investigate the affairs of the mutual fund, the trustees, and the AMC for the purposes stipulated therein. Regulation 62 requires that SEBI shall issue not less than ten days notice to the mutual fund, trustees, or AMC, as the case may be, before ordering an inspection or investigation. However, under sub-regulation (2), notwithstanding sub-regulation (1), SEBI can direct such inspection or investigation without any notice when it is satisfied that in the interest of the investors no such notice should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deem units in the scheme. Procedure and manner of winding up 41. (1) The trustee shall call a meeting of the unitholders to approve by simple majority of the unitholders present and voting at the meeting resolution for authorising the trustees or any other person to take steps for winding up of the scheme: Provided that a meeting of the unitholders shall not be necessary if the scheme is wound up at the end of maturity period of the scheme. (2)(a) The trustee or the person authorised under sub-regulation (1) shall dispose of the assets of the scheme concerned in the best interest of the unitholders of that scheme. (b) The proceeds of sale realised under clause (a), shall be first utilised towards discharge of such liabilities as are due and payable under the scheme and after making appropriate provision for meeting the expenses connected with such winding up, the balance shall be paid to the unitholders in proportion to their respective interest in the assets of the scheme as on the date when the decision for winding up was taken. (3) On the completion of the winding up, the trustee shall forward to the Board and the unitholders a report on the winding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vent, which, in the opinion of the trustees, requires the scheme to be wound up; (b) if 75% of its unitholders- 2(z)(i) of SEBI (Mutual Fund) Regulation 1996, unit holder means a person holding unit in a scheme of mutual fund. pass a resolution for winding up of the scheme; or (c) SEBI directs winding up of the scheme in the interest of the unitholders. Under each clause the initiator is different, and the condition to be satisfied is stipulated. Clause (a) empowers the trustees, while clauses (b) and (c) empower the unitholders and SEBI respectively. 19. When a scheme is to be wound up under sub-regulation (2), the trustees are required by sub-regulation (3) of Regulation 39 to issue a public notice in two daily newspapers having all India circulation and in a vernacular paper having circulation where the mutual fund is located. The public notice should state the circumstances leading to winding up of the scheme. The trustees are also required to write to SEBI and disclose the circumstances leading to winding up of the scheme. 20. On and from the date of publication, the cease and freeze mandate of Regulation 40 triggers. Regulation 40, which is in the nature of statuto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances leading to the winding up, the steps taken for disposal of the assets for winding up, expenses for winding up, net assets available for distribution to the unitholders and a certificate from the auditors. Sub-regulation (4), a non-obstante provision, states that the requirement in respect of disclosures in the form of half-yearly report and annual report shall continue until winding up is completed or the scheme ceases to exist. Regulation 42 states that after receipt of the report under Regulation 41(3), if SEBI is satisfied that all measures relating to winding up have been complied with, the scheme would cease to exist. 24. Regulation 42A stipulates that the units of the mutual funds scheme shall be delisted from the recognised stock exchange in accordance with the guidelines as may be specified by SEBI. 25. Regulation 18(15)(c), which relates to rights and obligations of the trustees, in simple words requires the trustees to take consent of the unitholders, when they, by majority, decide to wind up or prematurely redeem the units. Words winding up in Regulation 18(15)(c), ex-facie refers to the winding up of the open-ended scheme and the expression prema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of unitholders is required before a scheme is wound up pursuant to a decision taken by the Trustees, the provisions of Regulation 39(2)(b) to be rendered otiose as under the said Regulation, a scheme may be wound up at the instance of Unit holders (upon 75% of the Unit holders of a scheme passing a Resolution for winding up). (d) Regulation 40 comes into effect on and from the date of publication of notice by Trustees under Regulation 39(3)(b) and not from the date of consent of Unit holders , which makes it abundantly clear that consent of Unit holders is not contemplated qua decision of Trustees to wind up a scheme(s). (e) Further, Regulation 40 (a) provides that on and from the date of publication of notice under 39(3)(b), the Trustees or Asset Management Company, as the case may be, shall cease to carry on any business activities in respect of the scheme so wound up. Therefore, when a decision by Trustee to wind up scheme is taken, in terms of 39(2)(a), the notice is issued and Regulation 40 comes into operation and the requirement of obtaining consent of Unit holders at this stage cannot arise. (f) It is submitted that Regulation 41(1) casts an obligation on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers , and not consent given by individual unitholders who alone would be bound by their consent, that is, it excludes unitholders who are not agreeable. To accept the second or contra view, as pleaded by some of the objecting unitholders, would be to negate the very object and purpose of clause (c) to sub-regulation (15) of Regulation 18. In fact, the submission, if accepted, will make the Mutual Fund schemes and the winding up provisions in the Mutual Fund Regulations unworkable as there would be two different classes of unitholders one bound by the consent, and others who are not bound by consent. Consequently, the scheme would not wind up. The intent behind the provision is to bind even those who do not consent. 9. Black s Law Dictionary (10th Edition) defines the word consent as a voluntary yielding to what another proposes or desires; agreement, approval, or permission regarding some act or purpose, esp. given voluntarily by a competent person; legally effective assent. The dictionary also defines general consent to mean adoption without objection, regardless of whether every voter affirmatively approves. Shackleton on the Law and Practice of Meetings, 14th Edn. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... states that common parliamentary law fixes the quorum as a majority of the members . The constitution of the United States sets the quorum requirement in the House of Representatives at a majority of the membership. But to state that a quorum is a majority of the membership opens the way to potential conflict; which is precisely what has happened on numerous occasions. After examining the various definitions of the term quorum, the author observes that the definitions by themselves give no key as to how to determine what is minimum number or what constitutes majority. The expression majority can mean - (i) majority of total membership list; (ii) exclude or include delinquent members; (iii) members present and voting; or (iv) those present, voting and not voting. Different meanings, he observed, have added to the confusion around the concept of the quorum. Albeit referring to the position in 1967, the author observed: As we have emerged into the modern era, it is not surprising that by now the method, which has been legally agreed upon by the courts, to determine minimum and majority, is well established. 12. Clause (c) to sub-regulation (15) of Regulation 18 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind the corporation. In considering whether the requisite number is present, only those members must be included who are competent to take part in the particular business before the meeting. The power of doing a corporate act may, however, be specially delegated to a particular number of members, in which case, in the absence of any other provision, the method of procedure applicable to the body at large will be applied to the select body. If a corporate act is to be done by a definite body along, or by definite body coupled with an indefinite body, a majority of the definite body must be present. Where a corporation is composed of several select bodies, the general rule is that a majority of each select body must be present at a corporate meeting; but this rule will not be applied in the absence of express direction in the constitution, if its application would lead to an absurdity or an impossibility. ... (emphasis supplied) 14. The concept of absurdity in the context of interpretation of statutes is construed to include any result which is unworkable, impracticable, illogical, futile or pointless, artificial, or productive of a disproportionate counter mischief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lectors, a majority only of those existing at the time of the election need be present. When an election is to be made by a definite body only, or the electoral assembly is to consist of a definite and an indefinite body, the majority of the definite body must, as a general rule, be present in order to render the election legal. It is not necessary that a majority of the indefinite body should be present so long as there is majority of the definite body. If a constituent part of a corporation refuses to be present at an election, it cannot be held, and an election by the remaining parts will be void. But electors present at an election and abstaining from voting are deemed to acquiesce in the election made by those who vote. The aforesaid exposition, for the purpose of majority and quorum, draws distinction between an electorate consisting of definite number and an electorate composed of indefinite number. Justice Seshagiri Ayyar of the Madras High Court in his concurring judgment in Syed Hasan Raza Sahib Shamsul Ulama and two others v. Mir Hasan Ali Sahib and two others had drawn distinction between definite and indefinite numbers in the following manner: In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n acceptance nor rejection of the proposal. Regulation 18(15)(c), upon application in ground reality, must not be interpreted in a manner to frustrate the very law and objective/purpose for which it was enacted. We would rather accept a reasonable and pragmatic construction which furthers the legislative purpose and objective. The underlying thrust behind Regulation 18(15)(c) is to inform the unitholders of the reason and cause for the winding up of the scheme and to give them an opportunity to accept and give their consent or reject the proposal. It is not to frustrate and make winding up an impossibility. Way back in 1943, Sutherland in Statutes and Statutory Construction, Volume 2, Third Edition at page no. 523, in Note 5109, had stated: Where a statue has received a contemporaneous and practical interpretation and the statute as interpreted is re-enacted, the practical interpretation is accorded greater weight than it ordinarily receives, and is regarded presumptively the correct interpretation of the law. The rule is based upon the theory that the legislature is acquainted with the contemporaneous interpretation of a statue, especially, when made by an administrative b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to seek consent of the unit holders, when they by majority decide to wind up a scheme. Regulation 18(15)(c) mirrored by use of the word shall is couched as a command. Further, the expression when the majority of the trustees decide to wind up in Regulation 18(15)(c) manifestly refers to clause (a) to Regulation 39(2) as this is the only Regulation which entitles the trustees to wind up the scheme. Regulation 18(15)(c), when it refers to trustees decision to wind up, it implies the trustees opinion to wind up the scheme. Rather than making the decision of the trustees otiose, as suggested by SEBI, the trustees and the AMC, Regulation 18(15)(c) itself would become otiose in case their interpretation is accepted. Principle of harmonious construction should be applied which, in the context of the Regulations in question, would mean that the opinion of the trustees would stand, but the consent of the unitholders is a pre-requisite for winding up. 31. We do not think that this interpretation in any way dilutes or renders clause (b) to Regulation 39(2) meaningless or redundant. This clause applies where the winding up process is initiated at the instance of the unitholders, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are informed about the proposed change in fundamental attribute by sending individual communication and an advertisement is given in English daily newspaper having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. (iii) the unitholders are given an option to exit at the prevailing Net Asset Value without any exit load. Explanation: For the purposes of this clause fundamental attributes means the investment objective and terms of a scheme. By the same amendment- SEBI (Mutual Funds) (Second Amendment) Regulations, 2000. , sub-regulation (15A) has been inserted and reads: (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 unitholders, shall be carried out, unless (i) a written communication about the proposed change Is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timing. In view of attendant risks, diversification of portfolio is preferred but this consequentially requires a larger investment. Mutual funds managed by professional fund managers with advantages of pooling of funds and operational efficiency are the preferred mode of investment for ordinary and common persons. It would be wrong to expect that many amongst these unitholders would have definitive opinion required and necessary voting in a poll on winding up of a mutual fund scheme. Such unitholders, for varied reasons, like lack of understanding and expertise, small holding etc., would prefer to abstain, leaving it to others to decide. Such abstention or refusal to express opinion cannot be construed as either accepting or rejecting the proposals. Keeping in view the object and purpose of the Regulation with the language used therein, we would not accept a construction which would lead to commercial chaos and deadlock. Therefore, silence on the part of absentee unitholders can neither be taken as an acceptance nor rejection of the proposal. Regulation 18(15)(c), upon application in ground reality, must not be interpreted in a manner to frustrate the very law and objective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs may correct them. Money and investment of the unitholders being at stake, a wrong decision would obviously have inimical impact on the unitholders themselves. We would brace the argument that a good and intelligible decision of winding up would invariably be accepted by the unitholders. 37. Consent for the purpose of Regulation 18(15)(c) refers to the consent of the majority of the unitholders present and voting, and in case of a poll, the computation would be with reference to the number of units held by the unitholder. In fact, in the course of hearing, it was conceded that majority of the unitholders belong to provident fund trusts or pension funds. The voting pattern referred to in our earlier order reflects that voting under Regulation 18(15)(c) is possible and can work smoothly without much difficulty. The apprehensions expressed, therefore, do not carry much weight. It is obvious that where the unitholders vote against winding up, consequences would follow and accordingly the scheme would not be wound up. This is a natural and normal consequence which will have to be given effect to. It would, as stated above, happen rarely and that too would not happen without any g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme is to be wound up in terms of clauses (a), (b) or (c) to Regulation 39(2). Sub-regulation (3) to Regulation 39 also mandates the trustees to disclose in the public notice the circumstances leading to winding up of the scheme. This obviously means that where the trustees form an opinion to wind up a scheme, they must disclose the reasons, and thereupon, the unitholders exercise their right to vote and give or deny consent. This is the true legal effect on harmonious reading of Regulation 18(15)(c) and Regulation 39(2)(a). 40. The language of clauses (a) and (c) to sub-regulation (2), and sub-regulation (3) to Regulation 39 does not envisage involvement of the unitholders till the publication of notices in case of clauses (b) and (c) to sub-regulation (2) to Regulation 39. Therefore, when clauses (a) or (c) of Regulation 39(2) apply, the unitholders are to be informed about the winding up by the trustees or SEBI by way of public notice. Publication in terms of Regulation 39(3) is even required when the unitholders vote for winding up of a scheme under clause (b) of Regulation 39(2). 41. It is manifest that publication of notices under Regulation 39(3) should be instantaneou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the scheme make a requisition. 46. The impugned judgment, from paragraph 211 onwards, specifically refers to the responsibilities and duties of the trustees incorporated in the statement of additional information published by the mutual fund, which reads: (b) The Trustees shall obtain consent of the unit holders of the Scheme(s): i) When the Trustee is required to do so by SEBI in the interests of the unit-holders; or ii) Upon the request of three-fourths of the unit holders of any Scheme(s) under the Mutual Fund; or iii) If a majority of the directors of the Trustee company decide to wind up the Scheme(s) or prematurely redeem the units. Clause (iii) of the aforesaid quotation dealing with responsibilities and duties of the trustees, requires the trustees to obtain consent of the unitholders of the scheme if the majority of the directors of the trustee company decide to wind up the scheme or prematurely redeem the units. The language of clause (iii) of the aforesaid quotation is identical to clause (c) of sub-regulation (15) to Regulation 18. The High Court was, therefore, right in observing that the trustees and the AMC have understood and accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en it is in the interest of the unitholders. (c) Further, SEBI has not prescribed/issued guidelines or policy regarding formation of opinion by the trustees to wind up the scheme. (d) The opinion of the trustees is given paramountcy and is supreme. Even SEBI accepts that it has no role and cannot examine and set aside the decision of the trustees. Thus, SEBI, as per its own contention and submission, being bound by the opinion of the trustees, cannot interfere even when it is necessary to do so in the interest of unitholders or when the trustees have acted in their own vested interest. This is contrary to the scheme of the SEBI Act whereunder SEBI has been constituted primarily to act as a watchdog and to protect interests of the investors in the capital market, including the unitholders. (e) There is no provision for appeal or internal challenge against the decision of the trustees who may in a given case form a wrong opinion regarding winding up of the scheme. (f) For the above reasons, clause (a) to Regulation 39(2) suffers from manifest arbitrariness in the absence of any prescription regulating the exercise of the power by the trustees. Reliance is placed upon Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... powers of SEBI. Section 11 of the SEBI Act prescribes the functions of SEBI. Sub-section (1), in general terms, states that it will be the duty of SEBI to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market. SEBI is empowered to take measures in this regard as it thinks fit. Sub-section (2), without prejudice to the generality of sub-section (1), lists out as many as 17 specific clauses and states that SEBI is entitled to provide for measures relating to those clauses. Thereunder, Clause (e) relates to prohibiting fraudulent and unfair trade practices relating to securities markets. Clause (g) concerns prohibition of insider trading in securities. Clauses (b), (i), (ia), (ib) and (la) relate to registering and working of the trustees or trust deeds, investment advisors and such other intermediaries who may be associated with the securities market in any manner and permits SEBI to call for information from, undertaking inspection, conducting inquiries and audits of mutual funds and other persons associated with the securities market, intermediaries and self-regulatory organisations. They can also ask for records ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of hearing shall be given to such intermediaries or persons concerned. Sub-section (4A) authorises SEBI to conduct an inquiry in the prescribed manner notwithstanding the provisions of sub-sections (1), (2), (2A), (3) and (4), Section 11B and Section 15-I by an order and for reasons to be recorded in writing levy penalty under Sections 15A, 15B, etc. Under sub-section (5), the amount disgorged pursuant to the directions issued under Section 11B of the Act or 12A of the Securities Contracts (Regulation) Act, 1956 etc. is to be credited to the Investor Protection and Education Fund established by SEBI and to be utilised in accordance with the regulations framed under the Act. 51. Section 11B of the Act reads as under: 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; o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the Act, or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention. The provisions of Section 11B have been held to be procedural in nature and include not only an individual but also a company. Therefore, any person associated with the securities market who commits breach of the SEBI Act, Rules and Regulations, can be subjected to such directions and measures as may be imposed and issued by SEBI. Sub-section (2) to Section 11B states that SEBI may after holding an inquiry pass an order in writing, and, without prejudice to the provisions of Section (11), levy penalty under Sections 15A, 15B, etc. 53. Referring to the provisions, the Division Bench of the High Court in the impugned judgement has held as under: 291. 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 inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, i.e. clause (a) to Regulation 39(2), 39(3), 40, 41 or 42 by the trustees or the AMC, it is open to SEBI to proceed in accordance with law and in terms of Section 11 and 11B of the Act. It would be, therefore, incorrect to state that the decision of the trustees under clause (a) to Regulation 39(2) cannot be made subject matter of inquiry or investigation and therefore no directions or orders under Section 11 or 11B of the Act can be passed. No doubt, clause (a) to Regulation 39(2) gives primacy to the opinion of the trustees and does not require prior approval of SEBI, yet SEBI is entitled to conduct an inquiry and investigation when justified and necessary to ascertain whether the trustees have acted in accordance with their fiduciary duty and also for reasons which would fall within the four corners of clause (a) to Regulation 39(2). If the trustees have acted for extraneous and irrelevant reasons and considerations, the action would be in violation of clause (a) to Regulation 39(2) and therefore amenable to action under the SEBI Act, including directions under Section 11B. 55. The view we have taken is in consonance with the earlier decision of the Gujarat High Court in A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtensive powers with respect to the regulation of mutual funds including the trustee s decision to wind up a scheme of the mutual fund. Section 11(1) of the SEBI Act states that it is the duty of SEBI to protect the interest of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit . Under Section 11B of the SEBI Act, SEBI has broad powers to issue appropriate directions if it is satisfied after inquiry that such directions are necessary in the interest of investors or for orderly development of securities market or to prevent the affairs of any intermediary being conducted in a manner detrimental to the interest of investors or the securities market or to secure proper management of any intermediary or other person. The power of SEBI extends to regulating and monitoring the functioning and decisions taken by mutual funds, the trustees and the AMC. SEBI has the power to pass any direction if it deems fit in the interest of unitholders. The trustees and the AMC have specifically stated: It is evident form the aforesaid provisions that the SEBI has extensive powers to regulate, supervise, issue directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SEBI and subjected it to adverse comments. 58. It cannot be accepted that the trustees under clause (a) to Regulation 39(2) have been given absolute and unbridled power to wind up a scheme. Language of clause (a) to Regulation 39(2) states that the trustees must form an opinion on the happening of any event which requires the scheme to be wound up. Further, as per Regulation 39(3), the trustees are bound to give notice disclosing the circumstances leading to the winding up of the scheme. These notices along with the reasons have to be communicated to SEBI and made known to the unitholders by publication in two daily newspapers having circulation all over India and a vernacular newspaper having circulation at the place where the mutual fund is formed. The trustees are, therefore, required to come to a conclusion that due to specific circumstances articulated in writing, the scheme is required to be wound up. Two-thirds of the trustees are independent persons who are not associated with the sponsor, Regulation 16(5) and no director, officer or employee of the AMC can be appointed as a trustee. Regulation 16(3) The trustees hold the assets of the scheme in fiduciary capacity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, must be consented to by the unitholders in terms of the mandate of Regulation 18(15)(c). In view of this interpretation, the argument challenging constitutional validity of the Regulations on the ground that they give unbridled and absolute power to the trustees loses much of its sting and force. There are, therefore, sufficient guidance and safeguards in the Regulations itself on the power of the trustees to decide on winding up of the fund. 61. The Regulations, in our opinion, rightly draw the distinction between creditors and the unitholders. The unit holders are investors who take the risk and, therefore, entitled to profits and gains. Having taken the calculated risk, they must also bear the losses, if any. Unitholders are not entitled to fixed return or even protection of the principal amount (See Regulations 38 and 38A). Guaranteed Returns 38. No guaranteed return shall be provided in a scheme, - (a) unless such returns are fully guaranteed by the sponsor or the asset management company; (b) unless a statement indicating the name of the person who will guarantee the return, is made in the offer document; (c) the manner in which the guarantee is to be met ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igation though the appointed date of payment may not have arrived. Payable , in this context, means capable of being paid, suitable to be paid and legally enforceable. It would exclude labilities that are time barred or those not payable in facts or in law. Union of India v. Raman Iron Foundry, (1974) 2 SCC 231 In case of any dispute a summary but thorough inquiry may be made to ascertain whether the liability is due and payable. Regulations do not bar civil remedy Obviously, the liabilities which are not due and payable would not get preferential treatment, thereby reducing the amounts payable to the unitholders. 63. Since the Regulations are in the nature of economic regulations, while exercising the power of judicial review, we would exercise restraint unless clear grounds justify interference. We would not supplant our views for that of the experts as this can put the marketplace into serious jeopardy and cause unintended complications. Policy decisions can only be faulted on the grounds of mala fides, unreasonableness, arbitrariness and unfairness, in addition to violation of fundamental rights or exercise of power beyond the legal limits. The principle of manifest arb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, therefore, would include payment of redemption proceeds to the unitholders, which would include the request for redemption received prior to the date of publication under Regulation 59(3). The High court has, accordingly, held: 228. As regards redemption requests received prior to compliance with clause (3) of Regulation 39, the argument of AMC and the Trustees was that in view of clause (d) of Regulation 53, the redemption or repurchase proceeds are required to be dispatched within ten working days from the date of redemption notwithstanding the decision of winding up. As held earlier, the dispatch of redemption proceeds or repayment of redemption proceeds is also a part of business activity of a Scheme which is completely prohibited once the Regulation 40 triggers in. Therefore, the argument that the redemption requests made by the unit-holders on 23rd April, 2020 were required to be honoured even after Regulation 40 had triggered in cannot be accepted. Once there is a compliance with clause (3) of Regulation 39, the mandatory provisions of Regulation 40 forthwith operate. There is no exception carved out to any of the clauses in Regulation 40. It is obvious that such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expressly provided, a Mutual Fund shall not advance any loans for any purposes. However, clause (4) of Regulation 44 provides that a Mutual Fund may lend and borrow securities in accordance with the framework relating to short selling and securities lending and borrowing specified by SEBI. The provisions of Mutual Funds Regulations are intended to regulate activities of Mutual Funds for promoting its healthy growth and for protecting interest of unit-holders. In a case of Taxation law, the rules of interpretation applicable provide that if there are two interpretations possible, the one in favour of assessee will have to be preferred. In case of Mutual Funds Regulations, a construction needs to be adopted which will subserve the object of SEBI Act. 226. It is pertinent to note here that clause (a) of Regulation 40 uses the words business activities in respect of the Scheme and not merely business of the Scheme. As siated earlier, the activities of repurchase of units, redemption of units or payment of interest or dividend are also 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 liqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld to be a part of business activities in respect of the Scheme. 67. The case set up by some parties is at variance with the dictum pronounced by the High Court. They have submitted that the mutual fund must honour the request for redemptions received on or before the date of publication of notice under Regulation 39(3). In other words, Regulation 53(b) must be honoured and complied with even if the time of payment of redemption, the 10 days period stipulated therein, would fall after the date of publication of the notice under Regulation 39(3). They are of the opinion that it would be illegal not to honour the valid redemption requests. They are also of the opinion that the AMC should be allowed and permitted to borrow money within the prescribed limits to honour such valid redemption requests as long as the valid redemption requests are received prior to the cut-off date for winding up. 68. Before we answer this aspect, we would like to have greater clarity on the factual matrix, which would be possible once the proceedings in pursuance of show-cause notices etc. are concluded. Notably, many of the appellants have not addressed us on this aspect, their grievance being tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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