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2020 (10) TMI 1228 - HC - SEBIWinding up proceedings of Mutual fund scheme - objections to the e-voting results - Need for approval of unit-holders - validity of Regulations 39 to 40 of the Mutual Funds Regulations - majority of unit-holders on the happening of any event which in the opinion of the Trustees requires a Scheme to be wound up - duties of the Trustees under the Mutual Funds Regulations - obligation of the Trustees or Trustee Company - role of SEBI - issuance of direction to SEBI - HELD THAT - We hold that Regulations 39 to 40 of the Mutual Funds Regulations are valid.When the Board of Directors of a Trustee company, by majority, decides to wind up a Scheme by taking recourse to sub-clause (a) of clause (2) of Regulation 39, the Trustee company is bound by its statutory obligation under sub-clause (c) of clause (15) of Regulation 18 of obtaining consent of the unit-holders of the Scheme. The consent of unit-holders will be by a simple majority. In view of the obligation of the Trustees 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. 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 can be implemented only after obtaining the consent of unit-holders as required by sub-clause (c) of clause 15 of Regulation 18. On compliance being made with sub-clauses (a) and (b) of clause (3) of Regulation 39, Regulation 40 triggers in and therefore, AMC or Trustees have no right to continue the business activities of the Schemes which will include borrowings. Similarly, from the date of publication of the notice in accordance with sub-clause (b) clause (3) of Regulation 39, AMC is disentitled to honour the redemption requests made earlier. The copy of the Forensic Audit report produced in a sealed cover, does not contain final findings and it is specifically mentioned therein that after taking the views/responses of SEBI, AMC and Trustee company, some of the conclusions in the report may undergo a change. Hence, the said report can at best be termed as a tentative report. Hence, the same is not relevant for deciding these petitions. As the said document is not relevant, it is not necessary for this Court to go into the legality of the claim for privilege. After receiving the final findings/report of the Forensic Auditors, SEBI is bound to consider of initiating an action as contemplated by Regulation 65, depending upon the findings recorded therein. It is the obligation of the Trustees or Trustee Company to provide copies of the minutes of the meeting held on 20th and 23rd April 2020 to the Unit-holders and no confidentiality can be attached to the said minutes of the meetings - In exercise of the powers under Section 11B of the SEBI Act, SEBI has no jurisdiction to interfere with the decision of winding up of a Scheme made by taking recourse to Regulation 39(2)(a). ORDER - i) We hold that no interference is called for in the decision of the Trustees taken on 23rd April 2020 of winding up the said six Schemes; ii) We hold and declare that the decision of the Trustees (the Franklin Templeton Trustee Services private Limited) to wind up six Schemes mentioned in paragraph-1 of the Judgment by taking recourse to sub-clause (a) of clause (2) of Regulation 39 of the Mutual Funds Regulations cannot be implemented unless the consent of the unit-holders is obtained in accordance with sub-clause (c) of clause (15) of Regulation 18. Hence, we restrain the Trustees from taking any further steps on the basis of 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 provide true copies of the Board Resolutions placed on record in sealed cover to unit-holders of the said six Schemes as and when they apply for providing copies thereof; vii) We hold that the unit-holders are not entitled to receive a copy of the Forensic Audit Report filed on record in a sealed cover; viii) No other relief is required to be granted in these writ petitions.
Issues Involved:
1. Validity of Regulations 39, 40, and 41 of the Mutual Funds Regulations. 2. Requirement of unit-holders' consent under sub-clause (c) of clause (15) of Regulation 18 for winding up a Scheme under sub-clause (a) of clause (2) of Regulation 39. 3. Applicability of clause (15A) of Regulation 18 to the winding up of a Scheme. 4. Maintainability of writ petitions under Article 226 of the Constitution of India against the Trustees and AMC. 5. Legality of the decision of the Trustees to wind up the Schemes. 6. Compliance with sub-clauses (a) and (b) of clause (3) of Regulation 39. 7. Legality of borrowings and redemption payments after the compliance with clause (3) of Regulation 39. 8. Entitlement of petitioners to receive a copy of the Forensic Audit report and the minutes of the Trustees' meetings. 9. SEBI’s jurisdiction under Section 11B of SEBI Act to interfere with the decision of winding up. 10. Directions to SEBI. Detailed Analysis: 1. Validity of Regulations 39, 40, and 41: The court upheld the validity of Regulations 39 to 41 of the Mutual Funds Regulations. It was determined that these regulations are within the powers conferred by Section 30 of the SEBI Act and are necessary for regulating the winding up of Mutual Fund Schemes to protect investors' interests. The regulations were found not to be arbitrary or violative of Articles 14 and 21 of the Constitution of India. 2. Requirement of Unit-Holders' Consent: The court held that when the Board of Directors of a Trustee company, by majority, decides to wind up a Scheme under sub-clause (a) of clause (2) of Regulation 39, it is mandatory to obtain the consent of the unit-holders as per sub-clause (c) of clause (15) of Regulation 18. This consent must be obtained by a simple majority before issuing and publishing a notice under clause (3) of Regulation 39. 3. Applicability of Clause (15A) of Regulation 18: Clause 15A of Regulation 18, which deals with changes in the fundamental attributes of a Scheme, does not apply to the process of winding up a Scheme. Therefore, compliance with Clause 15A is not a condition precedent for winding up a Scheme under sub-clause (a) of clause (2) of Regulation 39. 4. Maintainability of Writ Petitions: The court determined that the Trustees perform a public duty under the Mutual Funds Regulations. Therefore, a writ of mandamus can be issued against the Trustees for violating the provisions of the SEBI Act or the Mutual Funds Regulations. The writ petitions under Article 226 of the Constitution of India are maintainable. 5. Legality of the Decision of the Trustees: The court found no interference was necessary with the decision of the Trustees dated 23rd April 2020 to wind up the Schemes. However, the implementation of this decision is contingent on obtaining the consent of the unit-holders as required by sub-clause (c) of clause (15) of Regulation 18. 6. Compliance with Clause (3) of Regulation 39: The court held that the Trustees did not comply with sub-clauses (a) and (b) of clause (3) of Regulation 39. Therefore, the decision to wind up the Schemes cannot be implemented until such compliance is achieved. 7. Legality of Borrowings and Redemption Payments: Once compliance is made with sub-clauses (a) and (b) of clause (3) of Regulation 39, Regulation 40 triggers, and AMC or Trustees cannot continue the business activities of the Schemes, including borrowings. Similarly, from the date of publication of the notice under sub-clause (b) of clause (3) of Regulation 39, AMC is not entitled to honor redemption requests made earlier. 8. Entitlement to Receive Forensic Audit Report and Minutes: The court held that the petitioners are not entitled to receive a copy of the Forensic Audit report as it is a tentative report and not relevant for deciding the petitions. However, the Trustees are obligated to provide true copies of the Board Resolutions to unit-holders upon request. 9. SEBI’s Jurisdiction Under Section 11B: SEBI does not have jurisdiction under Section 11B of the SEBI Act to interfere with the decision of winding up a Scheme made under Regulation 39(2)(a). SEBI's role is limited to ensuring compliance with the Mutual Funds Regulations. 10. Directions to SEBI: The court directed SEBI to ensure that the Forensic Auditors submit their report in accordance with Regulation 64 at the earliest. After receiving the final report, SEBI must examine it and decide on taking action as provided in Regulation 65 of the Mutual Funds Regulations and under the SEBI Act within six weeks. Order: The court restrained the Trustees from taking further steps on the basis of the impugned notices until the consent of the unit-holders is obtained. The writ petitions were partly allowed, and SEBI was directed to take necessary actions based on the Forensic Audit report.
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