Supreme Court: Remedial steps must be taken to bring about clarity and certainty in the Mutual Fund Regulations

Supreme Court: Remedial steps must be taken to bring about clarity and certainty in the Mutual Fund Regulations

In the case of Franklin Templeton winding up of six schemes, the Supreme Court ruled, "Modern regulatory enactments bear heavily on commercial matters and, therefore, must be precisely and clearly legislated as to avoid inconvenience, friction and confusion, which may, in addition, have adverse economic consequences. The legislator in the present case must, therefore, reflect and take remedial steps to bring about clarity and certainty in the Mutual Fund Regulations."

The Supreme Court bench comprising of Justices S. Abdul Nazeer and Sanjiv Khanna stated, ".....immediate directions are required as embargo prohibiting redemption of the units, effected by Regulation 40 from the date of publication of notice under Regulation 39(3)(b) on 23rd April 2020, for over ten months. Thereby the unitholders have suffered privation and harassment. This, in same manner, also undermines public sentiments and confidence vital for investments in mutual funds. Hence, in view of larger public interest, presently we are only deciding the limited aspect of "unitholders' consent to winding up" [assuming that Regulation 18(15)(c) would apply even where the trustees form an opinion that a scheme should be wound up under Regulation 39(2)(c)], and are persuaded to direct winding up of the six schemes to ensure disbursement of funds and liquidation of assets/securities."

According to the Court, modern regulatory enactments bear heavily on commercial matters and, therefore, must be precisely and clearly legislated as to avoid inconvenience, friction and confusion, which may have adverse economic consequences.

Owing to the fact that more than Rs.17,000 crores are to be realised which is a substantial amount the Court held that the trustees and Securities and Exchange Board of India (SEBI) were not at ad idem and have given different time frames within which they felt the securities can be liquidated. The Court directed that the distribution/disbursement of funds to the unitholders can be made in tranches without waiting for liquidation of all the securities/assets.

The Court concluded that that for the purpose of clause (c) to Regulation 18(15), consent of the unitholders would mean consent by majority of the unitholders who have participated in the poll, and not consent of majority of all the unitholders of the scheme. The Court further rejected the objections to poll results and hold that the unitholders of the six schemes have given their consent by majority to windup the six schemes.

The Apex Court finally clarified that this order does not examine and decide other aspects and issues including the questions whether Regulation 18(15)(c) would apply when the trustee's form an opinion that the scheme should be wound up in accordance with Regulation 39(2)(a) and the contention of the objecting unitholders regarding misfeasance, malfeasances, fraud and the effect thereof.