Franklin Templeton Trustee Services (P) Ltd. vs Amruta Garg

IN THE SUPREME COURT OF INDIA

CIVIL APPEALATE JURISDICTION

I. A. NO. 53453 OF 2022 IN CIVIL APPEAL NOS. 498-501 OF 2021

FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANOTHER ... APPELLANTS

VERSUS

AMRUTA GARG AND OTHERS ETC. ... RESPONDENTS

ORDER

SANJIV KHANNA, J.

This Court, vide order dated 03rd August 2022, dismissed the

aforesaid application filed on behalf of the Foundation of

Independent Financial Advisors,1 while stating that the reasons for

such dismissal would follow. The order further directed that Rs.

684,00,00,000/- (Rupees Six Hundred and Eighty Four Crores) be

distributed to the unitholders. As a corollary, the stay granted by us

vide order dated 12th April 2022, while issuing notice in the

application therein, also stood vacated. By the present order, we Signature Not Verified Digitally signed by Dr. Mukesh Nasa Date: 2022.08.12 17:01:46 IST Reason: provide the reasons for dismissal of the captioned application.

1 For short, ‘FIFA’

I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 1 of 9

2. FIFA claims that independent financial advisors/mutual fund

distributors are entitled to payment of commission agreed between

them and Franklin Templeton Asset Management (India) Private

Limited, which are in the nature of recurring expenses as per

Regulation 52 of the Security and Exchange Board of India (Mutual

Funds) Regulations, 19962. Our attention is drawn to sub-clause (i)

of Regulation 52(4)(b), which states that ‘recurring expenses’

encompass marketing and selling expenses, including agents’

commission, if any. The circular issued by Security and Exchange

Board of India3 dated 22nd October 2018, while referring to

Regulation 52, states that the asset management

companies/mutual funds shall adopt a full trail model of commission

in all schemes, without payment of any upfront commission or

upfronting of any trail commission, directly or indirectly. Upfronting

of trail commission is allowed only in case of inflows through

Systematic Investment Plans.

3. At the outset, we must state that FIFA is claiming commission for

the period from 23rd April 2020 and up to 17th March 2021. The

commission/service charges payable prior to 23rd April 2020 are not

2 For short, “Regulations” 3 For short, “SEBI”

I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 2 of 9 subject matter of the present application. 23rd April 2020 is relevant

as it is the date of publication of notices under Regulation 39(3)(b).

Accordingly, on and from the said date, the trustees/asset

management company ceased to carry on business in respect of

the six schemes so wound up. In our opinion, Regulation 52, which

relates to and permits deduction of expenses including commission

payable to the distributor, is applicable when the scheme is in

operation, and not post the decision of the trustees in terms of

Regulation 39(2)(a) read with Regulation 39(3), when, upon

publication of notices, the ceasure mandate of Regulation 40 is

triggered. On and from the date of publication of notices under

Regulation 39(3)(b), the trustees/asset management company

cannot carry on business activities, create or cancel units and issue

or redeem units of the scheme. It would be a different matter if the

unitholders do not approve the winding up of the scheme, which is

not a fact in the present case, as the unitholders have consented to

the winding up of the six Schemes in accordance with Regulation

18(15)(c).

4. If we are to accept the contention of FIFA, the necessary sequitur

is to also acknowledge and accept that the asset management

company, even post the publication of notices under Regulation

39(3)(b), would be entitled to fees and expenses mentioned and

I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 3 of 9 covered by Regulation 52, as per the terms and quantum specified

in sub-regulation 6 to Regulation 52. Sub-clause (c) to Regulation

52(6) specifies the percentage of total expenses of the scheme

which is allowable, varying from 2.5% to 1.75% of the daily net

assets. This, in our opinion, would not be a correct interpretation

and lead to anomalies and tribulation with adverse consequences

for the suffering unitholders, and undo the embargo directing the

ceasure of business. Regulations 40 and 52 need to be read

harmoniously. When read together, Regulation 52, authorising and

specifying the limit of the fees and expenses payable to the asset

management company, would apply only when the scheme is in

operation, and not after publication of the notice under Clause (b)

to sub-regulation 3 to Regulation 39 resulting in ceasure of any

business activities in respect of the scheme to be wound up.

5. Regulation 41, which deals with the procedure and manner of

winding up, applies once the notice under Regulation 39(3)(b) is

published and the unitholders’ approval under Regulation 18(15)(c)

of the Regulations is received. We are not required to interpret sub-

regulation 1 to Regulation 41, as we have already interpreted it in

our earlier order dated 14th July 2021 read with the order dated 12th

February 2021. However, FIFA claims that they would be entitled

I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 4 of 9 to payment of commission under clause (b) to sub-regulation 2 to

Regulation 41 which, for the sake of convenience, is quoted below:

“41. (1) ….

(2)(a) ….

(b) The proceeds of sale realised under clause (a), shall be first utilised towards discharge of such liabilities as are due and payable under the scheme and after making appropriate provision for meeting the expenses connected with such winding up, the balance shall be paid to the unitholders in proportion to their respective interest in the assets of the scheme as on the date when the decision for winding up was taken.

(3) ….

(4) ….”

We would concede that, in the given case, some of the

recurring expenses mentioned in clause (b) to Regulation 52(4) like

audit fee, insurance premium, cost of statutory advertisements,

etc., would be covered and would satisfy the requirement of clause

(b) to Regulation 41(2). However, if and only when they fall under

and meet the requirement of the expenses connected with the

winding up can they be allowed under Regulation 41(2)(b). Such

expenses are allowed not because of clause (b) to Regulation

52(4), but because the expenses incurred would satisfy the

requirement of being connected with such winding up under

Regulation 41(2)(b). Commission payable to the mutual fund

distributers is certainly not an expense connected with the winding

up of the scheme.

I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 5 of 9

6. In the aforesaid background, FIFA has claimed that the commission

payment due to the mutual fund distributors on and from 23rd April

2020 is an amount ‘due and payable under the scheme’, as it is an

amount or payment that had accrued before the publication of

notices under Regulation 39(2)(b), but was not paid as it was

payable in future. Commission payable to mutual fund distributors

is in the nature of trail, and therefore, is payment due for the

services rendered to the unitholders prior to the winding up. This

argument is farfetched and fallacious.

7. In our order dated 14th July 2021, we have explained that the

expression ‘due and payable’ has to be interpreted with reference

to the context in which the words appear. In the context of the

Regulations in question, we have held that the expression refers to

the present liabilities which may be payable in praesenti or in futuro.

There must be an existing obligation to pay though the appointed

date of payment may not have arrived. Any liability which is not due

and payable, in facts and in law, would not be covered by the

expression ‘due and payable’.4 Clause (b) to Regulation 52(4)

refers to recurring expenses, that is, expenses which will recur from

time to time. It does not refer to one-time payment which is deferred.

4 See paragraph 78 in the judgment reported as (2021) 9 SCC 606

I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 6 of 9 The recurring liability is not a present liability, but an obligation

which, on satisfaction of certain conditions, may accrue in future.

The right to claim commission may not accrue and become due and

payable. Distributor commission, as a recurring liability, is not

payable if the unitholder(s) redeem the unit. Winding up of the

scheme entails similar effects and consequences.

8. As noticed above, it is the asset management company which is

entitled to charge fees and expenses in terms of sub-regulations (1)

and (2) of Regulation 52. The mutual fund distributors are not

entitled to direct payment from the unitholders. Payment to the

distributors is made by the asset management company, from the

amount that they deduct as a recurring expense in terms of

Regulation 52(4)(b). On and after publication of the winding up

notice in terms of Regulation 39(3)(b), the trustees and the asset

management company cannot claim any payment on account of

recurring expenses under clause (b) to sub- regulation (4) to

Regulation 52. That being the position, as held above, the claim of

FIFA has to be rejected. If the amount cannot be due and payable

to the principal, the claim of the agent or a third party, in view of the

Regulations, must also fail.

I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 7 of 9

9. The claim of FIFA, on the basis of the Circular dated 22nd October

2018, which has been referred to above, is equally misconceived

and untenable. The Circular dated 22nd October 2018 bars the

asset management company from making upfront payment or

upfronting of any trail commission, except in case of inflows through

Systematic Investment Plans. It is also stipulated that, when the

Systematic Investment Plan is discontinued for a period for which

commission is paid, the commission amount has to be recovered

on pro rata basis from the distributor. As a deduction, it follows that

on publication of notices in terms of Regulation 39(3)(b), the

business of the mutual fund comes to a stop and therefore, on and

from that date the trail commission is not payable, as the scheme

is to be wound up and the money is to be collected and paid to the

unitholders, in terms of and as per the mandate of Regulation 41.

Even if a distributor renders some services to the unitholders after

publication of the notice under Regulation 39(3)(b), it would not

entitle him to claim an amount from the asset management

company. The Circular dated 22nd October 2018 cannot override

the Regulations. The Circular does not intend to do so. It has been

issued to bring about transparency in expenses, reduce portfolio

churning and mis-selling in mutual fund schemes. The intent behind

specifying total expense ratio and the performance disclosure for

I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 8 of 9 mutual funds is to bring greater transparency in expenses and to

not confer any right on the mutual fund distributors to claim

expenses under clause (b) to Regulation 41(2), which pertains to

the procedure and manner of winding up.

10. Franklin Templeton Trustee Services Private Limited and Franklin

Templeton Asset Management (India) Private Limited have filed an

affidavit before us stating that they have borne liquidation expenses

amounting to approximately Rs. 40,00,00,000/- (Rupees Forty

Crores) towards various services such as liquidator’s fee,

disbursement expenses, fees for the e-voting platform and the

scrutinizer for voting results, etc. It is stated by them that this

amount is not intended to be charged to the six Schemes in the

interest of the unitholders of the Schemes. We have taken the said

statement on record.

11. For the aforesaid reasons, the application IA No. 53453/2022 filed

by FIFA is dismissed, without any orders as to costs.

…...................................J. (S. ABDUL NAZEER)

......................................J. (SANJIV KHANNA)

NEW DELHI;

AUGUST 12, 2022.

I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 9 of 9