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TMI Blog2021 (2) TMI 598X X X X Extracts X X X X X X X X Extracts X X X X ..... g,Adv. Mr. Abhinav Shrivastava, AOR Mr. Karan Kohli,Adv. in SLP 15205/2020 Mr. Puneet Jain,Adv. Mr. Harshit Khanduja,Adv. Mr. Harsh Jain,Adv. Mr. Akshat Maheshwari,Adv. Mr. Harshvardhan Sharma,Adv. Mr. Neeraj Sharma,Adv. Ms. Christi Jain, AOR in SLP 15008-15011/ Mr. Tushar Mehta,SG 2020 Mr. Pratap Venugopal,Adv. Ms. Surekha Raman,Adv. Mr. Akhil Abraham Roy,Adv. Mr. Vijay Valsan,Adv. For M/S. K J John And Co, AOR in SLP 15206/2020 Mr. Shivam Singh,Adv. Mr. Sahil Raveen,Adv. Mr. Jaideep Khanna,Adv. Mr. Manish Kumar, AOR For Respondent(s) Mr. Tushar Mehta,SG SEBI Mr. Arvind P.Datar,Sr.Adv. Mr. Pratap Venugopal,Adv. Ms. Surekha Raman,Adv. Mr. Akhil Abraham Roy,Adv. Mr. Vijay Valsan,Adv. For M/S. K J John And Co, AOR For UOI Mr. Tushar Mehta,SG Mr. Rajat Nair,Adv. Ms. Garima Prasad,Adv. Ms. Priyanka Das,Adv. Mr. Arvind Kumar Sharma, AOR Mr. Harish Salve,Sr.Adv. Dr. Abhishek Manu Singhvi,Sr.Adv. Mr. Ashish Bhan,Adv. Mr. Mohit Rohatgi,Adv. Mr. Jasmeet Singh, AOR Mr. Rajendra Dangwal, Adv. Mr. Ashim Sood,Adv. Ms. Madhavi Khanna,Adv. Mr. Saif Ali,Adv. Ms. Meenakshi Arora,Sr.Adv. Mr. Nithyaesh Natraj,Adv. Mr. Vaibhav R.Venkatesh,Adv. Mr. Gopal Singh, AOR Ms. Meenakshi Arora,Sr.Adv. Mr. Nithy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pretation as erroneous. In other words, SEBI propounds that clause (a) of sub-regulation (2) to Regulation 39 is a standalone provision and the unitholders' consent is not required when the trustees upon happening of an event form an opinion that the mutual fund scheme is to be wound up. 3. The objecting unitholders'3 (also referred to as objectors) primary grievance relates to allegations of gross mismanagement, failure and dereliction of duty by the Asset Management Company ('AMC') and Franklin Templeton Trustee Services Private Limited ('trustees' or 'board of trustees'); violation of the Securities and Exchange Board of India Act, 1992 ('SEBI Act'); Mutual Fund Regulations; SEBI harmonization norms; investment horizon profiles; manipulation of Net Asset Value (NAV); disgorgement of wrongful payments etc. In particular, it is alleged that more than Rs. 15,000 crores were withdrawn from the six schemes two weeks prior to the decision for winding up. Objecting unitholders submit that a finding of fraud, on the part of the trustees and AMC, would entitle them to restitution etc. Other issues raised include the question of privilege regarding the forensic audit report. 4. While th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st in the assets of the scheme, as suggested by SEBI. It is obvious that this disbursal to unitholders is possible only when we accept that the six schemes should be wound up. 6. Before we advert to the order passed by this Court for eliciting consent/approval from the unitholders, we deem it appropriate to first reproduce sub-regulation (15) to Regulation 18 of the Mutual Fund Regulations, which reads as under: "Regulation 18: Rights and obligations of the trustees xx xx xx (15) The trustees shall obtain the consent of the unitholders - a) whenever required to do so by the Board in the interest of the unitholders; 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." 7. Interpreting the term 'consent' with reference to clause (c) of subregulation (15) to Regulation 18, the judgment under challenge holds: "221. Obviously, there can be a 'consent' of the unitholders 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave consented to winding up of the mutual fund schemes and cannot be imposed on others. The word 'consent', in the context of the clause, clearly refers to 'consent of the majority of the unitholders', 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 dic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary to act for the entire group." In the case of a public body, the power or authority which establishes the body may also determine what constitutes a quorum. Sturgis 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consists of thirteen members, there ought to be at least seven present to form a valid meeting, and the act of the majority of these seven or greater number will bind 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 constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rum and majority in indefinite electorate, 1st Edition of Halsbury's Laws of England on the question of quorum and meetings, had referred to the following principles: "791. Where a corporation consists of a definite number of corporate electors, a majority of that number must be present in order to constitute a valid election. But where a corporation consists of an indefinite number of corporate electors, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain, 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/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 conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Court had directed SEBI to appoint an Observer for the e-voting by the unitholders scheduled between 26th and 29th December, 2020. However, it was clarified that the trustees were undertaking the exercise of e-voting and that SEBI would appoint an Observer in terms of our directions. The results of the e-voting, it was directed, would not be declared and would be produced before this Court in a sealed cover along with the report of the Observer appointed by SEBI. 22. SEBI, vide its letter dated 18th December, 2020, had appointed Mr. T.S. Krishnamurthy, former Chief Election Commissioner of India, to act as the Observer 'regarding e-voting of the unitholders' of the six schemes. A Technical Assistance Team was also constituted by SEBI to assist Mr. T.S. Krishnamurthy. The Technical Assistance Team comprised the following persons: (i) Mr. B.N. Sahoo, Chief General Manager, SEBI, Mumbai; (ii) Ms. Nayana Ovalekar, Chief Operating Officer, Central Depository Services (India) Limited (CDSL), Mumbai; (iii) Mr. K. Sriram, Practising Company Secretary and Scrutiniser, Chennai; (iv) Mr. M. Krishna, Assistant Director, Central Forensic Science Laboratory (CFSL), Hyderabad; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng process, its role being to oversee the conduct of e-voting for all the six schemes in a fair and transparent manner. On 9th January, 2021, the Scrutiniser had submitted its report to the Observer setting out the final results. The Observer in paragraph 36 of his report has reproduced the results as set out in the Scrutiniser's report, in a tabular form, which is as under: S. No. Scheme Total valid votes Voted For Voted Against Number % Number % 1. Franklin Templeton Ultra Short Bond Fund 53805 52075 96.78% 1730 3.22% 2. Franklin Templeton Low Duration Fund 16920 16452 97.23% 468 2.77% 3. Franklin Templeton Dynamic Accrual Fund 7550 7370 97.62% 180 2.38% 4. Franklin Templeton Credit Risk Fund 11634 11398 97.97% 236 2.03% 5. Franklin Templeton Income Opportunities Fund 5876 5693 96.89% 183 3.11% 6. Franklin Templeton Short Term Income Plan 19634 19165 97.61% 469 2.39% 27. The aforesaid results have been computed/tabulated on unitholders' vote on one vote per unitholder basis. The trustees have also filed computation before us on the basis of one vote per unit held, i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as vitiated by breach of rules or mistake, until and unless the breach or mistake, it is proved has materially affected the result of the poll. This general principle may be deviated from only when poll/election is conducted so badly that it is not substantially in accordance with law as to elections, in which case it would not matter whether the result was affected or not. - See Morgan v. Simpson [1975] QB 151 (iii) When the poll or voting is on issues or choices of commercial nature, normally it is not a part of the judicial process for the court to ferret out flaws by examining merits or wisdom of the unitholders who have voted. The court is not equipped and should refrain from entering into such oversights as doctrine of internal management, institutional sovereignty and right to opt and decide come into play.- See Fertilizer Corpn. Kamgar Union (Regd.) v. Union of India, (1981) 1 SCC 568 The unitholders are the best judge and are more conversant with their own interests. All that is to be seen is that broad parameters of fairness in the administration, bona fide poll/election, and that fundamental rules of reasonable management of public business have not been breached. 29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be a ground to reject and ignore the affirmative result consenting to the proposal for winding up of the six mutual fund schemes. 32. Primary objection raised relates to appointment of M/s. KFin Technologies Pvt. Ltd. ('KFin Technologies') for providing e-voting platform services. The submission being that KFin Technologies is an associate/sister of M/s. Karvy Stock Broking Limited. This company, M/s. Karvy Stock Broking Limited, indicted by an adverse order dated 24th November, 2020 under Sections 11(1), 11(4) and 11B of the SEBI Act read with Regulation 35 of SEBI (Intermediary) Regulations, 2008, is barred from accepting new clients on grounds of investor fraud, falsification of records of investors/clients and misuse of client funds. 33. This argument does not impress us and cannot be a ground to reject the results. KFin Technologies, it has been pointed out, has been providing e-voting platform services to listed public limited companies ever since the Ministry of Corporate Affairs mandated them to secure approval of the resolutions by the shareholders through electronic voting. The e-voting platform of KFin Technologies is certified by the Ministry of Corporate Affai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 26 December 2020 0900 28 December 2020 1800 19897 19897 19897 6 Franklin India Ultra Short Bond Fund 26 December 2020 0859 28 December 2020 1803 54247 54247 54247 Total 116736 116736 116736 B. 0.5% of the above votes have been selected randomly; scheme wise and the same have been verified in the Master Database. The screen captures of the same are provided at Annexure I (Page Nos. 01 to 16). On verification the EVoting Logs match with the Master Database. 2) Analysis of the Instapoll Votes during the AGM VCs conducted on 29th December 2020 indicate: A. On 29th December 2020, AGM through video conferencing for the SIX Schemes took place at scheduled time intervals. The details are given below. B. It was informed by KFin Tech. that the customers who had voted already during the E-Voting on 26th December 2020 to 28th December 2020 are not allowed to vote again during the Insta Voting process. C. The below table shows the details of Instapoll Votes Cast against the each Scheme: S. No. Scheme Name AGM ID AGM VC Start Date and Time AGM VC End Date and Time First Insta Vote Cast Date and Time Las ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 231 Hrs. due to issues in implementing the configuration. The details of these E-Votes are provided at Annexure I (Page Nos. 1989 to 2928). 5) The complete Database Activity Monitoring Logs could not be provided by the KFin Tech Pvt. Ltd." 35. The trustees/AMC and KFin Technologies have disputed paragraph 5 of the report stating that database monitoring logs were provided to the forensic experts. However, we need not go into the said aspect, for, in our opinion, paragraph 4 of the report is being misread and misunderstood by the objectors. It is correct that for some of the votes, the IP address 10.41.3.252 as captured was that of the Load Balancing Server of KFin Technologies. However, the report also records that KFin Technologies has explained that due to technical or implementation issues it was able to capture public IP address of evotes after 1231 hours on 26th December, 2020. Paragraph 4 states that details of the customers, scheme-wise, where the same IP address has been logged for multiple e-votes, had been provided to the forensic experts. Clearly, the details of each customer /unitholder where one or same IP address was used for casting multiple votes was furnished. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith orderly realization of value form Scheme assets and distribution to Unitholders at the earliest, the Trustee had sought permission of the Hon'ble Supreme Court to seek the approval of Unitholders for winding up the Schemes, which permission was granted by the Hon'ble Supreme Court on December 3, 2020 without prejudice to the rights and contentions of all parties. xx xx xx As disclosed in the Scheme Portfolio published on the website (www.franklintempletonindia.com), Unitholders may note that a significant portion of the scheme assets is held insecurities and the liquidity position of each security, and consequently the value realized may vary depending on the time available to generate liquidity. An orderly liquidation would obtain better value for Unitholders. xx xx xx For all the reasons explained above, the Trustee believes that it will be beneficial for Unitholders to vote 'YES' to the proposed resolution." 37. At the first blush there does appear to be merit in the contention, albeit the notice for e-voting and meeting of the unitholders has to be read in entirety. We must also account for the history leading to the e-voting process. It is but obvious that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities of securities over a short period of time and it may not be possible to get bids at reasonable prices for all securities in such circumstances. iii) A distress sale of securities held in the portfolio could result in a rapid and steep decline in the NAV leading to substantial losses for Unitholders (irrespective of market conditions. While the endeavor would be to minimize losses, however there is no assurance that the Scheme will be successful in doing so. (iv) Unitholders will need to apply for redemptions if they wish to receive monies. This may result in disproportionate distribution of any cash generated to Unitholders depending on the time of redemption. (v) An adjustment in valuation and consequential reduction in the NAV may be required on account of the abovefactors in accordance with applicable regulations. The controversy relating to winding up of the six mutual fund schemes has been in the public domain for a long time. The court would also take judicial notice that the unitholders were aware and conscious of the litigation against the winding up, including the procedure. At the same time, many in the general public may not be fully aware of the commercial consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Franklin India Short Term Income Fund (FISTIP) 3. Franklin India Credit Risk Fund (FICRF) 4. Franklin India Low Duration Fund (FILDF) 5. Franklin India Dynamic Accrual Fund (FIDA) 6. Franklin India Income Opportunities Fund (FIIOF) Factors leading to Winding-Up: The impact schemes of Franklin Templeton were able to meet their redemption obligationacross all market conditions and even during the initial phase of the Covid-19 pandemic lockdown despite redemption pressures and increased market illiquidity. However, the extension of the lockdown has heightened redemption volumes and reduced inflows to unsustainable levels. The schemes even resorted to borrowings within permissible limits in line with market practice to fund redemptions during this time but given the situation, we felt that it would not be prudent to leverage the schemes further. While the respective valuations of these schemes have been marked promptly and conservatively thus far, continuous redemption pressures in the backdrop of a severe dislocation in the corporate bond markets would place great strain on our ability to ensure equitable treatment of all investors. Further, given the current un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties, which do not have any substance. These contentions are: (i) Mr. T.S. Krishnamurthy's appointment as the Observer by SEBI vide its letter dated 18th December, 2020 was made public belatedly on 26th December, 2020; (ii) Notice for e-meeting dated 6th December, 2020 issued under the name of Mr. Alok Sethi, Director of the Trustees, was not digitally signed by him. However, Mr. Alok Sethi had digitally signed the notice subsequently on 28th December, 2020; (iii) M/s. J. Sagar and Associates should not have been appointed as the Scrutiniser to oversee the conduct of the e-voting and the Observer Mr. T.S. Krishnamurthy should have acted as the Scrutinser; (iv) KFin Technologies was appointed for providing electronic platform for e-voting vide meeting of the Board of Directors of the trustees dated 29thApril, 2020 and thereafter the agreement dated 8th June, 2020 was entered into, but this agreement was digitally signed on 30th June, 2020. Similarly, M/s. J. Sagar and Associates, the law firm, was appointed as the Scrutiniser by letter of engagement dated 13th May, 2020 and the law firm had conveyed its willingness to act as the Scrutiniser. However, the resolution by the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had to be undertaken essentially by the Scrutiniser, M/s. J. Sagar and Associates. To conduct the e-voting, for the purpose of consent, the trustees had engaged services of KFin Technologies and M/s. J. Sagar and Associates. M/s J. Sagar and Associates being a law firm, it is obvious, are not experts in information technology. Necessarily, they would rely on the data and details made available by KFin Technologies. We have already dealt with the question of integrity and authenticity of the e-voting data and that it was checked by two technical experts who are Assistant Directors at CFSL, Hyderabad. The comments of the forensic experts have been examined and considered in detail. 40. In the present case, we do not think the procedure prescribed by Regulation 4117 is required to be followed as the trustees themselves have stated that the process of winding up, which would include liquidation of the securities and distribution/payment to the unitholders, should be undertaken by a third party. The objectors had also made similar submissions. Accordingly, with the consent of the parties, we have appointed M/s. SBI Funds Management Private Limited to undertake the exercise of winding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to do so by the Board in the interest of the unitholders; 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. 2 Regulation 39: Winding up (1) A close-ended scheme shall be wound up on the expiry of duration fixed in thescheme 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,- (d) on the happening of any event which, in the opinion of the trustees, requires the scheme to be wound up; or (e) if seventy-five per cent of the unit holders of a scheme pass a resolution that the scheme be wound up; or (f) if the Board so directs in the interest of the unitholders. (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:- (g) to the Board; and (h) in two daily newspapers having circulation all over India, a vernacular newspaper circula ..... X X X X Extracts X X X X X X X X Extracts X X X X
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