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TMI Blog2011 (5) TMI 1066X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration in this appeal. Facts giving rise to the appeal are these. 2. The appellants before us are husband and wife and they claim that they regularly invest in shares and mutual fund schemes through market intermediaries duly registered with the Securities and Exchange Board of India (the Board) and/or recognized by the stock exchanges. Respondent no. 2 is the Board of Trustees of HSBC Mutual Fund. Respondent no. 3 is the HSBC Mutual Fund set up in the year 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsors of the mutual fund. Respondent no. 4 is a private limited company promoted by HSBC Limited and appoint ed by respondent no. 3 to manage the mutual funds and operate the schemes of such funds in accordance with the provisions of the Regulations. Respondent no. 5 is the Chief Executive Officer of the fourth respondent. 3. Respondents 2 to 4 had launched an open ended Gilt scheme by the name of HSBC Gilt Fund during the year 2003 (hereinafter referred to as the scheme) which sought to generate reasonable re turns through investments in government securities. The scheme had two plans Short Term Plan and Long Term Plan. The short term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butor who reportedly informed the former that respondents 2 to 5 had made changes in the scheme on January 5, 2009. The long term plan was wound up. The short term plan which was meant for investment in government securities for a period of 5 to 7 years was changed to a term investment not exceeding 15 years. The respondents had also changed the na me of the scheme by dropping the words SHORT TERM from its name. They also changed the benchmark index of the scheme from I sec Si-Bex to I sec composite index . According to the appellants, the fall in the NAV was as a consequence of the changes made in the scheme and their grievance is that the respondents had changed the fundamental attributes of the scheme without informing the unitholders or the distributor of the changes and without giving a reasonable opportunity to the unitholders to exit the scheme as required under the Regulations. The appellants also allege that they were completely unaware of the changes until March 2009. It is their case that mutual funds are required to follow the guidelines and procedures laid down by the Board under the Regulations and respondent s 2 to 5 were under an obligation to inform each unith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to me is a very important fa ctor which could have influenced the decision of the investors/ unitholders on whether to remain invested in the scheme or to exit. Regulation 18( 15A) of the Mutual Funds Regulations provides for the communication about the proposed changes to the unitholders and giving them an exit option . Having said this, he goes on to hold that the changes did not fall within the clarifications issued by the Board as per its circular of February 4, 1998 and, therefore, they did not alter the fundamental attributes of the scheme so as to attract Regulation 18(15A). He also observed that the changes in the scheme did fall within any other change which would modify the scheme and affects the interest of unitholders and thereby attract Regulation 18(15A) of the Regulations but he did not record any adverse finding against Respondents 2 to 5 on the plea that there was no such allegation in the s how cause notice issued to them. The whole time member also referred to the change in the benchmark index and concluded that such a change did not affect the fundamental attributes of the scheme. As regards issues (b), (c) a nd (d) referred to in paragraph 4 of the imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny case, modified the scheme affecting the interest of unitholders and, therefore, the respondents ought to have complied with the provisions of Regulation 18(15A) of the Regulations where under every unitholder on the date of the change including the appellants should have been given a right to exit the scheme at the then prevailing NAV. Further grievance of the appellants is that even though the Board on their complain t has found that material changes were brought about in the scheme which affect ed the rights of the unitholders, it has erred in not issuing directions to respondents 2 to 5 to comply with the provisions of Regulation 18(15A) and give a right to exit to every unitholder who on the date of the change was a member of the scheme. The provisions of Regulation 18(15A) of the Regulations shall be dealt with in detail while dealing with the merits of the contentions raised before us and suffice it to mention th at under the said provision, if a change in the fundamental attribute of a scheme is carried out or the scheme is modified affecting the interest of the unit holders, then every unitholder on the date of the change ought to be given a right to exit the scheme. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Judges of the Supreme Court were examining the question of locus standi of the appellants therein and laid down tests to distinguish between persons aggrieved and strangers and busy body of meddlesome interlopers. Persons in the last category were said to be those who interfere in th ings which do not concern them and act in the name of Pro Bono Publico though they have no interest of the public or even of their own to protect. The learned Judges observed that distinction between persons aggrieved and strangers was real and they laid down the following broad tests in this regard :- Whether the applicant is a person whose legal right has been infringed? Has he suffered a legal wrong or injury, in the sense, that his interest, recognized by law, has been prejudicially and directly affected by the act or omission of the authority, complained of? Is he a person who has suffered a legal grievance, a person against whom a decision has been pronounced which has wrongfully deprived him of something or wrongfully refused him something, or wrongfully affected his title to something? Has he a special and substantial grievance of his own beyond some grievance or inconvenience suffered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objection raised on behalf of the respondents. 7. This brings us to the merits of the grievances made by the appellants. Mr. Zal Andhyarujina, learned counsel for the appellants, strenuously contended that when the scheme was floated in the year 2003, it had two plans short term plan and the long term plan and that the appellants consciously chose the short term plan where under the investments in the scheme could be made for a period not exceeding 7 years though the said period could be brought down to 5 years. It is argued that after the appellants had invested their life s savings in the scheme, respondents 2 to 5 brought about substantial changes therein changing its fundamental attributes and, therefore, it was incumbent upon them to have sent a written communication about the proposed change to each unit holder including the appellants and also to have given them an option to exit at the prevailing net asset value without burdening them with any exit load. In other words, what is argued is that because of the material changes made in the scheme, respondents 2 to 5 ought to have complied with the provisions of Regulation 18(15A ) of the Regulations and not having done so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scheme after the appellants had made investments therein. As already observed, the scheme as originally formulated in the year 2003 was by the name of HSBC Gilt Fund and it had two plans, short term plan and long term plan. It is common case of the parties that the long term plan was wound up in January 2009 and the short term plan under which investments were to be made for a period from 5 to 7 years has been changed to a term investment for a period not exceeding 15 years. The name of the scheme was also changed and the words SHORT TERM appearing in the title of the scheme were also dropped. Apart from changing the duration of the investments to be made, the benchmark index of the scheme was also changed from I sec Si-Bex to I sec composite index . It is pertinent to mention here that a benchmark index of a scheme is a methodology adopted to measure the success and performance of a scheme. It is, thus, clear that the name of the scheme was changed, the duration of the investments to be made therein ha d undergone a substantial change and the benchmark index to measure its performance was also altered. 9. We may now refer to the provisions of the Regulations. These were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders. The words fundamental attributes have not been defined in the regulations and, therefore, they have to be understood according to their ordinary dictionary meaning. Fundamental is something which is basic or serves as a foundation or goes to the root of the matter. In the context of an investment scheme, one of the important f actors that an investor looks at is the duration for which the investments are going to be made in that scheme. In this sense, the duration of the investment constitutes one of the fundamental attributes thereof. In the instant case when the scheme was launched it had two plans short term plan and long term plan the duration of both was different and the investors took an informed decision in investing in one or the other plan. As already observed, the appellants chose the short term plan as, in their perception the said plan would give better returns. It is the case of respondents 2 to 5 that the long term plan which had a long average maturity period had to be wound up as they could not muster even a minimum of 20 investors so as to continue with the said plan. It was on the winding up of the long term plan that the duration of investments in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as per its circular of February 4, 1998. We cannot agree with him. The circular was issued giving clarifications in regard to some of the fundamental attributes of a scheme. What is elaborated therein is only illustrative and in the very nature of things it cannot be exhaustive. Apart from the attributes referred to in the circular, there could be other fundamental attributes of a scheme like the duration of a scheme as in the present case. We agree with the learned senior counsel for the respondents that if the nature of the investments were to change, the fundamental attributes of a scheme would get altered. He was right in contending that if investments were to be made in equity or money market instruments instead of Government securities as originally stipulated, th e fundamental attributes of a scheme would undergo a change. But those could not be the only fundamental attributes of a scheme. As already observed, there could be other attributes as well depending upon the nature of the scheme. 11. We are really amazed that the whole time member after recording a finding that respondents 2 to 5 had changed the scheme which affected the interest of the unitholders without co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... violating the code of conduct prescribed in the fifth schedule to the Regulations for which they have been appropriately warned. Since they have not come up in appeal, it is not necessary for us to go into the merits of those findings. For the reasons recorded above, we allow the appeal, set aside the findings of the whole time member on issue (a) as formulated in para 4 of the impugned order and hold that the changes brought about in the scheme altered the fundamental attributes thereof and also modified the same affecting the interest of the unitholders. In view of these findings, we would have normally issued a direction to respondents 2 to 5 to comply with Regulation 18(15A) of the Regulations and give an exit route to all those who were unitholders on the date of the change. We are refraining from issuing such a direction as we were informed by the respondents during the course of the hearing that NAV of the scheme has now substantially increased and that no un itholder shall like to exit at the then prevailing NAV which was much lower. Moreover, no other unitholder/investor has come up in appeal before us. This, however, does not mean that the appellants who have been a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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