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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 ..... m services - objection to the e-voting results emanates from the notice to the unitholders HELD THAT:- Though we have not been provided with scheme-wise break-up of the votes which should have been given, it does not matter in view of the overwhelming consent for winding up of the schemes. The trustees also state that a large number of corporate votes were rejected by the Scrutiniser on technical grounds of absence of corporate formalities for authorisation of the concerned representatives. The rejected votes represent 1,997 unitholders holding approximately 68.10 crore units valued at ₹ 2,464 crores. Further, an overwhelming majority of the rejected votes ₹ 2,420 crores by value, 98.6% by units and 97.5% by number of unitholders were in favour of the scheme. Accordingly, if these rejected votes are taken into consideration, the total votes being polled in proportionate terms would increase from approximately 54% to approximately 62%. We do not think we are required to go into the said aspect in great detail. As already held above, the unitholders were given a chance and option to vote and about 38% of the unitholders in numerical terms and 54% in value terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision to wind up the six schemes, the trustees would proceed for orderly realization and liquidation of the underlying assets with the objective of preserving value for unitholders. Their endeavour would be to liquidate the portfolio holdings at the earliest opportunity, to enable an equitable exit for all investors in the unprecedented circumstances . We do not think, in the facts of the present case, the notice for e-voting and the contents would justify annulling the consent given by the unitholders for the winding up of the six schemes. The present case, we do not think the procedure prescribed by Regulation 41 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 up, which would include liquidation of the holdings/assets/portfolio and distribution/payment to the unitholders. We hold that for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r.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. Nithyaesh Natraj,Adv. Mr. Vaibhav R.Venkatesh,Adv. Mr. Anirudh Sriram,Adv. Mr. Gopal Singh, AOR Mr. Ravindra Shrivastava,Sr.Adv. Mr. Arjun Garg,Adv. Mr. Abhinav Shrivastava, AOR Mr. Karan Kohli,Adv. Ms. Supriya Juneja, AOR 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 For the Intervenor : Ms. Meenakshi Arora,Sr.Adv. Mr. Manish Kumar, AOR For Applicant(s) Mr. Dheeraj Nair, AOR Mr. Kumar Kislay,Adv. Mr. Angad Baxi,Adv. For the Applicant : Ms. Madhumita Bhattacharjee, AOR Ms. Arti Jain,Adv. Ms. Srija Choudhury,Adv. For the Applicant : Mr. Sanjay Kapur, AOR Ms. Megha Karnwal,Adv. Mr. V.M.Kannan,Adv. Mr. Sambit Panja,Adv. Mr. Arjun Bhatia, Adv. ORDER SANJIV KHANNA, J. Leave is granted in the above captione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular, it is alleged that more than ₹ 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 the objecting unitholders submit that the trustees decision to wind up the six schemes is a smokescreen to conceal misfeasance and malfeasance, which issues along with the question of liability of the trustees/AMC should be decided first or together; we have deliberately decided to segregate and examine these issues subsequently. Pertinently, after receipt of the forensic audit report, SEBI has issued show cause notice which is pending adjudication. Common people invest in mutual funds driven by factors such as simplicity in purchase and redemption of units, flexibility of holding and tenure, and liquidity by conversion into money. In the light of this, immediate directions are required as embargo prohibiting redemption of the units, effected by Regulation 40 4 from the date of publication of notice under Regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 silent on the nature of majority. Obviously, it is not a specific majority like three-fourth majority. Wherever three-fourth majority of the unit-holders was intended, the Mutual Funds Regulations say so. For example, sub-clause (b) of clause (15) of Regulation 18 and sub-clause (b) of clause (2) of Regulation 39. Therefore, it has to be a simple majority. For this purpose, we must make a reference to a decision of a Full Bench of the Allahabad High Court in the case of Wahid Ullah Khan v. District Magistrate, Nanital. In paragraph 32, the Allahabad High Court held thus: 32. The word majority speaks, of greater number out of the total number which cannot be a fixed number. In fact, the starting point of majority is more than half, but any number more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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., while defining majority, and the binding effect of majority, has opined: Definition 7-30. Majority is a term signifying the greater number. In legislative and deliberative assemblies, it is usual to decide questions by a majority of those present and voting. This is sometimes expressed as a simple majority, which means that a motion is carried by the mere fact that more votes are cast for than against, as distinct from a special majority where the size of the majority is critical. The principle has long been established that the will of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titutes 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 per se does not prescribe any quorum or specify the criterion for computing majority or ratio of unitholders required for valid consent for winding up. Clause (b) of Regulation 39(2), on the other hand, specifies that seventy-five per cent of the unitholders of a scheme can pass a resolution that the scheme be wound up. Similarly, Regulation 41(1) requires the trustees to call a meeting to approve, by simple majority of the unitholders present and voting, a resolution for authorising the trustees or any other person to take steps for winding up of the scheme. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite 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- See Bennion on Statutory Interpretation, 5th Edition, at 969 . Logic referred to herein is not formal or syllogistic logic, but acceptance that enacted law would not set a standard which is palpably unjust, unfair, unreasonable or does not make any sense. Ibid at 986 When an interpretation is beset with practical difficulties, the courts have not shied from turning sides to accept an interpretation that offers a pragmatic solution that will serve the needs of society- Ibid at 971, quoting Griffiths LJ . Therefore, when there is choice b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 AIR 1918 Mad 1131 had drawn distinction between definite and indefinite numbers in the following manner: In the first class of cases, the number of the select body is fixed. In the second class of cases, the number is subject to variation every year or at stated periods. For example, the number of electors of a Temple Committee or the number for a Municipality is liable to fluc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 body or executive officers charged with the duty of administering or enforcing the law, and therefore impliedly adopts the interpretation upon reenactment. With some modifications, the principle can be applied in the present case. Practical interpretation should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders 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 (v) Mr. Ch E Sai Prasad, Assistant Director, CFSL, Hyderabad. 23. Order of this Court dated 18th January, 2021 records that Mr. T.S. Krishnamurthy had submitted his report, and the e-voting results recorded therein were read out in the Court. The Registry was directed to scan the report and make e-copies of the Observer s report available to the counsels for the parties, including Advocateson- Record who had filed applications for intervention/impleadment. Parties were given liberty to file objections to the Observer s report/evoting results, with right to others to file response/reply to the objections. It was also directed that the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reflect and take into account the relative number of units held by the unitholders. Unitholders with fewer units have the same say as those with a greater number of units. It is not a good option when the proposal is contested. Poll, whether in a physical meeting, by way of a postal ballot or e-poll, has an advantage as each unitholder has one vote for every unit/share held. Therefore, in cases where there is huge disparity between the units held, or possibility of contest/dispute, poll is the preferred method for ascertaining preference of the unitholders. The value of poll lies in the fact that the weighted voting strength based upon the number of units gives more accurate and precise results. Majority consent of the investors/unitholders should depend upon the number of units held by them- Sections 107 to 110 of Companies Act, 2013 are express provisions and will accordingly apply in case of meeting of shareholders. . (ii) Polls are akin to election. Poll results like the election results are not to be lightly interfered with. More so, when it is fault of a third party and not of the proposer/successful candidate. Poll results like election results are not to be regarded as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n technical grounds of absence of corporate formalities for authorisation of the concerned representatives. The rejected votes represent 1,997 unitholders holding approximately 68.10 crore units valued at ₹ 2,464 crores. Further, an overwhelming majority of the rejected votes ₹ 2,420 crores by value, 98.6% by units and 97.5% by number of unitholders were in favour of the scheme. Accordingly, if these rejected votes are taken into consideration, the total votes being polled in proportionate terms would increase from approximately 54% to approximately 62%. 31. We do not think we are required to go into the said aspect in great detail. As already held above, the unitholders were given a chance and option to vote and about 38% of the unitholders in numerical terms and 54% in value terms had exercised their right to give or reject consent to the proposal for winding up. In the absence or need for minimum quorum, which is not provided or stipulated in the Regulations nor mandated under law, the e-voting result cannot be rejected on the ground that 38% of the unitholders in numerical terms and 54% in value terms, even if we do not account for the rejected votes, had par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e approval Number CQW/198 and valid up to 4th Feb, 2022. OBSERVATIONS OF THE ANALYSIS 1) The E-Voting took place during the period 26th December 2020 to 28th December 2020. A. Analysis of the E-Votes cast has been performed on the basis of E-Voting Logs, E-Voting Transaction Logs and the E-Voting related data taken from the Master Data Base. The below table provides the details of the E-Votes cast against each Scheme. S. No. Scheme Name First Vote Cast Date and Time Last Vote Cast Date and Time No. of Votes as per the Database No. of Votes as per the e- Voting Logs No. of Votes as per transaction logs 1 Franklin India Credit Risk Fund 26 December 2020 0900 28 December 2020 1800 11795 11795 11795 2 Franklin India Dynamic Accural Fund 26 December 2020 0900 28 December 2020 1801 7680 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29-12-2020 1400 29-12-2020 1500 29-12-2020 14:01 29-12-2020 14:07 64 2 Franklin India Dynamic Accrual Fund 4275 29-12-2020 1200 29-12-2020 1300 29-12-2020 12:04 29-12-2020 12:48 33 3 Franklin India Income Opportunities Fund 4276 29-12-2020 1515 29-12-2020 1615 29-12-2020 15:16 29-12-2020 16:00 30 4 Franklin India Low Duration Fund 4277 29-12-2020 1045 29-12-2020 1145 29-12-2020 10:46 29-12-2020 11:58 93 5 Franklin India Short Term Income Plan 4278 29-12-2020 1630 29-12-2020 1730 29-12-2020 16:17 29-12- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. It is not the case of the objectors that any of the unitholders/voters have complained of impersonation or misuse of their identity. KFin Technologies has explained that in total 1,17,416 votes were registered in the system. The source IP address was captured in 88,293 cases. In 29,123 cases, votes with Load Balancing Server IP was captured in the IIS logs for which end-user IP report in the firewall between 26th December 2020 (09:00 a.m. till 12:31 p.m.) was available. They have, by way of data flow diagram, elucidated and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the trustees had already taken a decision to wind up the six schemes. Regulation 39(3) requires the trustees to disclose the circumstances leading to winding up of the schemes. The trustees accordingly, in the notice for e-voting and meeting of the unitholders, had furnished their explanation and reason for winding up of the six schemes and had also stated as under: The Trustee is providing the following explanation to help Unitholders assess the pros and cons of the voting options available to them. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 considerations and niceties relating to mutual funds and debt securities market. This is the precise reason why most people do not make direct investment in the securities market and prefer mutual funds. Further, the trustees had earlier vide document No. 16 (enclosed at pages 1253 to 1255 in the appeal arising out of Special Leave Petition (C) No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... empleton 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 unprecedented situation even the committed borrowing lines maintained by the funds are inadequate to meet the demand for sustained narrowing across the schemes. We explored the possibility of suspending redemptions until market conditions stabilize without winding up the schemes. However, conditions for suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Board of Directors of the trustees was approved by circulation on 21st May, 2020. Further addendum to their letter of engagement was issued on 22nd December, 2020; and (v) Notices for e-voting did not specify with clarity whether e-voting was possible on any technology platform, viz. laptop/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 41 17 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 up, which would include liquidation of the holdings/assets/portfolio and distribution/payment to the unitholders. 41. As per the consolidated affidavit filed by the trustees and AMC, securities equivalent to more than ₹ 17,000 crores are yet to be realised. This is a substantia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nits. 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 circulating at the place where the mutual fund is formed. 3 The term objecting unitholders does not refer to all unitholders but only 15 unitholders, namely, Ms. Amruta Garg, Mr. Areez Khambatta, Mr. Persis Khambatta, Khambatta Family Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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