Securities Exchange Board Of India vs Franklin Templeton Trustees Services ...

(Formally having its office at Sakar-1 Ground Floor, Opposite:Nehru Bridge Gandhigram Railway Station Ashram Road, Ellisbridge Ahmedabad - 380 009) ... Appellant

[By Shri Tushar Mehtha, Solicitor General of India/Senior Advocate, along with Shri Pratap Venugopal, Shri Nithin Prasad, Shri Vidur Nair and Shri T. Suryanarayana - Advocates of M/S King and Partridge - through Video Conferencing] 2

And:

1. Franklin Templeton Trustees Services Pvt. Ltd Having its Registered Office at Indiabulls Financial Centre, Tower-2 12th and 23rd Floor, Senapati Bapat Marg Elphinstone (W) Mumbai - 400 013

2. Franklin Templeton Asset Management (India) Pvt. Ltd Having its office at: Indiabulls Financial Centre, Tower-2 12th and 23rd Floor, Senapati Bapat Marg Elphinstone (W) Mumbai - 400 013

Also having an office at 202 Abhijit-III, Opposite to Mayor's Bunglow Mithakhali Six Roads, Navrangpura Ahmedabad-380 006.

3. Mr. Areez Phirosha Khambatta Aged 83, Male Having his address at 8th Floor, White House, Panchvati Ahmedabad - 380 006

4. Ms. Persis Khambatta Aged 75, Female Having her address 8th Floor, White House, Panchvati Ahmedabad - 380 006

5. Khambatta Family Trust 8th Floor, White House, Panchvati Ahmedabad - 380 006

6. Franklin Templeton Inc Franklin Resources Inc C/o Corporate Secretary One Franklin Parkway San Mateo CA 94403-1906 3

7. Union of India Through Ministry of Corporate Affairs Serious Fraud Investigation Office Fountain Telecom, 6th Floor, Building-1 Mahatma Gandhi Road Mumbai Maharashtra - 400 001

(Opp. No.1, 2 and 6 are original Resp.No.2, 3 and 4 in the petition; Opp. No.3, 4 and 5 are the original Petitioners No.1, 2 and 3 in the petition; Opp.No.7 is the original Resp.No.5 in the petition.)

... Respondents

(By Shri Harish Salve and Shri Janak Dwarkadas, Senior Advocates, assisted by Ms. Ankita Singhania and instructed by Shri Ashish Bhan, Shri Harsh Pais, Ms. Anuradha Agnihotri, Shri Kunaal Shah, Shri Mohit Rohatgi, Shri Shubhang Setlur, Ms. Sanjam Arora, Shri Anirudh Kapoor, Ms. Chitra Rentala, Shri Rajendra Dangwal, Advocates of M/s Tri Legal for R1 & R2)

Shri Adithya Sondhi, Senior Advocate along with Shri Paritosh Gupta, Shri Karan Joseph - Advocates for R3, R4 and R5

Shri K.G. Raghavan, Senior Advocate instructed by Shri Ashish Bhan, Shri Harsh Pais, Ms. Anuradha Agnihotri, Shri Kunaal Shah, Shri Mohit Rohatgi, Shri Shubhang Setlur, Ms. Sanjam Arora, Shri Anirudh Kapoor, Ms. Chitra Rentala, Shri Rajendra Dangwal, Advocates of M/s Tri Legal for R6)

Shri M.B. Naragund, Additional Solicitor General along with Shri. M.N. Kumar, CGC for R7). 4

This writ appeal has been filed on the Letters Patent Appeal No.311/2020 filed before the High Court of Gujarat at Ahmedabad against the order dated 08.06.2020 which dismissed Civil Application No.1/2020 filed for vacating the interim relief granted by the Gujarat High Court by order dated 03.06.2020 in the Special Civil Application No.7201/2020 (As stated in Para-3 and 4 in "E" of Part-1 Appeal Memo)

Vide order dated 19.06.2020 in SLP 7553/2020 with Transfer Petition (c) Nos.663-664/2020 passed by Supreme Court of India, it is ordered to hear the matter before this Hon'ble High Court by Division Bench (Order dated 19.06.2020 placed at Flag-"A")

"SEBI v. Franklin Templeton Trustee Services Pvt. Ltd. bearing LPA No.311/2020 in SCA No.7201/2020 filed before the Gujarat High Court"

IN W.P. No.8644/2020

Between:

1. Mr. Areez Phirozsha Khambatta Aged 83, Male Having his address at 8th Floor, White House, Panchvati Ahmedabad - 380 006

2. Ms. Persis Khambatta Aged 75, Female (Having her address at 8th Floor, White House, Panchvati Ahmedabad - 380 006) 5

3. Khambhatta Family Trust 8th Floor, White House, Panchvati Ahmedabad - 380 006 ...Petitioners (By Shri Adithya Sondhi, Senior Advocate along with Shri Paritosh Gupta and Shri Karan Joseph of M/s. Gupta Law Associates Advocates for Petitioners)

And: 1. Securities and Exchange Board of India Having its office at Sakar-1, Ground Floor Opposite Nehru Bridge Gandhigram Railway Station Ashram Road, Ellisbridge Ahmedabad - 380 009

2. Franklin Templeton Asset Management (India) Pvt. Ltd Having its office at Indiabulls Financial Centre, Tower-2 12th and 13th Floor, Senapati Bapat Marg Elphinstone (W), Mumbai - 400 001

Also having an office at 202 Abhijit-III, Opp. Mayor's Bunglow Mithakhali Six Roads Navrangpura Ahmedabad - 380 009

3. Franklin Templeton Trustees Services Pvt. Ltd Having its Registered Office at Indiabulls Financial Centre, Tower-2 12th and 13th Floor, Senapati Bapat Marg Elphinstone (W), Mumbai - 400 013

4. Franklin Templeton Inc Franklin Resources Inc C/o Corporate Secretary One Franklin Parkway San Mateo CA 94403-1906 6

5. Union of India Through the Ministry of Corporate Affairs Serious Fraud Investigation Office Fountain Telecom, 6th Floor, Building-1 Mahatma Gandhi Road Azad Maidan, Fort, Mumbai Maharashtra - 400 001 ...Respondents

(Shri. Tushar Mehtha, Solicitor General of India/Senior Advocate along with Shri. Prathap Venugopal, Shri. Nithin Prasad, Shri Vidur Nair and Shri T. Suryanarayana - Advocates of M/S. King and Partridge for R1

By Shri Harish Salve and Shri Janak Dwarkadas, Senior Advocates, assisted by Ms. Ankita Singhania and instructed by Shri Ashish Bhan, Shri Harsh Pais, Ms. Anuradha Agnihotri, Shri Kunaal Shah, Shri Mohit Rohatgi, Shri Shubhang Setlur, Ms. Sanjam Arora, Shri Anirudh Kapoor, Ms. Chitra Rentala, Shri Rajendra Dangwal, Advocates of M/s Tri Legal for R2 & R3

Shri K.G. Raghavan, Senior Advocate instructed by Shri Ashish Bhan, Shri Harsh Pais, Ms. Anuradha Agnihotri, Shri Kunaal Shah, Shri Mohit Rohatgi, Shri Shubhang Setlur, Ms. Sanjam Arora, Shri Anirudh Kapoor, Ms. Chitra Rentala, Shri Rajendra Dangwal, Advocates of M/s Tri Legal for R4

Shri. M.B. Naragund, Additional Solicitor General along with Shri. M.N. Kumar, CGC for R5

Shri. Puneet Jain, Smt. Revathy Adinath Narde for Applicants in IA-3/2020) 7

This writ petition has been filed praying to (A) quash and set aside the impugned decision, notice dated 23.04.2020 and communication addressed to investors on 23.04.2020 communicating the said decision, issued by Franklin Templeton vide Annexure D and E. (AA) Quash and set aside the notice dated 28.05.2020 regarding e-voting and unit holders meet send through e-mail by R3 vide Annexure K/1 colly to the petition. (B) Declare that regulation 40 to the said regulations is not applicable to the said six Schemes as the initiation of winding up has not been proper and legal. (C) Declare that inaction on part of Franklin Templeton on request for redemptions has been illegal. (D) Direct Franklin Templeton to register the redemption filed by petitioners and other senior citizens at the NAV as on the date the funds were closed and to forthwith release the consequent amounts with such interest, as may be deemed appropriate to this Hon'ble Court. (E) Direct to the respondent board to initiate appropriate proceedings against Franklin Templeton and its responsible officers for the deeds of mismanagement and misdemeanor and for violation of the rules/regulations framed for protection of investors. (F) Direct to the respondent Board to constitute an appropriate body to manage the said funds till the satisfaction of the redemption of the unit holders. (G) State the implementation and operation of the impugned decision, notice dated 23.04.2020 and communication addressed to investors on 23.04.2020 communicating the said decision vide Annexure D and E to the petition. (GG) Pending hearing and final disposal of the present petition, your lordships may be pleased to stay respondent No.3 enclosed as Annexure-K/1-colly to the petition. (H) Pending hearing and final disposal of the present petition, your lordship may be pleased to direct Franklin Templeton to refrain from calling for a meeting purportedly under Regulation 41 (1) of the Regulations. (I) Direct Franklin Templeton, their officers and agents to forthwith register the redemptions filed by the petitioners and other senior citizens at the NAV as on the date the funds were closed and forthwith release the consequent amounts to them. (J) Pending hearing and final disposal of the present petition, you lordship may be pleased to direct R6 to conduct Forensic Auditing of the Accounts of the said Six Mutual Funds and Franklin Templeton and submit reports with its observations before this Hon'ble Court. (K) Grant Ad-interim relief in terms of prayers (F), (G), (H), (I) and (J). 8

IN W.P. No.8748/2020

Between:

M/s. Chennai Financial Markets and Accountability Represented by its President Manoj K Sheth Having its registered office at GA Florentina, No.43, 1st Main Road Gandhi Nagar, Adyar, Chennai - 600 020 ...Petitioner (By Shri Nithyaesh Natraj and Shri Vaibhav, Advocates)

And:

1. The Securities and Exchange Board of India Southern Regional Office (SRO) 7th Floor, 756-L, Anna Salai Chennai - 600 002, Tamil Nadu Also having their corporate office at Plot No.C4-A, G- Block, near bank of India Bandra Kurla Complex, Bandra East Mumbai, Maharashtra - 400 051

2. Franklin Templeton Asset Management India Pvt. Ltd Indiabulls Finance Ctr, Tower 13th Floor Elphinstone Road, Mumbai - 400 013

Also having Regional branch at 4b, MGR Main road, Kandancavadi, Perungudi Chennai - 600 096

3. Franklin Templeton Trustee Services Private Limited, Indiabulls Finance Centre, Tower 2, 12th and 13th Floor, Senapati Bapat Marg, Elphinstone (West), Mumbai - 400 013

4. Sanjay Vishwanath Sapre Wholetime Director Franklin Templeton Asset Management India Pvt. Ltd Flat 41/A, Embassy Apartments 9

46 Nepean Sea Road M Hill, A K Marg Mumbai - 400 036

5. Jayaram Subramaniam Iyer Director Franklin Templeton Asset Management India Pvt Ltd 2001, Tower B3, Godrej Platinum Pirojsha Nagar, Near Godrej Memorial Hospital Vikhroli East Mumbai - 400 079

6. Vivek Kudva Director Franklin Templeton asset Management India Pvt. Ltd Flat 202, 2nd Floor, Vishnu Villa 7B Worli Sea Face Opp Bandra Worli Sea Link Worli Colony Mumbai - 400 030

7. Radhakrishnan Venkata Subramaniam, Director, Franklin Templeton Asset Management India Pvt. Ltd Flat No.52, Tower 3, Pebble Bay 1st Main Road, Dollars Colony Near RMV Club Bangalore - 560 094

8. Pradip Panalal Shah Director Franklin Templeton Asset Management India Pvt. Ltd 72A Embassy Apartments 7th Floor, Napean Sea Road Mumbai - 400 006

9. Tabassum Abdulla Inamdar 703, Imperial Heights Tower B Best Nagar Motilal Nagar Mumbai - 400 104 10

10. Santosh Das Kamath MD and Chief Investment Officer Franklin Templeton Asset Management India Pvt. Ltd Indiabulls Finance Ctr, Tower 13th Floor Elphinstone Road, Mumbai - 400 013

...Respondents

(Shri. Arvind Datar, Senior Advocate along with Shri. Prathap Venugopal, Shri. Nithin Prasad, Shri Vidur Nair and Shri T. Suryanarayana - Advocates of M/S. King and Partridge for R1

By Shri Janak Dwarkadas, Senior Advocate, assisted by Ms. Ankita Singhania and instructed by Shri Ashish Bhan, Shri Harsh Pais, Ms. Anuradha Agnihotri, Shri Kunaal Shah, Shri Mohit Rohatgi, Shri Shubhang Setlur, Ms. Sanjam Arora, Shri Anirudh Kapoor, Ms. Chitra Rentala, Shri Rajendra Dangwal, Advocates of M/s Tri Legal for R2 & R3

Shri. Udaya Holla, Senior Advocate, instructed by Shri Ashish Bhan, Shri Harsh Pais, Ms. Anuradha Agnihotri, Shri Kunaal Shah, Shri Mohit Rohatgi, Shri Shubhang Setlur, Ms. Sanjam Arora, Shri Anirudh Kapoor, Ms. Chitra Rentala, Shri Rajendra Dangwal, Advocates of M/s Tri Legal for R4 to R10

Shri Ashish A. Kamath, Advocate for Applicants in IA No. 1/2020 and IA No. 2/2020)

This writ petition has been filed praying to issue a writ in the nature of writ of mandamus by exercising the inherent jurisdiction under Article 226 of the Constitution of India and directing the R1 to initiate appropriate proceedings including but not limited to appropriate penal/criminal proceedings against the R2 to R10 under the provisions of the SEBI Act and the Rules and Regulations thereunder in the larger interests of the market as 11

well as unit holders and further direct the R1 to ensure that the R2 to 10 complete repayment of the investments of the unit holders in the six debt Schemes in a time bound manner under the supervision, guidance and aegis of this Hon'ble Court and/or and pass such further or other orders as this Hon'ble Court may deem fit and proper in the circumstances of the case and thus render justice.

The counsel for the petitioner has also filed these applications that is interim direction in W.P. No. 7744/2020 (3 Nos), interim injunction petition in W.P.No.7744/2020 and interim stay petition in W.P.No. 7744/2020.

IN W.P. No.8545/2020

Between:

Amruta Garg (Formerly Amruta Narendra Nikam) W/o Arjun Garg R/o F-2, 2nd Floor, Lajpat Nagar-III New Delhi - 110 024 ...Petitioner (By Shri Ravindra Shrivastava, Senior Advocate along with Shri Abhinav Shrivastava, Shri Arjun Garg, Shri S. Mahesh Sahasranaman, Shri Anshuman Shrivastava, Shri Abhijeet Shrivastava, Ms. Garima Tiwari, Shri Karan Kohli, Shri Karan Chadha and Shri Chaitanya S.G. - Advocates)

And:

1. Union of India Through Secretary, Ministry of Corporate Affairs "A" Wing Shastri Bhawan Garage No.14, Dr. Rajendra Prasad Road New Delhi Delhi - 110 001 12

2. Ministry of Finance Through its Secretary Rajpath Marg, E Block Central Secretariat, New Delhi Delhi - 110 011

Also at: 3rd Floor, Jeevan Deep Building Sansad Marg, New Delhi Delhi - 110 001

3. Securities Exchange Board of India Through its Chairman 5th Floor, Bank of Baroda Building 16, Sansad Marg, New Delhi Delhi - 110 001

4. Serious Fraud Investigation Office through its Director 2nd Floor, Paryavaran Bhawan CGO Complex, Lodhi Road New Delhi, Delhi - 110 003

5. Franklin Templeton Asset Management (India) Pvt. Ltd Indiabulls Finance Center Tower 2, 12th and 13th Floor Senapati Bapat Marg Elphinstone West, Mumbai Maharashtra - 400 013 IN

Also at 707-710, 7th Floor, Ashoka Estate Building 24 Barkhamba Road, Opposite Statesman Building, or, next to Gopal das Building and Near, Barakhamba, Road Delhi - 110 001

6. Franklin Templeton Trustee Services Pvt. Ltd Indiabulls Finance Center 13

Tower 2, 12th and 13th Floor Senapati Bapat Marg Elphinstone (West), Mumbai - 400 013

7. Templeton International Inc. 300 SE 2nd St Ste 600 FORT LAUDERDALE FL, 33301-1950 United States

8. Franklin Resources Inc, USA ONE FRANKLIN PARKWAY BUILDING 920 SAN MATEO CA 94403 United States ...Respondents

(By Shri. Tushar Mehtha, Solicitor General of India along with Shri. M.B. Naragund, Additional Solicitor General, and Shri. M.N. Kumar CGC for R1, R2 and R4

Shri. Arvind Datar, Senior Advocate Shri. Pratap Venugopal, Shri. Nitin Prasad, Shri Vidur Nair and Shri T. Suryanaryana of M/S. King and Partridge Advocates for R3,

Shri. Harish Salve and Shri. Janak Dwarakadas, Senior Advocates assisted by Ms. Ankita Singhania and instructed by Shri Ashish Bhan, Shri Harsh Pais, Ms. Anuradha Agnihotri, Shri Kunaal Shah, Shri Mohit Rohatgi, Shri Shubhang Setlur, Ms. Sanjam Arora, Shri Anirudh Kapoor, Ms. Chitra Rentala, Shri Rajendra Dangwal, Advocates of M/s Tri Legal for R5 & R6

Shri. K.G. Raghavan, Senior Advocate instructed by Shri Ashish Bhan, Shri Harsh Pais, Ms. Anuradha Agnihotri, Shri Kunaal Shah, Shri Mohit Rohatgi, Shri Shubhang Setlur, Ms. Sanjam Arora, Shri Anirudh Kapoor, Ms. Chitra Rentala, Shri Rajendra Dangwal, Advocates of M/s Tri Legal for R7 & R8) 14

This writ petition has been filed praying to declare regulations 39, 40 and 41 of the 1996 Regulations as ultra vires the SEBI Act, 1992 and unconstitutional and violative of Article 14. Quash of impugned notice dated 23.04.2020 issued by R6 for winding up of 6 Schemes. Quash of impugned notice dated 28.05.2020 issued by R6 for winding up of 6 Schemes. Direct the respondent to allow the petitioner to redeem/or direct the respondent to refund the money invested by the petitioner in the Franklin Templeton short term income plan forthwith at the present NAV. Issue direction to R3 (SEBI) to conduct an investigation into the affairs of a Mutual Fund under Section 61 of the SEBI (Mutual Fund), Regulations, 1996 against R5 and 6. Issue direction directing the R4 (SFIO) to conduct an investigation into the affairs of the private R5 and 6 and to prosecute the personal responsible criminally. Issue direction to R5 and 6 to assist and provide all necessary details to R3 pertaining to the decision for winding up of its 6 Schemes.

These writ petitions and writ appeal having been heard through Video Conferencing hearing and reserved for judgment, coming on for pronouncement of Judgment, this day, Chief Justice delivered the following: 15

JUDGMENT

OVERVIEW:

1. The event which lead to filing of this group of petitions is

the notice dated 23rd April, 2020 issued by the Franklin Templeton

Trustee Services private Limited (for short "the Trustees") by

taking recourse to the provision of sub-clause (a) of clause (2) of

Regulation 39 of the Securities and Exchange Board of India

(Mutual Funds) Regulations, 1996 (for short 'the Mutual Funds

Regulations'). By the said notice, it was declared that the

Trustees have decided to wind up the following six Schemes of

the Franklin Templeton Mutual Fund:

i) Franklin India Low Duration Fund (Number of Segregated portfolios - 2)

ii) Franklin India Ultra Short Bond Fund (Number of Segregated portfolios - 1)

iii) Franklin India Short Term Income Plan (Number of Segregated portfolios - 3)

iv) Franklin India Credit Risk Fund (Number of Segregated portfolios - 3)

v) Franklin India Dynamic Accrual Fund (Number of Segregated portfolios - 3)

vi) Franklin India Income Opportunities Fund (Number of Segregated portfolios - 2) 16

2. There were three writ petitions filed in the High Courts of

Delhi, Gujarat and Madras for challenging the action of winding

up of the aforesaid six Schemes (for short "the said Schemes").

A criminal petition was filed in Madras High Court seeking a writ

of mandamus against the respondents therein for setting criminal

law in motion against those who were allegedly responsible for

the winding up of the said Schemes.

3. On 19th June, 2020, the Apex Court passed an order in

Special Leave Petition (civil) No.7553/2020 and Transfer Petition

(civil) Nos.663-664/2020), transferring the aforesaid four cases to

this High Court. The order of the Apex Court reads thus:

"After hearing the learned senior counsel appearing for the parties at length, we are not inclined to entertain the interim order dated 08.06.2020 passed by the High Court of Gujarat at Ahmadabad in Civil Application No. 1 of 2020 in Special Civil Application No. 7201 of 2020.

It is pointed out that several writ petitions are pending in the High Court of Gujarat, The High Court of Delhi as well as the High Court of Judicature at Madras. It is agreed that let the matters be transferred to the High Court of Karnataka, to be heard by a Division Bench. Thus, we request the 17

Hon'ble Chief Justice of the High Court of Karnataka to take up matters himself in a Division Bench. Let the pending matters be transmitted to the High Court of Karnataka, including the appeal filed by SEBI before the High Court of Gujarat against the interim order.

Let the matters be transmitted to the High Court of Karnataka within 15 days by the concerned High Courts. Let the High Court of Karnataka hear and finally decide the matter, including SEBI appeal, within three months.

As per the list provided by the learned counsel, the following matters are to be transmitted to the High Court of Karnataka:-

• M/S Chennai Financial Markets and Accountability V. SEBI and others, W.P.No.7744/2020 filed before the Madras High Court.

• Areez Phirozsha Khambatta and Ors. V. SEBI and Ors., Civil Application No.7201 of 2020 filed before the Gujarat High Court.

• Amruta Garg (Formerly Amruta Narendra Nikam) V. UOI and Ors., W.P. (Civil) 3366/2020 filed before the Delhi High Court.

• M/S. Chennai Financial Markets and Accountability V. Additional Director General of Police, CRL OP No. 8660/2020 filed before the Madras High Court.

18 • SEBI V. Franklin Templeton Trustee Services Pvt. Ltd., bearing LPA No. 311/2020 in SCA No. 7201/2020 filed before the Gujarat High Court. • LPA No. 311/2020 - Securities and Exchange and Board of India Versus Franklin Templeton Trustees Services Pvt. Ltd. & others.

In view of the above, the Special Leave Petition and the Transfer Petitions are disposed of."

4. In Writ Petition No.7744/2020 filed in the Madras High

Court, Special Civil Application No.7201/2020 filed in the Gujarat

High Court and Writ Petition (Civil) No. 3366/2020 filed in the

Delhi High Court, the challenge in substance is to the decision of

the winding up of the said Schemes. In addition, there are

directions prayed for against the Securities and Exchange Board

of India (for short, 'SEBI') established under the provisions of the

Securities and Exchange Board of India Act, 1992 (for short 'SEBI

Act'). In the writ petition filed before the Delhi High Court, there

is also a challenge to the validity of the Regulations 39, 40 and 41

of the Mutual Funds Regulations. Crl. P. No.8660/2020 has been

filed in the Madras High Court, essentially seeking a relief of a

writ of mandamus directing registration of First Information

Report. Letters Patent Appeal (LPA) No.311/2020 filed before 19

the Gujarat High Court is an appeal directed against the interim

order passed by the learned Single Judge of Gujarat High Court

in Special Civil Application No.7201/2020. As per the aforesaid

order dated 19th June 2020, the Apex Court transferred the

aforesaid cases to this High Court. The same were registered

and renumbered in this High Court. After registration in this

Court, the following corresponding new numbers have been

assigned:

Original case number Name of the High New case number Court assigned by the High Court of Karnataka

W.P.No.7744/2020 Madras High WP. No.8748/2020 Court

Spl CA No.7201/2020 Gujarat High WP.No.8644/2020 Court

WP (Civil) Delhi High Court WP.No.8545/2020 No.3360/2020

Crl.OP.No.8660/2020 Madras High CRL.P.NO.3206/2020 Court

LPA No.311/2020 Gujarat High W.A.No.399/2020 Court 20

5. Presumably, due to the situation created by pandemic

COVID -19, there was some delay in receiving the files from the

High Courts. After receiving the files, it was noticed that the

service of notice was not completed and therefore, the pleadings

were incomplete. By order dated 8th July 2020, this Court issued

notice to the respondents and directed that

counter/reply/statement of objections shall be filed by all the

respondents by 22nd July 2020 and Rejoinder, if any, shall be filed

by 29th July 2020. However, in criminal petition filed in Madras

High Court, notice was issued on 15th July 2020 as the file was

received late. By order dated 6th August 2020, the hearing was

fixed from 12th August 2020 in the afternoon session on day-to-

day basis. As per the direction of the Apex Court in the aforesaid

transfer order, the present Bench was constituted by the Chief

Justice to hear the above transferred cases.

6. From 8th July 2020, COVID-19 positive cases started

multiplying in the State of Karnataka and the figures issued by the

Department of Health from time to time will show that from July,

2020, every day about 1500 to 2500 new positive cases were

being reported in Bengaluru Urban District. Now, about 4000 to

5200 cases positive cases per day are being reported in 21

Bengaluru. The spread of COVID -19 pandemic has also badly

affected the High Court of Karnataka and in July 2020, more than

fifty staff members were tested positive. By the time we deliver

this Judgment, the figure has crossed 180 mark. The COVID-19

has not spared Judicial Officers in the State and Registrars of this

Court. To reduce the footfall in the High Court complex, there was

no other option but to take recourse to virtual hearing. That

suited the learned members of the Bar. The reason is that the

members of the Bar could argue while sitting at New Delhi,

Mumbai, Chennai, Bengaluru and London. As noted in the last

part of this Judgment, with the cooperation of all the learned

counsel, video conference hearing was conducted to everyone's

satisfaction for several days and hours. The submissions were

concluded on 24th September 2020.

7. The hearing commenced on 12th August, 2020. Before

commencement of the oral arguments, this Court made a query

to the learned counsel appearing for all the parties whether

anyone had any objection for the use of zoom platform for

conducting the video conferencing hearing. None of the learned

members of the Bar had any reservations about the use of zoom

platform.

22

8. Before we go to the submissions made across the Bar, it

will be necessary for us to briefly narrate the few factual aspects

set out in the pleadings filed on record. The factual aspects are

common in all these petitions and, therefore, we are adverting to

the facts of the case stated in W.P.No.8545/2020 (Delhi Petition).

FACTS OF THE CASE:

IN WRIT PETITION No 8545 OF 2020:

9. It is pointed out that 6th respondent - Franklin Templeton

Trustee Services Private Limited (the Trustees), entered into

business of Mutual Funds in India in the year 1996. It is a

company covered by definition of "Trustee" within the meaning of

clause (g) of Regulation 2 of the Mutual Funds Regulations. The

5th respondent is an Asset Management Company (for short

'AMC') within the meaning of clause (d) of Regulations 2 of the

Mutual Funds Regulations. The 8th respondent - Franklin

Resources Inc, is a USA based company of which, the 7th

respondent - Templeton International Inc is a subsidiary

company. The 7th respondent is a "sponsor" within the meaning

of clause (x) of Regulation 2 of the Mutual Funds Regulations. It

is pointed out in the petition that on 4th January, 1996, the

Franklin Templeton Mutual Fund (for short 'the Mutual Fund') was 23

constituted as a Trust under the provisions of the Indian Trust

Act, 1882 (for short 'the Trusts Act'), as defined under clause (q)

of Regulations 2 of the Mutual Funds Regulations. The 'Mutual

Fund', as defined in clause (q) of Regulations -2 means, a fund

established in the form of a trust to raise monies through the sale

of units from the public or a section of the public under one or

more Schemes for investing in securities, including money market

instruments or gold or gold related instruments or real estate

assets. The 7th respondent - Templeton International Inc

sponsored the said Mutual Fund. Under clause (y) of Regulation

2 of the Mutual Funds Regulations, the word 'Trustees' is defined

and it means the Board of Trustees or the Trustee Company who

hold a property of a Mutual Fund in trust for the benefit of the unit-

holders.

10. An agreement dated 5th January, 1996 was entered into by

and between the Trustees of the Mutual Fund and the 5th

respondent AMC by which, AMC was appointed as investment

manager to the Schemes of the Franklin Templeton Mutual Funds

(for short 'FTMF'). The said agreement was amended by a

supplemental investment agreement of management dated 26th

August, 2005. The investment manager was approved by SEBI 24

to act as AMC for FTMF. The petitioner has invested a sum of

Rs.5,00,000/- in the year 2018 in Franklin India Short Term

Income Plan launched by FTMF.

11. The first case of novel corona Virus (COVID-19) was

reported in India on 30th January, 2020 and from 25th March,

2020, the nationwide lockdown was imposed by the Government

of India. Prior to that, on 11th March, 2020, the World Health

Organization (WHO) had declared COVID-19 as a global

pandemic. On 9th April, 2020, AMC requested SEBI for

enhancement of borrowing limit prescribed in Regulation 44 (2) of

the Mutual Funds Regulations, from 20% to 30%. This request

was made in respect of Franklin India Income Opportunities

Fund. By a letter dated 13th April 2020, SEBI allowed the said

request subject to certain conditions including the condition that

incremental borrowing limit should be used only for the purposes

of redemption. It appears that by e-mail dated 22nd April 2020, a

similar request was made by AMC in respect of three other

Schemes. By a letter dated 22nd April 2020, SEBI communicated

to AMC that its request for enhancement to 40% in case of

Franklin India Short Term Income Fund and Franklin India

Income Opportunities Fund was granted subject to conditions 25

mentioned therein. In case of Franklin India Credit Risk Fund,

the borrowing limit was enhanced to 30% subject to conditions.

The condition of using the incremental borrowing limit only for

redemption was incorporated in the said letter. On 14th April

2020, AMC addressed e-mail to SEBI. In the said e-mail, it was

mentioned that as a last resort, the Mutual Fund may be required

to resort to suspension of redemption as permitted under the

Regulations and a request was made for removing the restriction

of being able to suspend the redemptions only for a period of 10

days out 90 days. After few days i.e., on 20th April, 2020, the

Trustees submitted a proposal to SEBI for winding up of the said

Schemes and Franklin India Dynamic Accrual Fund. By the said

letter, while seeking permission to wind up, forbearance on the

proposal for winding up was sought from SEBI.

12. On 23rd April, 2020 the Trustees issued the impugned

notice informing that they have decided to wind up the said

Schemes mentioned in paragraph 1 above, pursuant to the

provisions of sub-clause (a) of clause (2) of Regulation 39 of the

Mutual Funds Regulations. It was mentioned therein that the

Trustees of FTMF, after careful analysis and review of the

recommendations made by AMC and on consultation with the 26

investment team, were of the considered opinion that an event

has occurred, which requires the said Schemes to be wound up.

It was mentioned that winding up was the only viable option to

preserve the value for unit-holders and to enable an orderly and

equitable exit for all investors under the unprecedented

circumstances. It was mentioned in the said notice that in view

of the provisions contained in Regulation 40 of the Mutual Funds

Regulations, the Trustees and AMC have ceased to carry on any

business activity in respect of the said Schemes.

13. It is pointed out that on 27th April, 2020, the Reserve Bank

of India (for short 'the RBI') announced Rs.50,000 crores Special

Liquidity Facility for Mutual Funds (SLF-MF), in the background of

heightened volatility in capital markets. It was mentioned therein

that under SLF - MF, RBI shall conduct repo operations of 90

days tenor at the fixed repo rate. It was stated that the funds

available under SLF - MF shall be used by Banks for extending

loans to Mutual Fund. On 6th May 2020, Ms. Jenny Johnson, the

Chief Executive Officer of Franklin Templeton had issued a public

statement blaming SEBI for issuing strict regulations and circulars

leading for winding up of the said Schemes. On 7th May 2020, a

press release was issued by SEBI stating that SEBI has advised 27

FTMF to focus on returning money to the investors in the context

of the winding up of the said Schemes. On 8th May 2020, AMC

issued a notice explaining what Ms. Jenny Johnson said. On 28th

May, 2020, the Trustees issued notices of e-voting and unit-

holders meet as per Regulation 41 (1) of the Mutual Funds

Regulations, seeking approval of unit-holders for one of the two

options. The first option was of authorizing the Trustees to take

steps for winding up of the said Schemes. The second option

was to authorize Deloitte Touche Tohmatsu India LLP (for short

'Deloitte') to do the said job.

14. On 3rd June, 2020, the writ petition was filed before the

Delhi High Court to which, this Court has on its transfer assigned

W.P.No.8545 of 2020. The first substantive prayer in the writ

petition was to declare Regulations 39, 40 and 41 of the Mutual

Funds Regulations as ultra vires SEBI Act, 1992. A prayer was

also made for quashing the impugned notices dated 23rd April

2020 and 28th May 2020. Another prayer was for directing the

respondents to refund the money invested by the petitioner in the

Franklin Templeton Short Term Income Plan or to allow the

petitioner to redeem the Units. A writ of mandamus is sought

directing SEBI to conduct an investigation into the affairs of FTMF 28

as contemplated under Regulation 61 of the Mutual Funds

Regulations. Another prayer was made seeking a writ of

mandamus against the 4th respondent Serious Fraud

Investigation Office to register FIR and to conduct investigation

into the affairs of Trustees and AMC.

15. Before we go to the reply/response filed by the 3rd

respondent - SEBI and the other companies, it is necessary for us

to refer to the facts of other petitions and prayers made therein.

IN WRIT PETITION NO. 8644 OF 2020 AND WRIT APPEAL NO. 399 OF 2020

16. Now we come to writ petition No.8644/2020. The

petitioners in this writ petition filed before the Gujarat High Court

are claiming to be the investors in the said Schemes of the

Mutual Fund. According to their case, the petitioners have

invested a sum of Rs.6,05,50,000/- having the value of

Rs.7,84,72,210/- as on the date of declaration of the winding up

i.e., on 23rd April, 2020. The challenge in the petition, as

originaly filed was to the notice dated 23rd April 2020. Thereafter,

by an amendment, a challenge was incorporated to the notice

dated 28th May, 2020 as well. There is a prayer for declaration

that Regulation 40 of the Mutual Fund Regulations is not 29

applicable to the said Schemes. The main contention raised in

the petition is that the discretion conferred on a Mutual Fund

under sub-clause (a) of clause (2) of Regulation 39 is subject to

the fulfillment of the conditions as provided in clause (15) of

Regulation 18. It is contended that consent of the unit-holders

was required for winding up, in view of clause (15) of Regulation

18. Various other factual contentions have been raised in the

writ petition. By order dated 3rd June 2020, the learned Single

Judge of the Gujarat High Court, while issuing notice, stayed the

operation and implementation of the notice dated 28th May, 2020.

Being aggrieved by the said interim order passed by the learned

Single Judge, SEBI has preferred an appeal to the Division

Bench of the Gujarat High Court which has been numbered as

Writ Appeal No.399/2020 on its transfer to this Court.

IN WRIT PETITION NO. 8748 OF 2020

17. Writ Petition No. 8748/2020 was filed before the High Court

of Judicature at Madras. The petitioner therein is a Society

registered under the Tamil Nadu Societies Registration Act, 1975.

The said society has filed the said petition in the nature of a

Public Interest Litigation. The main grievance in the petition is

about the inaction on the part of SEBI. It is pointed out that the 30

petitioner has made a representation to SEBI on 28th April, 2020

against AMC.

IN CRL.P.NO.3206/2020

18. CRL. P.No. 3206/2020 was filed by the petitioner in Writ

Petition No.8748/2020 in the High Court of Judicature at Madras

seeking a direction to the respondents to register First Information

Report against AMC and the Trustees as well as various officers

of the said companies for the offences under the Economic

Offences Act. As First Information Report was registered during

the pendency of this petition, the same has been disposed of.

BRIEF SUMMARY OF IMPORTANT CONTENTIONS IN THE STATEMENT OF OBJECTIONS FILED BY SEBI, AMC AND TRUSTEES:

19. Now we are referring to the statement of

objections/response/counter filed by the contesting respondents.

20. In W.P.No.8545/2020, the 3rd respondent - SEBI has

contended that though the petitioner has contended that the

Regulations 39, 40 and 41 are ultra vires and unconstitutional as

well as violative of Article 14 of the Constitution of India, the

petitioner has not explained how Article 14 has been violated. It

is contended that Regulation 39 (2) has to be read with the 31

Regulation 41 of the Mutual Funds Regulations. It is contended

that Regulation 41 only deals with the procedure and the manner

of the winding up process. It is contended that Regulation 39 (2)

only states that a Scheme can be wound up after repaying the

amount due to the unit-holders but the manner in which the

repayment is to be made is provided under Regulation 41. It is

contended that under Regulation 41, the approval of the unit-

holders is needed only for authorizing the Trustees or any other

person to take steps for winding up of a Scheme, consequent

upon the decision of winding up of the Scheme. It is submitted

that Regulation 41 provides adequate protection to the unit-

holders. It is contended that under clause (1) of Regulation 41, a

right has been conferred on the unit-holders to participate in the

winding up process and clause (2) of Regulation 41 lays down

that the assets of the Scheme have to be disposed of in the best

interests of unit-holders. It is further submitted that the

repayment of the amount to the unit-holders, as contemplated by

clause (2) of Regulation 39 is not the redemption. It is a

repayment in accordance with Regulation 41. It is contended that

the Trustees, after careful analysis and review of the

recommendations submitted by AMC decided to wound up the 32

said Schemes pursuant to sub-clause (a) of clause (2) of

Regulation 39. It is submitted that once the Trustees have

decided to wind up the Schemes on the happening of an event

which in their opinion requires immediate winding up, the

requirement to go to unit-holders for approval is limited to seeking

approval of the unit-holders for authorizing the Trustees or any

other person for taking steps for winding up. In paragraph 18 of

the statement of objections, it is pointed out that if the decision of

winding up is reversed, the Trustees would have to reopen the

Scheme for transactions and all unit-holders would put 100%

redemption requests immediately, as a result, the Mutual Fund

would have to make distress sale of securities at very deep

discount as the market is under distress. It is contended that

such a distress sale of the assets of a Scheme would

considerably reduce the Net Asset Value (NAV) which will be

detrimental to all the unit-holders. It is contended that winding up

of the Schemes after paying all liabilities will preserve the value

for all unit-holders and provide equitable exit to all investors.

21. It is repeatedly stated in the statement of objections that

sub-clause (a) of clause 2 of Regulation 39 does not envisage

any consent of the unit-holders and the voting in terms of clause 33

(1) of Regulation 41 is only to authorize the Trustees or any other

person to take steps to realize the assets of the Schemes. It is

contended that a few investors should not be allowed to derail the

whole procedure of winding up, as it may adversely affect the

other investors of the Mutual Fund Schemes and millions of

investors in the market at large.

22. It is contended that SEBI has already initiated a Forensic

Audit/inspection with regard to the said Schemes under winding

up. It is contended that vide letter dated 27th May, 2020, the

Forensic Audit/inspection of the books of accounts and other

records and documents of the FTMF, AMC and Trustees has

already been initiated. If any violation is found, appropriate

action will be taken under the law and that said inspection

process should not be linked with the decision of the Trustees to

voluntarily winding up the said six Schemes.

23. Reliance is placed on the circulars dated 23rd March 2020

and 30th April, 2020 by which, the timelines fixed in the earlier

circulars was extended. It is further submitted that sub-clause

(a) of clause (2) of Regulation 39 confers finality on the decision

of the Trustees. It is contended that in view of Regulation 40 34

read with sub-clause (b) of clause (3) of Regulation 39, the

decision to wind up of a Scheme automatically takes effect.

24. Referring to press release dated 7th May, 2020 relied upon

by the petitioners, it is submitted that said press release is only an

advisory to the FTMF to focus on returning the money of the

investors as soon as possible. It is submitted that if in the

Forensic Audit/inspection ordered by SEBI in respect of the said

Schemes under winding up, any illegalities are found, an action

will be initiated. However, the same need not be linked with the

winding up process.

25. Lastly it is submitted that the powers conferred on the

Trustees are not vague or arbitrary, as the same are subject to

regulatory provisions of the Mutual Funds Regulations. Hence, it

is contended that the Regulations 39 to 41 are legal and valid.

26. The statement of objections filed by SEBI in

W.P.No.8644/2020 is more or less similar.

27. The statement of objections have been filed by AMC and

Trustees. It is contended that the petitioners have sought for

private remedy against a private person in connection with the

private transactions. It is submitted that SEBI, which is a 35

specialized sectoral regulatory authority is already seized of the

matter. It is submitted that the petitioners have not exhausted

the alternate and efficacious remedies available to them. It is

pointed out that SEBI has already initiated Forensic

Audit/inspection into the affairs of the answering respondents on

27th May, 2020 and both the companies are extending

cooperation for the Forensic Audit/inspection.

28. Reliance is placed on the Master Circular for Mutual Funds

dated 10th July, 2018 and other circulars. It is submitted that the

circulars have put in place an extensive regime to regulate

management of the Mutual Funds. Various safeguards provided

in the said Master Circulars have been set out. It is submitted

that SEBI has wide powers of special review, audit and inspection

with respect to the affairs of the Mutual Funds under SEBI Act as

well as under Chapter-VIII of the Mutual Funds Regulations.

Reliance is placed on Regulations 61 and 66 of the Mutual Funds

Regulations which authorize SEBI to appoint an investigating

officer to inspect and/or to investigate the affairs of the

management Trustees and AMC. Reliance is placed on Section

11 of SEBI Act read with Regulation 76 of the Mutual Funds

Regulations which confer powers on SEBI to take any measures 36

as it thinks fit in order to protect the interests of the investors in

securities and promote the development of, and to regulate the

securities market.

29. It is submitted that where the legislature has designated an

authority under a specific law to regulate a specific sector, the

Courts should refrain from interfering in respect of the said

matter. It is pointed out that SEBI has already taken action by

appointing a Forensic Auditor. It is stated that both the

companies are cooperating with the Auditor.

30. It is submitted that the petitioners have not exhausted the

efficacious remedies available to them by approaching the

Securities Appellate Tribunal. It is submitted that they have

approached SEBI by filing complaints for redressal of their

grievances, which are already registered on SEBI's Complaints

Redress System (SCORES). It is pointed out that the

petitioners, in the petition filed before the Gujarat High Court have

filed two complaints with SCORES. But, without awaiting the

response from SCORES, within 30 days thereafter, the writ

petitions have been filed and therefore, two parallel remedies

have been adopted for the same cause of action. 37

31. It is also contended that these writ petitions involve various

complex and disputed questions of fact and there is an alternate

efficacious mechanism in law to thoroughly examine and deal

with such factual allegations. It is submitted that considering the

fact that SEBI, being a specialized sectoral regulatory authority is

already proceeding with the Forensic Audit/inspection/

investigation, the Writ Court should not exercise its jurisdiction,

inasmuch as, the writ petitions involve the disputed questions of

fact. Various decisions of the Apex Court have been relied upon

in this behalf.

32. It is submitted that the writ petition filed in Gujarat High

Court seeks private remedies against a private persons on

matters arising out of the contractual relationship. Various other

factual details have been pleaded in the statement of objections.

It is contended that said Schemes are all debt Schemes. These

Schemes invest in debt/fixed income instruments such as non-

convertible debentures/bonds issued by corporate issuers. A

detailed tabular statement is given for setting out that the said

Schemes are 'debt Schemes' based upon features such as

Macaulay duration of the portfolio. A detailed procedure is set out

for making investments in the Schemes. Reliance is also placed 38

on the offer documents of the Schemes and its contents.

Detailed averments have been made on the functioning of the

Mutual Funds as set out in the Mutual Funds Regulations and the

structure of the Schemes.

33. It is contended that apart from the said six debt Schemes,

FTMF manages additional 27 open ended Schemes, 24 close

ended Schemes and 6 Fund Of Funds (FOF) Schemes with

approximately Rs. 50,000 crores of assets under management.

It is pointed out that around 20 lakh investors who have invested

in the other Schemes are not affected by the present winding up.

34. Various details have been set out as to why the decision

was taken to wind up the said Schemes. It is contended that

COVID-19 pandemic and consequent lockdown of the economy

led to severe and sustained liquidity challenges for the said

Schemes as bond yields spiked and liquidity in the bond market

completely collapsed. There were no viable buyers in the market

for certain types of debt instruments. At the same time, the

Schemes were facing massive and sustained redemptions from

the investors precipitated by the economic shock and uncertainty

created by COVID-19 crisis. It is pointed out that the debt 39

Schemes ordinarily make redemption payments from two main

sources of liquidity. The first source is scheduled maturities and

interest payments by issuers of the debt instruments from time to

time. The second source is prepayments of amounts due by

issuers in certain cases. The third source of redemption payment

is the sale of investments in the portfolio of Non Convertible

Debenture/Bonds (for short, 'NCDs') in the secondary market. It

is submitted that the net result for the Schemes due to COVID-19

pandemic and associated market dislocations was a massive and

sustained liquidity crisis. Due to liquidity crisis, on one hand, the

investors in large numbers suddenly sought redemption and on

the other hand, the market for assets meant to fund such

redemptions (i.e. corporate bonds) completely seized up.

35. It is pointed out that the said Schemes have been

successful over a sustained period of time and have successfully

navigated stressed market cycles in the past. The long and

successful track record of the Schemes is placed on record. The

various facts and figures have been set out.

36. It is pointed out that the impact of COVID -19 pandemic is

not a unique to the Indian Corporate bond markets. It is pointed 40

out that the United States Corporate bond market seized up on

account of COVID-19 and related market disruptions. It is

pointed out that in European market, at least 76 funds managing

assets worth 40 billion USD were compelled to suspend

redemption in March, 2020 due to increased demand for

withdrawals from investors. It is pointed out that COVID-19

pandemic was a rare, unpredictable and unprecedented with a

severe and sustained impact. The impact of COVID-19 has

been set out in detail in paragraph 66 of the statements of

objections.

37. It is pointed out that due to extraordinary effect of

COVID-19 pandemic on the Indian economy led the Government

of India and the Reserve Bank of India taking extraordinary

measures. In fact, the provisions for initiation of insolvency under

the Insolvency and Bankruptcy Code, 2016 (for short 'the Code of

2016') were suspended by six months upto September 2020.

Six months moratorium was offered to the borrowers by the

banks and non-banking financial institutions up to 31st August,

2020. It is submitted that even the RBI acknowledged the

liquidity crunch in the financial markets in India by taking various

steps.

41

38. It is specifically contended that the decision to wind up the

said Schemes was taken specifically to protect the interests of all

unit-holders in the unprecedented economic conditions and all

potential avenue were exhausted before taking such a decision.

Various facts and figures have been set out in paragraph 71 and

72 in this behalf.

39. In subsequent paragraphs, there is a reference to detailed

considerations and deliberations. It is submitted that the Trustees

and AMC were faced with very difficult choice so as to ensure

protection of interest of all unit-holders of the Scheme as well as

to ensure fair and equitable treatment to all the unit-holders. It is

submitted that all potential avenues were duly exhausted. The

appropriate answer and the course of action for the Trustees was

to wind up the said Schemes pursuant to the express provisions

of the Mutual Funds Regulations which was necessary to protect

the interests of the investors due to the unprecedented economic

environment arising from COVID-19 pandemic. This decision

gave the said Schemes the ability to preserve value and to

undertake a managed monetization of the portfolio securities.

This was necessary for maximizing the value for unit-holders and

for distribution of proceeds to unit-holders in a fair, orderly and 42

equitable manner in accordance with the process prescribed

under Regulation 41 of the Mutual Funds Regulations. The

alternative would have been a disorderly liquidation by forced

sale of sound assets in a hasty and disorganized manner at

discounted valuations in adverse market conditions, which would

have caused value losses to the entire body in particular, small

and retail unit-holders. It is submitted that the decision of winding

up was taken specifically with a view to protect the best interests

of the unit-holders of the Scheme.

40. The events subsequent to the decision of the winding up

have also been set out. It is pointed out that the net asset value

(NAV) of each Schemes is being published on daily basis.

Details about the cash realized by these six Schemes on account

of winding up since the winding up and up to 27th July, 2020 have

been set out.

41. It is submitted that the decision of winding up of the said

Schemes and decisions regarding investments are taken in

accordance with SEBI Regulations and investment objectives of

the respective Schemes as set out in the Scheme document. It is

contended that the Trustees and AMC have exercised requisite 43

care and diligence at all times. It is pointed out that the Board of

Directors of the Trustees and AMC had also put in place various

guard-rails over and above the regulatory requirements of law

with a view to manage and mitigate risks for the Schemes. In

paragraph 99, various factual details have been set out dealing

with the allegations of mismanagement of the said Schemes. It

is further submitted that investment in the Scheme of a Mutual

Fund is a contractual matter.

42. It is contented that the decision to wind up the said

Schemes was pursuant to the express provisions of the Mutual

Funds Regulations, as contended in the statement of objections

filed by SEBI and it is contended that no approval from the unit-

holders is required for taking a decision regarding winding up.

While referring to Regulation 18 (15) (c), it is submitted that the

reference to wind up is only with respect to winding up of a

Mutual Fund as a whole and not to winding up of a Scheme of a

Mutual Fund. It is pointed out that the winding up is limited to six

Schemes and the other Schemes of FTMF are not affected. It is

submitted that sub-clause (c) of clause (15) of Regulation 18

merely refers to winding up and not winding up of a Scheme. It

is submitted that Regulations 39 to 40 forming a part of Chapter-V 44

of the Mutual Funds Regulations dealing with the Schemes of

Mutual Fund constitute a specific and complete code dealing with

winding up of Schemes of a Mutual Fund. The Regulation 18 is a

general Regulation which must be read harmoniously with the

specific provisions of Regulations 39 to 42 relating to winding up

of the Schemes. It is submitted that if sub-clause (c) of clause

(15) of Regulation 18 is to be read into sub-clause (b) of clause

(2) of Regulation 39, the provisions of Regulation 39 will be

rendered otiose.

43. It is contended that holding of meeting of unit-holders is

necessary for seeking approval of unit-holders pursuant to

Regulation 41 (1). It is submitted that the process of obtaining

authorization from the unit-holders is fair and transparent. There

are detailed averments made with regard to manner in which the

investments were made by the Schemes.

44. It is contended that on 24th April 2020, the Trustees

published notices in compliance with the provisions of sub-clause

(b) of clause (3) of Regulation 39. The averments made in various

paragraphs of writ petition have been separately dealt with. It is

contended that in the petition filed in Delhi High Court, no 45

grounds have been set out to substantiate the challenge to

constitutional validity of Regulations 39 to 41. It is submitted that

the Trustees is not a public authority or agency or instrumentality

of the State. It is urged that the petitions ought not to be

entertained.

45. As far as two foreign entities are concerned, a contention

has been raised that no jurisdiction lies with the Court to deal with

the foreign private entities.

46. There are rejoinders filed by the petitioners to the

statement of objections which are merely argumentative in

nature.

SUMMARY OF SUBMISSIONS OF THE PETITIONERS

47. As directed by this Court, submissions of the learned

Senior Counsel appearing for the petitioner in the petition filed

before the Delhi High Court (W.P.No.8545/2020) were heard first,

as there is a challenge therein to the validity of Regulations 39 to

41 of the Mutual Fund Regulations.

48. Shri. Ravindra Srivastsava, the learned Senior Counsel

appearing for the petitioners in writ petition No.8545/2020 has 46

taken us through the various provisions of SEBI Act and the

Mutual Funds Regulations. He invited our attention to the

objects and reasons of SEBI Act. He submitted that SEBI Act

has been enacted essentially for the protection of the investors.

The object of enacting the said Act is to confer statutory powers

on SEBI to effectively deal with all matters relating to the capital

market. From the preamble of SEBI Act, he pointed out that the

object of said legislation is to protect the investors and to regulate

securities market. He pointed out that vast powers have been

conferred on SEBI under section 11 of the said Act. He also

invited our attention to sub-sections (2) and (3) of Section 11 of

SEBI Act. He pointed out that Section 30 confers power on the

Board to make Regulations. He has taken us through the various

provisions of the Mutual Funds Regulations and various

definitions under clause (d), (f), (q), (s), (u), (x), (y), (z) and (z-i) of

Regulation 2. He pointed out the entire Scheme of the Mutual

Funds Regulations starting from registration of the Mutual Funds,

its structure and its management. He laid emphasis on

Regulation 18 which incorporates the duties and obligations of

the Trustees. He invited our attention to sub-clause (c) of clause

(15) of Regulation 18 and submitted that for winding up of the 47

Schemes, the Trustees are under an obligation to obtain consent

of the unit-holders. He pointed out the various provisions which

require the Trustees to exercise due diligence and in particular,

clause (25) of Regulation 18. He also pointed out the obligations

of AMC under the Regulations. He also pointed out the

procedure laid down for launching of the Schemes.

49. Thereafter, he has taken us through the Regulations 39,

40, 41 and 49. He submitted that sub-clause (a) of clause (2) of

Regulation 39 permits the Trustees to wind up a Scheme on the

happening of an event. He submitted that this provision is

completely arbitrary, unguided and vague. There are no specific

guidelines laid down by the Mutual Funds Regulation on the

question as to which events will qualify the requirement of sub-

clause (a) of clause (2) Regulation 39 empowering the Trustees

to wind up the Schemes. He submitted that this provisions are

manifestly arbitrary and ultra vires the provisions of SEBI Act,

inasmuch as, the very object of SEBI Act is to protect the interest

of the investors and sub-clause (a) appears to have granted a

blanket power to the Trustees to wind up Schemes as per their

whims and fancies. He submitted that he is going to submit in

the alternate that sub-clause (a) of clause (2) of Regulation 39 48

needs to be read down as the consent provided in sub-clause (c)

of clause (15) of Regulation 18 will have to read into it. He urged

that both the provisions must be construed harmoniously and it

must be held that the powers under sub-clause (a) cannot be

exercised without complying with the requirement of obtaining the

consent of the unit-holders. He submitted that there is no

material placed on record to show that the Trustees have

complied with the requirement of obtaining the consent of the

unit-holders and the requirement of sub-clause (b) of clause (3) of

Regulation 39 of publishing the notice disclosing the

circumstances leading to the winding up of the Scheme in two

daily newspapers having circulation all over India and one

vernacular newspaper having circulation at the place where the

Mutual Fund is formed. He submitted that these two statutory

compliances have not been made. He urged that the investors

stand to lose substantially, inasmuch as firstly, the assets of the

said Schemes will be sold and only after clearing the liabilities,

remaining amount, if any, will be made available for distribution to

the unit-holders. He submitted that under Regulation 42, an

enquiry can be made by SEBI only about compliance with the 49

procedure and the manner of winding up provided under

Regulation 41.

50. He also invited our attention to the provisions of Regulation

43 regarding investment objectives of the Mutual Funds as well

as Regulation 44 which deals with the investment and borrowing

restrictions. He has taken us through the statement of objections

filed by SEBI and pointed out that though Forensic

Audit/inspection was directed on 27th May, 2020, so far nothing is

placed on record to show whether the Forensic Audit is

completed or not. He submitted that taking the contentions

raised in the statement of objections as correct, SEBI has failed

to comply with its statutory obligations and abdicated its duty of

protecting the interests of the investors/unit-holders. He pointed

out that SEBI has in fact, shown its helplessness to interfere with

the impugned decision of the Trustees to wind up the Schemes.

51. The learned Senior Counsel has taken us through offer

documents of the Scheme, the correspondence exchanged

between the Trustees and SEBI and the impugned notices. He

submitted that initially, AMC had taken a stand in the

communication dated 14th April 2020 that they have never thought 50

of winding up of the Scheme and they were considering of only

postponement of redemption. He submitted that within a span of

three days thereafter, suddenly, there was a change of opinion of

the Trustees and they wanted to wind up the said Schemes. He

submitted that though the report/guidance of SEBI was sought

specifically by addressing a letter, in fact, without waiting for the

guidance or advice of SEBI, straightaway the impugned notice

dated 23rd April 2020 has been issued. He submitted that as the

Trustees and AMC are bound to follow the statutory Regulations

framed under SEBI Act, they are performing a public duty and,

therefore, their actions are amenable to a challenge under Article

226 of the Constitution of India. He has taken us through the

several documents to show as to how the situation did not

warrant the winding up of the said Schemes. He submitted that

the reasons given for winding up of the Schemes were already in

existence much before the COVID 19 pandemic. He submitted

that no other Mutual Fund has gone for winding up due to the

pandemic. He pointed out that RBI has taken several measures

for improving the liquidity. He urged that SEBI, being a statutory

authority has not at all gone into the question of genuineness of

the reasons put forth by the Trustees for winding up of the said 51

Schemes. He submitted that SEBI, which is the protector of the

unit-holders/investors has failed to discharge its statutory duties.

He also relied upon the articles published in the newspapers,

magazines etc., and publication of certain information about the

said Schemes.

52. Coming to the challenge to the validity of the Regulations

39 to 43 of the Mutual Funds Regulations. He submitted that

firstly, the provisions are discriminatory and violative of Article 14

of the Constitution of India. He submitted that his second

challenge is on the ground of manifest arbitrariness. His third

ground of challenge is that the provisions violate the fundamental

rights conferred under Article 21 of the Constitution of India.

Lastly, he urged that the said Regulations are ultra vires the

statutory provisions of SEBI Act.

53. He invited our attention to the powers conferred on SEBI

under Section 11-A which are conferred only for protection of

investors. He also pointed out that the powers conferred on

SEBI under Section 11-B which enable SEBI to issue directions

to any person or class of persons including the Trustees of the

Trust and any intermediary after holding an enquiry, if it is 52

satisfied that it is in the interest of the investors to do so. He

pointed out the powers conferred on SEBI to frame Regulations

under Section 30 of SEBI Act. He submitted that the general

regulation making powers conferred on SEBI under sub-section

(1) of Section 30 of SEBI Act can be exercised only for carrying

out the objects and purposes of the Act. He submitted that very

object of establishing SEBI is to protect the interest of the

investors and, therefore, under the general powers conferred by

sub-section (1) of Section 30 of the Act, SEBI cannot make

Regulations providing for winding up of a Scheme of Mutual Fund

solely on the basis of the opinion of the Trustees. Referring to

sub-section (2) of Section 30 which confers power to frame

regulations on specific subjects, he urged that the provisions of

sub-sections (1) and (2) of Section 30 of the Act do not empower

SEBI to frame the Regulations enabling the Mutual Funds to take

unilateral decisions of winding up of its Schemes. He would,

therefore, submit that there is no power vesting in SEBI to frame

such Regulations providing for winding up of a Scheme of Mutual

Funds. He, would, therefore submit that the Regulations 39 to 41

of the Mutual Funds Regulations are completely ultra vires SEBI

Act.

53

54. Thereafter, referring to the provisions of the Regulation 39,

in particular sub-clause (a) of clause (2), he submitted that it

enables the Trustees to wind up a Scheme, when, in their opinion

an event occures which requires the Scheme to be wound up.

He submitted that this provision is very vague. What is the event

contemplated by sub-clause (a) of clause (2) of Regulation 39 is

not laid down. There are no checks and balances in the said

provisions in the sense that there is no specific provision which

enables SEBI to decide whether the event as contemplated by

sub-clause (a) has indeed happened. He submitted that sub-

clause (a) gives a blanket power to the Trustees for winding up of

Schemes as per their whims and fancies which is detrimental to

the interests of the investors. He submitted that this Regulation

making power is conferred under SEBI Act only with the object of

protecting the interests of the investors. But, the impugned

Regulations provide for Trustees taking arbitrary action, which will

be against the interests of the investors. He submitted that as

per sub-clause (a) of clause (2) of Regulation 39, an unfettered

power has been conferred on the Trustees without authorizing

any statutory authority including SEBI to go into the question as

to whether the opinion of the Trustees regarding happening of 54

any event is lawful and within the four corners of law. He

submitted that in view of clause (a) of Regulation 40, once a

notice as required by sub-clause (3) of Regulation 39 is

published, the Mutual Fund shall cease to carry on any business

activities in respect of the said Scheme. Therefore, from the

moment the notice as contemplated under clause (3) of

Regulation 39 is published, in view of the express provisions of

clause (a) and (c) of Regulation 40, the business of the

concerned Scheme comes to an end and the units cannot be

redeemed by the investors.

55. He submitted that in view of Regulation 41, firstly the

Trustees of the Scheme are required to dispose of the assets of

the Scheme in the best interests of the unit-holders of that

Scheme. The proceeds of sale are required to be first utilized

towards discharge of such liabilities as are due and payable in

respect of the Scheme and after making appropriate provision for

meeting the expenses connected with such winding up, only the

balance if any, remains available for distribution to the unit-

holders in proportion to their respective interest in the assets of

the Scheme. He submitted that the provisions of the said

Regulations are very vague and the same confer unguided 55

powers on the Trustees of a Mutual Fund to take arbitrary

decision and act against the interests of the investors.

56. He invited our attention to the stand taken by SEBI that the

investigation in the form of Forensic Audit is in progress. He

submitted that while responding to the averments in the petition,

SEBI has not even disclosed whether the audit is completed and

what is the outcome of such audit. He submitted that by this

method, by the time audit report is received, the whole thing will

become fait accompli, as the winding up process will be finalised.

57. Thereafter, the learned counsel has taken us through the

offer document in respect of Franklin India Short Term Income

Plan. He pointed out that the risk factors of the Scheme, as

mentioned in clause (2) of the offer document indicate that one of

the risk factor mentioned is that the length of time for settlement

may be affected in the event the Scheme has to meet an

inordinately large number of redemption requests. He pointed

out that clause (2) also mentions that the Trustees have reserved

right to limit or withdraw, sale and/or repurchase/redemption of

the units. He also pointed out to the clause relating to the

fundamental attributes of the Scheme. He submitted that the 56

liquidity provision such as repurchase or redemption is a

fundamental attributes of the Scheme. He pointed out that the

provision regarding the procedure for redemption incorporated in

the offer document mentions that the Mutual Funds may limit the

right to make redemption. He pointed out that there is a provision

for suspension of redemption of units. He pointed out that there

are similar provisions in the offer document of all the six

Schemes. He submitted that the statement of additional

information published by FTMF makes it clear that Templeton

International Inc USA is the sponsor. He also pointed out that

the clause under the caption 'responsibilities and duties of the

Trustees' provides that it is the obligation and duty of the

Trustees to obtain consent of the unit-holders of the Scheme, if

majority of the Directors of the Trustee company decide to wind

up of the Scheme. He pointed out that the offer document

contains a clause consistent with the Regulations which provides

that the Trustees shall be accountable for their acts, and be the

custodian of the funds and property of the Scheme and shall hold

the same in trust for the benefit of the unit-holders in accordance

with SEBI Regulations and the provisions of the trust deed. He

pointed out that there is a specific provision in the offer document 57

regarding the procedure and the manner of winding up. He

submitted that it is specifically stated that the Scheme may be

wound up if there are changes in the capital markets and fiscal

laws or legal system or any event or series of events occurs,

which, in the opinion of the Trustees, requires the Scheme to be

wound up. Thus, he submitted that the contingencies under

which the winding up can take place are specifically mentioned

and, therefore a recourse cannot be taken to sub-clause (a) of

clause (2) of Regulation 39 unless such exigencies as set out in

the offer document are existing.

58. He invited our attention to master circular for Mutual Funds

issued by SEBI in supersession of the earlier circulars and in

particular, in supersession of the master circular dated 14th

September 2016. While referring to clause 1.12 of the said

master circular, he submitted that even the type of a Scheme

such as 'open ended' or 'close ended' and the 'investment

objectives' can be said to be fundamental attributes and even the

redemption is also a fundamental attribute. He pointed out the

provisions under Chapter-4 'risk management system'. He

invited our attention to clause 4.2.3 which lays down that the 58

Mutual Funds shall adopt the risk management practices as a

part of their due diligence exercise. He submitted that as far as

the winding up of the Scheme as provided in sub-clause (a) of

clause (2) of Regulation 39 is concerned, there are no guidelines

in the Regulations or in the master circular.

59. Thereafter, he invited our attention to the circular dated 30th

April 2020 regarding relaxation in compliance with the

requirements pertaining to Mutual Funds. He also invited our

attention to the notification dated 23rd September 2019 by which,

the Securities and Exchange Board of India (Mutual Funds)

(second amendment) Regulation 2019 (for short 'the said

amendment of 2019') was brought into force and submitted that

Regulation 24 was amended with effect from 15th October, 2019

and clause 1A of the 7th Schedule was substituted. The seventh

schedule contains restrictions on investments, as provided in

clause (1) of Regulation 44. Clause 1A which is incorporated in

7th schedule provides that a Mutual Fund Scheme shall not invest

in unlisted debt instruments including commercial papers, except

Government Securities and other money market instruments.

The proviso therein lays down that Mutual Fund Schemes may 59

invest in unlisted non-convertible debentures up to a maximum of

10% of the debt portfolio of the Scheme, subject to conditions

which may be imposed by SEBI.

60. He invited our attention to what is set out in e-mail dated

14th April, 2020 sent by the President of AMC to SEBI and pointed

out that the e-mail sets out the anticipated and continued liquidity

stress for the reasons which are mentioned therein. It is pointed

out in the said e-mail that the present SEBI Regulations permit

suspension of redemptions for a maximum period of 10 working

days in every 90 days. Therefore, a request was made to SEBI to

remove the restriction on the period of suspension of redemption.

He also pointed out that on 20th April, 2020, the Trustees

submitted a proposal to SEBI for winding up of the said Schemes.

From the said proposal letter, he pointed out that the net outflow

for the quarter period of 1st June - 30th September 2019 of the

said Schemes was Rs.1,855.39 crores which jumped to

Rs.8,697.53 crores in the immediate next quarter. He, therefore,

pointed out that the redemption pressure started increasing much

before the onset of COVID 19 pandemic. He pointed out that in

the said proposal letter, the Trustees pointed out the present 60

scenario of the economy and that the said Schemes are

anticipating the continued liquidity stress.

61. The learned Senior Counsel further invited our attention to

the letter dated 14th April, 2020 and pointed out that in the said

letter, the stand of AMC was that the last resort was the

suspension of redemption. He pointed out that within six days

thereafter, by another letter dated 20th April, 2020, the Trustees

informed SEBI that winding up of the Scheme was the only

option. He submitted that within a span of six days, no

development had taken place and the circumstances had not

changed. He pointed out that the impugned notice dated 23rd April

2020 mentions that an event has occurred which requires the

said Schemes to be wound up. But what was the event which

occurred has not been mentioned. Secondly, it is stated that is

the only option to preserve the value for the unit-holders. He

submitted that in fact, on 27th April, 2020, the RBI had announced

Rs.50,000/- crores special liquidity facility for Mutual Funds. He

submitted that in view of this special announcement by the RBI,

there was no reason for the Trustees to proceed further with the

winding up.

61

62. He pointed out that there is no material placed on record

either by AMC or Trustees to show compliance with the

requirements of sub-clause (b) of clause (3) of Regulation 39.

He submitted that there is nothing placed on record to show that

the impugned notices, disclosing the special circumstances for

winding up of the said Schemes were published in two daily

newspapers having circulation all over India, and a vernacular

newspaper circulating at the place where the Mutual Fund is

formed, as provided under sub-clause (b) of clause (3) of

Regulation 39. He submitted that mere notice of winding up of

the said Schemes is not sufficient but the circumstances leading

to the winding up must be disclosed. He pointed out the reply

given by SEBI when information was sought under the Right to

Information Act, 2005. It is stated that SEBI neither confirmed nor

denied the existence of any investigation on any specific matters.

He invited attention of the Court to the statement of objections

filed by SEBI and in particular, paragraph 18 and submitted that

SEBI, instead of acting for the benefit of the unit-holders, seems

to have taken the side of FTMF. He submitted that SEBI has not

at all rebutted the averments made in the writ petition regarding

applicability of sub-clause (c) of clause (15) of Regulation 18 to 62

the process of winding up of the said Schemes. He submitted that

SEBI has virtually abdicated its statutory duty by failing to take

concrete steps/care to protect the interests of the unit-

holders/shareholders. He invited our attention to large number of

articles written in several magazines/news papers which are on

record wherein the large number of violations made by the

Trustees and AMC were pointed out.

63. He submitted that the challenge to the Regulations 39 to 41

is firstly on the ground that the same are ultra vires the statutory

provisions of SEBI Act. Secondly, the same offend the rights

conferred on the unit-holders under Article 14 of the Constitution

of India, as it seek to bring about discrimination and arbitrariness.

He submitted that moreover, there is a violation of fundamental

rights under Article 21 of the Constitution of India as well, which is

vested in the unit-holders.

64. He invited our attention to the decision of the Apex Court in

the case of Securities and Exchange Board of India -vs-

Rakhi Trading Private Limited1 and submitted that as held by

the Apex Court, the main function of SEBI is to make enquiry and

1 (2018) 13 SCC 753 63

investigation and to give appropriate directions to the Trustees

and AMC to promote the orderly and healthy growth of the

securities market. He submitted that on the contrary, the stand

taken by SEBI in its statement of objections is disappointing. The

confidence reposed on it by the unit-holders has been shaken by

such a stand. He invited our attention to another decision of the

Apex Court in the case of Securities and Exchange Board of

India -vs- Akshya Infrastructure Private Limited2 and

submitted that the Apex Court observed that SEBI is the

watchdog of the securities market and its is the guardian to

protect the interest of the depositors/unit-holders.

65. Inviting our attention to the statement of objects and

reasons as well as the preamble of SEBI Act, he submitted that

the main object of enacting SEBI Act is to ensure that SEBI is

under a statutory obligation to protect the interest of the

investors/unit-holders. He invited our attention to the provisions

of Section 11 of SEBI Act, in particular clauses (ba) and (c) of

sub-section (2) as well as sub-section (4). He submitted that

under Section 11-A and 11-B, there are wide powers conferred

on SEBI to issue directions and levy penalty. He submitted that 2 (2014) 11 SCC 112 64

the power of winding up of a Mutual Fund is essentially the power

of SEBI which cannot be delegated. He submitted that only sub-

clause (c) of clause (2) of Regulation 39 is valid and can stand

the test of scrutiny.

66. He referred to another decision of the Apex Court in the

case of Securities and Exchange Board of India -vs- Ajay

Agarwal3 and submitted that as held by the Apex Court, SEBI Act

was enacted to achieve the purpose of promoting the orderly and

healthy growth of securities market and protecting the interests of

the investors/unit-holders. He submitted that SEBI Act is a

welfare legislation and therefore, the paramount duty of the

Courts is to adopt such an interpretation as to further and

strengthen the very object of enacting such law. He invited our

attention to Section 11-C of SEBI Act, and the powers which can

be exercised by SEBI.

67. Coming to sub-clause (a) of clause (2) of Regulation 39, he

submitted that the provisions contained therein are very vague,

inasmuch as, the event contemplated by sub-clause (a) is not

specifically defined anywhere. There is no procedure laid down

3 (2010) 3 SCC 765 65

for arriving at the decision by the Trustees that an event has

indeed occurred as contemplated by sub-clause (a). He

submitted that the unguided power has been conferred on the

Trustees to wind up of a Mutual Fund as per their whims and

fancies. He urged that there are no checks and balances

provided in the Regulations either before or after the formation of

the opinion by the Trustees. He submitted that the Regulations

do not confer any power on SEBI to supervise the exercise of the

power under sub-clause (a) of clause (2) of Regulation 39. He

submitted that Regulation 40 is completely arbitrary, inasmuch

as, it comes into operation from the moment the compliance is

made by the Trustees with clause (3) of Regulation 39. Even if

the action taken under sub-clause (a) of clause (2) of Regulation

39 is illegal and arbitrary, Regulation 40 operates. Coming to

Regulation 41, he submitted that the Scheme is peculiar,

inasmuch as, it provides that either Trustees themselves act as

liquidators or their nominee can act as a liquidator. Thus, the

result is that the Trustees themselves liquidate the Schemes

thereby giving scope for collusive sales. As there is no

machinery available for taking corrective measures, Regulation

41 becomes absolutely arbitrary. Moreover, there are no 66

timelines provided therein. He submitted that the provisions of

Regulations 39 to 41 are manifestly arbitrary and ultra vires the

provisions of SEBI Act. He submitted that the provisions of

Regulation 41 discriminate between two types of investors, as

can be seen from sub-clause (b) of clause (2) of Regulation 41.

The creditors who have invested the money in the Scheme other

than the unit-holders get priority and the unit-holders who hail

from the poor sections of the society are placed in the last in the

list of priorities. He submitted that going by the Scheme of the

said Regulations, the Trustees hold the money of the

investors/unit-holders in trust and for the benefit of the unit-

holders. But Regulation 41 makes their position worst than the

creditors of the Scheme. He invited our attention to the decision

of the Apex Court in the case of Pioneer Urban Land and

Infrastructure Limited and another -vs- Union of India and

others4 . He submitted that in view of the dictum laid down by the

Apex Court in the above case, the provision regarding winding up

of the Scheme has to be treated as arbitrary, inasmuch as, the

choice of cut off date exclusively vests in the Trustees. He

pointed out that from the moment the Trustees specify the cut off

4 (2019) 8 SCC 416 67

date and comply with the clause (3) of Regulation 39, the drastic

provision of Regulation 40 comes into picture which has the effect

of ceasing the entire business activities of the Scheme and from

that date, redemption of units in the Scheme cannot be made.

He relied upon the decision of the Apex Court in the case of LIC

of India and another -vs- Consumer Education and Research

Centre and others5 which in turn relies upon the decision of the

Apex Court rendered in the case of D.S. Nakara and others -vs-

Union of India6. He submitted that the said Regulations have

been framed in exercise of the powers of delegated legislation

which do not enjoy the same immunity which a legislation enjoys.

He relied upon a decision of the Apex Court in the case of Life

Insurance Corporation of India and others -vs- Retired LIC

Officers Association and others7 and submitted that SEBI as a

delegatee ought to have exercised its power to frame the

Regulations within the four corners of the statutory provisions of

SEBI Act. He also invited our attention to a decision of the Apex

5 (1995) 5 SCC 482 6 (1983) 1 SCC 305 7 (2008) 3 SCC 321 68

Court in the case of Indian Express Newspapers (Bombay)

Private Limited and others -vs- Union of India and others8 .

68. He pointed out that the grounds on which a subordinate

legislation can be challenged have been laid down in paragraph-

15 of the decision of the Apex Court in the case of State of Tamil

Nadu and another -vs- P. Krishnamurthy and others9 . He

urged that when provisions of subordinate legislation are directly

inconsistent with the mandatory provisions of the parent statute,

such a subordinate legislation can be held to be invalid. He

submitted that in the present case, the Regulations under

challenge can be held to be invalid, inasmuch as, the same are

manifestly unjust, oppressive or outrageous. Thereafter, the

learned Senior Counsel has taken us through another decision of

the Apex Court in the case of Harakchand Ratanchand Banthia

and others -vs- Union of India and others10. He submitted that

the Regulation 39 of the Mutual Funds Regulations contains the

provisions which are uncertain, directionless, unjustifiable and

unintelligible. He submitted that if a Regulation does not contain

any principles or standard for exercise of power, the same will

8 (1985) 1 SCC 641 9 (2006) 4 SCC 517 10 (1969) 2 SCC 166 69

have to be held as arbitrary. He placed reliance on the decision

of the Apex Court in the case of Air India -vs- Nergesh Meerza

and others11. He would therefore, submit that the impugned

Regulations are violative of fundamental rights conferred under

Article 14 of the Constitution of India. He submitted that the

common man invests his hard earned money in the Mutual Fund

for various good reasons. He submitted that a common man

needs the money for his medical treatment, for education

expenses of his children etc. Ultimately, the right to live with

dignity is also a part of fundamental right of the citizens under

Article 21 of the Constitution of India. He submitted that the

impugned Regulations operate in an arbitrary manner which

infringe the fundamental rights of the unit-holders. Their right of

redemption of their investments in the open ended Schemes is

completely withdrawn in view of Regulations 39 and 40.

69. Now coming to the challenge to the impugned notices of

winding up of the Scheme, he submitted that both the impugned

notices are issued in gross violation of the Mutual Funds

Regulations. He submitted that the impugned notices are

cumulatively malafide and action of issuing notices amounts to 11 (1981) 4 SCC 335 70

colourable exercise of power by the Trustees and AMC. He

submitted that the Trustees have not at all placed on record even

an iota of evidence to show in what manner they formed an

opinion as provided in sub-clause (a) of clause (2) of Regulation

39. He submitted that the Trustees who are expected to

discharge their duties in trust and for the benefit of the unit-

holders have not at all performed their duties. The winding up is

solely on extraneous grounds. He submitted that the decision of

winding up of the Scheme is patently against the interests of the

unit-holders. He invited our attention to clause (15) of Regulation

18 and submitted that sub-clause (c) of clause (15) requires that

when the majority of the Trustees decide to wind up a Scheme,

they are required to obtain the consent of the unit-holders and

they cannot curtail the rights of the unit-holders of redemption

without their consent. He submitted that the Regulations do not

contemplate winding up of a Mutual Fund and in fact, there is no

provision of winding up of Mutual Fund in the said Regulations.

Therefore, the decision of the Trustees for winding up of the said

Schemes is violative of the provisions of sub-clause (c) of clause

(15) of Regulation 18. He submitted that sub-clause (c) of clause

(15) of Regulation 18 and sub-clause (a) of clause (2) of 71

Regulation 39 will have to be harmoniously construed. He

submitted that before the Trustees take action under sub-clause

(a) of clause (2) of Regulation 39, they are required to obtain

consent of the unit-holders, as provided under sub-clause (c) of

clause (15) of Regulation 18. He submitted that if such

interpretation is not accepted, firstly, sub-clause (c) of clause (15)

of Regulation 18 will become redundant. Secondly, if such

interpretation is accepted, it may save the provisions of sub-

clause (a) of clause (2) of Regulation from vice of

unconstitutionary.

70. He submitted that the decision of the Trustees of winding

up of an open ended Scheme which was taken under Regulation

39 takes away the fundamental rights of the unit-holders of

redemption and, therefore, the open ended Scheme becomes a

close ended Scheme. He submitted that it also amounts to

change in the fundamental attributes of the Scheme, as can be

seen from the contents of offer document itself. He also relied

upon the master circular for Mutual Funds issued by SEBI on 10th

July, 2018 and clause 1.12 thereof and submitted that clause

1.12 specifically records that types of Schemes such as 'open

ended' or 'close ended' are fundamental attributes and even the 72

redemption/liquidity is also a fundamental attributes. He,

therefore, submitted that in case of winding up of open ended

Scheme, clause (15A) of Regulation 18 will be attracted, as the

winding up in such case will amounts to change in the

fundamental attributes. He submitted that no change in the

fundamental attributes shall be carried out unless the unit-holders

are given an option to exit at the prevailing Net Asset Value

(NAV) without any exit load. He submitted that therefore, the

condition precedent for initiating action under sub-clause (a) of

clause (2) of Regulation 39 is compliance with the mandatory

requirements of clause (15) and (15A) of Regulation 18.

71. The learned Senior Counsel invited attention of the Court to

paragraph 51 of the statement of objections filed by the 5th and 6th

respondents (AMC and Trustees) and pointed out that in

paragraph 51 it is specifically stated that on 23rd April, 2020, the

Trustees, after careful analysis and review of the

recommendations submitted by the 5th respondent-AMC took a

decision for winding up of the said Schemes. He also pointed

out that what was the recommendation made by AMC has not

been placed on record and even the decision of the Trustees to 73

wind up of the Scheme is not placed on record. He submitted

that even the temporary liquidity crunch can never be a ground

for such a decision. He submitted that the decision of the

Trustees of winding up of the Scheme is an arbitrary decision.

He submitted that not only that the recommendation of AMC is

not placed on record but also the decision of the Trustees is not

placed on record. He stated that even the material showing the

statutory compliance with the provisions of sub-clause (3) of

Regulation 39 has not been placed on record.

72. Now coming to the language used in sub-clause (2) of

Regulation 39, he submitted that the repayment to the unit-

holders is a condition precedent for exercise of the powers

mentioned therein. He submitted that in the present case, no

attempt is made to make repayment to the unit-holders. He relied

upon a decision of the Apex Court in the case of Bhikhubhai

Vithlabhai Patel and others -vs- State of Gujarat and

another12 . He submitted that the decision making process of the

Trustees can be certainly gone into by this Court. He submitted

that the Court is entitled to examine as to whether there was any

material available with the Trustee and whether there were

12 (2008) 4 SCC 144 74

reasons recorded for formation of an opinion by the Trustees.

He submitted that the Court can also look into the question

whether the reasons recorded have any rational relationship with

the formation of an opinion by the Trustees.

73. Thereafter, the learned Senior Counsel has taken us

through the decision of the Apex Court in the case of 63 Moons

Technologies Ltd., (formerly known as financial technologies

India Ltd.,) and others -vs- Union of India and others13. He

also relied upon the decision of the Apex Court in the case of

Barium Chemicals Ltd., and another -vs- Company Law

Board and others14. He relied upon a decision of the Apex

Court in the case of Rampur Distillery Co. Ltd., -vs- Company

Law Board and another15.

74. He submitted that large number of requests for redemption

has nothing to do with the spread of COVID-19. He submitted

that there are several other 'open ended Schemes' of various

Mutual Funds and none of them have gone for winding up due to

COVID-19. He again invited our attention to e-mail dated 14th

13 2019 SCC Online SC 624 14 1966 Supp SCR 311=AIR 1967 SC 295 15 (1969) 2 SCC 774 75

April 2020 of AMC to SEBI in which, AMC has stated that except

for taking recourse of suspension of redemption, there may not

be any other alternative and therefore, a request was made that

suspension of redemption for forty (40) days out of ninety (90)

days be permitted.

75. He relied upon a decision of the Apex Court in the case of

Nirma Industries Limited and another -vs- Securities and

Exchange Board of India16. He drew the attention of the Court

to several paragraphs of the said decision and pointed out that

the case before the Apex Court arose out of the request made by

the appellants for withdrawal of public offer to acquire the equity

shares of a company under SEBI (Substantial Acquisition of

Shares and Takeovers) Regulations, 1997 (for short, the said

Regulations 1997'). The said request was rejected. He invited

our attention to Regulation 27 of the said Regulations 1997 which

is quoted in paragraph 60 which in turn uses the same phrase of

as is used in sub-clause (a) of clause (2) of Regulation 39 of the

Mutual Funds Regulations. It provided that no public offer, once

made, shall be withdrawn except 'in such circumstances', as in

the opinion of the Board (SEBI) 'merits withdrawal'. He pointed

16 (2013) 8 SCC 20 76

out that the Apex Court has accepted the argument that

permitting such withdrawal would lead to encouragement of

unscrupulous elements to speculate in the stock market. He

pointed out that the Apex Court further held that permitting the

appellants therein to withdraw such public offer would deprive the

ordinary shareholders of their valuable right to have an exit option

under the said Regulations. Therefore, the learned Senior

Counsel submitted that in the present case, the right of

redemption of the unit-holders in 'open ended Scheme' is a

valuable right. The learned counsel relied upon a decision of the

Apex Court in the case of Hathising Manufacturing Co. Ltd.,

Ahmedabad and another -vs- Union of India and another17.

76. Thereafter, the learned counsel addressed the Court on the

issue of maintainability of writ petition against AMC, Trustees and

sponsor. He relied upon what is observed in paragraph 1 of the

decision of the Apex Court in the case of B.P. Achala Anand -

vs- S. Appi Reddy and another18 and submitted that the law

never remains static and as social norms and values change, the

laws too will have to be reinterpreted and recast and the task of a

17 AIR 1960 SC 923=(1960) 3 SCR 528 18 (2005) 3 SCC 313 77

Judge is to mould the law so as to serve the needs of the time.

Thereafter, he relied upon a decision of the Apex Court in the

case of Rohtas Industries Ltd and another -vs- Rohtas

Industries Staff Union and others19 and pointed out by relying

upon paragraph 9 of the said decision that the expansive and

extraordinary power of the High Court under Article 226 of the

Constitution of India is of a widest amplitude and the language

goes to indicate that it can be exercised even against a private

individual and is available in a case where another remedy exists.

He pointed out that in the said decision, the Apex Court held that

an award made by an Arbitrator under Section 10-A of the

Industrial Disputes Act, 1947 can be interfered with under Article

226 of the Constitution of India. Thereafter, he relied upon a

decision of the Apex Court in the case of Zee Telefilms Ltd and

another -vs- Union of India and others20 and submitted that

with the opening up of economy and globalization, more and

more governmental functions are being performed and allowed to

be performed by private bodies. When the functions of a body are

identifiable with the State functions, they would be State actors

only in relation thereto. When a body performs governmental

19 (1976) 2 SCC 82 20 (2005) 4 SCC 649 78

functions or quasi-governmental functions as also when the

business of the body is of public importance and is fundamental

for the life of the people, a writ petition will lie against such a

body. Hence, the functioning of the Trustees is akin to public

function which has an element of public interest. He invited our

attention to paragraphs 31 and 33 of the said decision.

77. Coming back to the decision in the case of LIC of India

and another (supra), he submitted that every action of the public

authority or the person acting in public interest or any act that

given rise to public element, should be guided by public interest.

He submitted that the Apex Court has observed that it is the

exercise of the public power or action hedged with public

elements becomes open to challenge. He submitted that the

Trustees have to act in public interest and the entire business of

the Mutual Funds is regulated by SEBI Act and the Mutual Funds

Regulations which is a piece of subordinate legislation. He

heavily relied on the decision of the Apex Court in the case of

Binny Ltd., and another -vs- V. Sadasivan and others21 and

submitted that the Apex Court has reiterated that Article 226 is

worded in such a manner that the writ of mandamus could be 21 (2005) 6 SCC 657 79

issued even against the private authority, provided that such

Private Authority must be discharging a public function and the

decision sought to be corrected or enforced must be in discharge

of a public function.

78. On the issue of maintainability, the learned Senior Counsel

relied upon the decisions in the case of VST Industries Ltd -vs-

VST Industries workers' Union and another22, Ramesh

Ahluwalia -vs- State of Punjab and others23 and Board of

Control for Cricket in India -vs- Cricket Association of Bihar

and others24. In substance, his submission is that the source of

powers vesting in the Trustees is under the Mutual Funds

Regulations. Therefore, he submitted that a public duty is

imposed by the statutory regulations and discharge of all the

obligations of the Trustees towards the unit-holders is a public

function and, therefore, the writ petition seeking mandamus

against Trustees is maintainable.

79. The learned Senior Counsel relied upon a decision of the

learned Single Judge of the Delhi High Court in the case of M/S.

22 (2001) 1 SCC 298 23 (2012) 12 SCC 331 24 (2015) 3 SCC 251 80

Narinder Batra -vs- Union of India25 which reiterates that the

powers of the High Court under Article 226 of the Constitution of

India are plenary and it constitutionally empowers a High Court to

issue writs to any person not only for enforcement of fundamental

rights but also for any purpose.

80. He submitted that the 6th respondent Trustee is appointed

with the prior approval of SEBI, a statutory body, as required by

Regulation 17 of the Mutual Funds Regulations. He submitted

that if the object of establishment of SEBI is considered and the

entire Scheme of the Mutual Funds Regulations is considered,

Section 11-B of SEBI Act will have to be read with Regulation 39

of the Mutual Funds Regulations and, therefore, for the purposes

of issuing directions under Section 11-B of SEBI Act, SEBI will

have to go into the question whether the circumstances, as

contemplated by sub-clause (a) of clause (2) of Regulation 39

indeed existed.

81. He submitted that even the terms of reference given to the

Auditors/Forensic Auditors are not at all placed on record. He

submitted that no one knows what has happened to the Forensic

Audit, as it has not seen the light of the day. He submitted that 25 2009 SCC Online Del 480 81

going by the statement of objections filed by SEBI, it is apparent

that it has refused to perform its statutory duties as the guardian

of the investors/unit-holders. He would, therefore, submit that this

Court will have to issue a writ of mandamus, directing the 4th

respondent (Serious Fraud Investigation Office) to conduct/hold

an investigation/enquiry into the affairs of the AMC and the

Trustees, as there is overwhelming public interest involved. He

submitted that SEBI has not performed its statutory duty and

thereby it has left more than three lakh investors without any

relief. He submitted that as the investors or unit-holders are

having no other statutory remedy provided either under SEBI Act

or under the Mutual Funds Regulations, they have no option but

to approach the Writ Court. He would, therefore, submit that

interference at the hands of this Court is necessary and prays for

allowing the writ petition. Further, he urged that if this Court is of

the view and were to come to the conclusion that no case is

made out to strike down the impugned Mutual Funds Regulations,

the same will have to be read to mean that without the consent of

the unit-holders, as contemplated by sub-clause (c) of clause (15)

of the Regulation 18, recourse to winding up of the Schemes

cannot be taken. He would, therefore, submit that this Court will 82

have to step in and protect the interests of the large number of

investors.

82. In Writ Petition No.8644/2020, Shri. Adithya Sondhi,

learned Senior Counsel had made the submissions on behalf of

the petitioners. Inviting our attention to the Regulation 39 (2) (a)

of the Mutual Funds Regulations he submitted that the condition

precedent for winding up of a Scheme is the formation of opinion

of the Trustees. He submitted that in the present case, AMC has

influenced the decision of the Trustees and in fact, the decision of

the Trustees or formation of the opinion of the Trustees is not

placed on record at all. He urged that it is very clear from the

documents on record that AMC influenced the decision of the

Trustees. He invited the attention of the Court to the impugned

notice dated 23rd April, 2020 and submitted that while arriving at

the decision, the Trustees have relied upon the recommendations

of AMC and such recommendations of AMC are also not placed

on record. He submitted that in the letter to investors issued by

FTMF which is placed on record, it is merely mentioned that in

view of the recommendations of AMC, the Trustees were of the

opinion that an event has occurred which required the Schemes 83

to be wind up. He stated that the role played by AMC in the

decision of the winding up of the Schemes is on record. He

invited our attention to the letter dated 20th April, 2020 of the

Trustees addressed to SEBI and submitted that the net outflow,

as stated in the said letter for the period between first October

2019 to 31st December 2019 shows that there were large number

of requests for redemption during the said period. In the said

quarter, the net outflow was Rs.8,697.53 crores and whereas, in

the immediate earlier quarter, the net outflow was Rs.1,855.39

crores. He would, therefore, submit that the reason for increase

in the demand for redemption was not at all on account of

COVID-19. He pointed out the contents of the circular dated 31st

May, 2016 issued by SEBI which provided for imposing

restrictions on redemption for a specific period of time not

exceeding ten working days in ninety days. He submitted that

FTMF had made a request to extend the said period of 10 days to

40 days.

83. He invited our attention to the statement of objections filed

by AMC and the Trustees and in particular the averments made

at page 69 and submits that the averments made therein would 84

clearly indicate that COVID-19 is not the reason for winding up of

the Scheme.

84. He submitted that the assets of a Scheme of a Mutual Fund

are always held in fiduciary capacity by the Trustees in trust and

for the benefit of the unit-holders. Relying upon the provisions of

Section 47 of the Indian Trusts Act, 1882 (for short 'the said Act

of 1882'), he submitted that the Trustees cannot delegate their

functions. He pointed out that there is a joint statement of

objections filed by AMC and the Trustees and the said joint

statement of objections is affirmed by the Secretary of AMC and

not by the Trustee and from this, an inference can be drawn that

the decision for winding up of the Scheme is influenced by AMC.

He submitted that as there was a demand for redemption, on 22nd

April, 2020, AMC had requested SEBI to grant enhancement of

borrowing limit from 20% to 30% in case of one Scheme and 40%

in relation to the few other Schemes. He pointed out that said

request was immediately granted by SEBI.

85. He invited our attention to the rejoinder filed by the

petitioner and in particular, Annexure-T which is a notice of 26th

extraordinary general meeting of the Trustees convened on 18th 85

June, 2020. He pointed out that it was proposed to pass a

resolution that the Trustees Company shall indemnify all

directors, in connection with liability that any of them may incur in

connection with the winding up of the said Schemes. He

submitted that this conduct of the Trustees is completely contrary

to the provisions of the Mutual Funds Regulations. He invited

our attention to various sub-clauses of the Regulations 16 and 18.

He submitted that very high standard of conduct is expected from

the Trustees and in the present case, there is a clear conflict of

interests between the Trustees and AMC. He invited our attention

to statement of additional information furnished by FTMF and the

email dated 21st May, 2020 addressed by the Grievances

Redressal Mechanism Team to the investors and pointed that in

the said communisation, it was clearly stated that heightened

redemptions were noticed since January, 2020. He submitted

that the said e-mail shows that the decision to winding up of the

said Schemes is by AMC and not by the Trustees. He pointed

out that there was a direct involvement of AMC in the decision

making process.

86. He submitted that there is a material on record to show that

the Trustees have delegated their power to AMC despite the fact 86

that there was no such provision in the Trust Deed. He relied

upon the interpretation put by the Calcutta High Court in the case

of Shri. Mahadeo Jew and another -vs- Balkrishna Vyas and

another26 in particular, what is held in paragraphs 22 and 23.

He submitted that it is well settled law that a Trustees cannot

transfer his duties, powers and obligations to some other body or

person and thereby surrender his own conscience. He submitted

that the Trustees cannot transfer their duties unless it is

specifically provided in the Trust Deed. He submitted that the

draft of the Trust Deed, as contemplated by Mutual Funds

Regulations does not provides for insertion of any such clause in

the trust deed, empowering the Trustees to delegate their powers

to any other person or body. In this behalf, he relied upon a

decision of the Apex Court in the case of Sheikh Abdul Kayum

and others -vs- Mulla Alibhai and others27.

87. He argued that if consent as provided in sub-clause (c) of

clause 18 of Regulation 15 is not read into sub-clause (a) of

clause (2) of Regulation 39, the said sub-clause (c) will become

redundant. He invited our attention to a decision of the

26 AIR 1952 Cal 763 27 AIR 1963 SC 309 87

Constitution Bench of the Apex Court in the case of Hardeep

Singh -vs- State of Punjab and others28. He relied upon what

is held in paragraph 42 onwards and submitted that an

interpretation which leads to the conclusion that a word used by

the legislature is redundant, should be avoided as the

presumption is that the legislature has deliberately and

consciously used the words. He submitted that no word can be

rendered ineffective or purposeless. Thereafter, he relied upon a

decision of the Apex Court in the case of Swedish Match AB

and another -vs- Securities and Exchange Board of India and

another29. He submitted that as held in paragraph 104 of the

said decision, the Mutual Funds Regulations being regulatory in

nature, the intent and object sought to be achieved thereby must

be strictly complied with.

88. He invited our attention to the language used by the

Regulations and submitted that sub-clause (c) of clause (15) of

the Regulation 18 clearly provides that the Trustees are under a

mandate to obtain consent of the unit-holders, when the majority

of the Trustees decide to wind up the Scheme. He submitted

28 (2014) 3 SCC 92 29 (2004) 11 SCC 641 88

that clause (1) of Regulation 41 refers to approval by simple

majority of the unit-holders to the resolution for authorizing the

Trustees or any other person to take steps for winding up of a

Scheme. He submitted that this approval is entirely different

from the consent contemplated in sub-clause (c) of clause (15) of

Regulation 18. He invited our attention to the Statement of

Additional Information published by FTMF which specifically

refers to the procedure for obtaining the consent of the unit-

holders in accordance with the provisions contained in clause

(15) of Regulation 18. He pointed out that it lays down the

manner in which the consent of the unit-holders can be obtained.

He submitted that if the Scheme of the Mutual Funds Regulations

is considered in its true letter and spirit, it is apparent that every

Scheme of a Mutual Fund becomes a trust within a trust. He

pointed out the specific provision of the Regulations that the

Trustees hold the assets of a Scheme in trust and for the benefit

of the unit-holders. He submitted that each Scheme of a Mutual

Fund being a trust, the same cannot be revoked without prior

consent of the beneficiaries/unit-holders, as required under

Section 78 of the Trusts Act. He submitted that winding up of an 89

individual Scheme amounts to revocation of trust which cannot be

made in violation of the statutory provisions of the Trusts Act.

89. He relied upon a decision of the Apex Court in the case of

Commissioner of Income Tax Andhra Pradesh -vs- The

Trustees of H.E.H. The Nizam's Family Trust30. He pointed out

that in the said decision, it was found that one deed of trust

executed by Nizam provided for a number separate and distinct

trusts. He pointed out clause (8) of Regulation 18. The code of

conduct mentioned in the fifth schedule to the Mutual Funds

Regulations clearly supports his case that each Scheme

constitutes a separate trust within the larger trust of a Mutual

Fund. He relied upon the observations made by the Apex Court

in the case of Commissioner of Income Tax, Bombay City I,

Bombay -vs- Manilal Dhanji, Bombay31. He relied upon

another decision of the Apex Court in the case of Sahara India

Real Estate Corporation Limited and others -vs- Securities

and Exchange Board of India and another32 and in particular,

what is held in paragraphs 65 and 70 thereof. He relied upon

the decision of the Madras High Court in the case of

30 (1986) 4 SCC 352 31 AIR 1963 SC 433 32 (2013) 1 SCC 1 90

C.Duraiswami Iyengar and another -vs- The United India Life

Assurance Co. Ltd33. He relied upon the said decision in

support of his submission that each Scheme is a trust within the

larger trust of a Mutual Fund. Thereafter, he invited our attention

to the provisions of the Trusts Act regarding the liabilities of the

Trustees for the breach of trust. He relied upon the decision of a

British Court in the case of Wedderburn -vs- Wedderburn34.

90. Thereafter, going to his next limb of arguments, based on

the provisions contained in clause (15A) of Regulation 18, he

submitted that the offer document clearly lays down what are the

fundamental attributes of the said Schemes. He submitted that

one of the fundamental attributes is the facility of redemption. He

submitted that the moment a notice under clause (3) of

Regulation 39 is published, in view of Regulation 40, the right of

redemption conferred on the unit-holders is taken away and the

Scheme ceases to be an 'open ended Scheme'. He submitted

that therefore, the action initiated by the Trustees for winding up

of the said Schemes clearly amounts to a change in the

fundamental attributes of the said Schemes. The condition

33 AIR 1956 Mad 316 34 1 JAC & W 50 91

precedent for change in fundamental attributes is that the unit-

holders are given an option to exit at the prevailing NAV without

any exit load. He submitted that in view of non-compliance with

the mandatory requirements of clause (15A) of Regulation 18, the

decision of the Trustees to wind up of the said Schemes becomes

completely illegal. He submitted that by virtue of the publication

of a notice under clause (3) of Regulation 39 and in view of what

is provided under Regulation 40, the facility of redemption is

taken away and therefore unit-holders will not get their hard

earned investment back unless the entire procedure under

Regulation 41 and 42 is completed. He submitted that thus, the

action taken under clause 2(a) of Regulation 39 clearly brings

about a change in the fundamental attributes of the said Scheme,

inasmuch as, there is no opportunity for the unit-holders to exit by

taking the NAV after the date of the decision. Therefore, the

decision for winding up of the said Schemes is completely illegal.

91. Learned senior counsel appearing for the petitioner relied

upon a decision of the Delhi High Court in the case of

Mahanagar Telephone Nigam Ltd and etc., -vs- Telecom 92

Regulatory Authority of Delhi and etc.,35 and contended that

what cannot be done directly cannot also be done indirectly.

Relying upon the very same decision, he submitted that the

provisions of Regulation 39 will have to be read harmoniously

with the provisions of clauses (15) and (15A) of Regulation 18.

He submitted that the action of winding up of the Schemes is an

action in rem which should be taken as a last resort. In support

of his submission, he placed reliance on the decisions of the

Apex Court in the case of Hind Overseas Pvt Limited -vs-

Raghunath Prasad Jhunjhunwalla and another36 and Swiss

Ribbons Private Limited and another -vs- Union of India and

others37. He submitted that recourse to winding up of the

Scheme can be taken only as a last resort. For the same

proposition, he relied upon another decision of the Apex Court in

the case of Poineer Urgan Land and Infrastructure Limited

and another -vs- Union of India and others38.

92. He placed reliance on the orders of winding up passed in

relation to certain Mutual Funds where there is a provision for

redemption. However, he accepted that such orders have been 35 2000 SCC Online Del 19 36 (1976) 3 SCC 259 37 (2019) 4 SCC 17 38 (2019) 8 SCC 416 93

passed by SEBI in exercise of its powers under sub-clause (c) of

clause (2) of Regulation 39.

93. He submitted that 32% of the AUM have been invested in

the unlisted documents, which percentage could not have

exceeded 20%. He relied upon a document styled as 'Review of

Risk Management Framework of Liquid Funds, Investment Norms

and Valuation of Money Market and Debt Securities by Mutual

Funds' and submitted that the recommendation in the said

document is that by the end of 31st March, 2020, the minimum

investment in listed non-convertible debentures should be 90%

and unlisted investment should be maximum 10%. He submitted

that on the basis of the said recommendation, SEBI approved the

Prudential norms for investment which provide that the Mutual

Funds can invest in un-listed document of NCDs up to a

maximum of 10% of the debt portfolio. The learned Senior

Counsel relied upon clause (2) of Regulation 25 of the Mutual

Funds Regulations which required AMC to exercise due diligence

and care in all its investment decisions. He submitted that the

said care has not been taken by AMC. He invited our attention to

the annexure to rejoinder filed by the petitioner which is a 94

communication addressed by the President of AMC to the unit-

holders and pointed out that AMC has blamed the pendency of

the present case for the delay. He invited our attention to clause

(v) of paragraph 92 of the statement of objections of AMC and the

Trustees, in which it is specifically contended that the two

Schemes i.e., Franklin India Ultra Short Bond Fund and Franklin

India Dynamic Accrual Fund out of six Schemes are now cash

positive and have ready cash available for distribution. He pointed

out that those two Schemes have the ability to immediately start

paying monies to their investors and the main reason why the

payments are on hold is the ongoing litigation and specifically the

stay order passed by the Gujarat High Court. He submitted that

on the one hand, the Trustees took a decision to wind up the said

Schemes and on the other hand, they continued to request SEBI

for extension of limit of borrowing. The learned counsel has

invited our attention to the fact that the progress of the Forensic

Audit of the said Schemes is not brought on record and in fact, in

the statement of objections, SEBI has categorically stated that it

is an internal document of SEBI. Referring to the averments

made in paragraphs 29 and 30 of the statement of objections filed

by the Trustees and AMC, he submitted that there is no clarity as 95

to whether the Forensic Audit is ordered or an inspection has

been ordered. He submitted that SEBI must explain and must

place before this Court the report of the Forensic Audit.

94. About the issue of maintainability, the learned Senior

Counsel relied upon a decision of the Apex Court in the case of

Marwari Balika Vidyalaya -vs- Asha Srivastava and others39.

He submitted that the jurisdiction to issue writs under Article 226

of the Constitution of India is not confined only to the statutory

agencies/authorities and instrumentalities of the State. The

directions can be issued to any other person or body, performing

a public duty. He submitted that if the nature of the duties

imposed on a particular body is in the nature of public duties, a

writ of mandamus can be issued against the said body. On the

same proposition, he also relied upon the decisions of the

Calcutta High Court in the case of Kotak Mahindra Bank

Limited -vs- Hindustan National Glass and Industries Limited

and others40 and in the case of The Peerless General Finance

and Investment Co. Ltd and another -vs- Canara Bank and

39 2019 SCC Online SC 408 40 2009 SCC Online Cal 2112=(2013) 7 SCC 369 96

others41. The learned senior counsel, therefore, submitted that

intervention at the hands of this Court is necessary for protection

of the unit-holders. He submitted that this Court, while exercising

jurisdiction under Article 226 of the Constitution of India has

power and jurisdiction to go into the merits of the decision of the

Trustees. Further, he submitted that as there are no other

remedies available to the unit-holders except to invoke the

jurisdiction of this Court under Article 226 of the Constitution of

India, the petitioners are before this Court.

95. Now we come to the submissions made by Shri Nithyesh

Nataraj, the learned counsel appearing for the petitioners in Writ

Petition No.8748/2020. He taken us through the Mutual Funds

Regulations and in particular, Regulations 11 and 11B. He

pointed out that AMC had indulged in making the investments

which are not prudent, as 30% of the investments were made in

an illiquid and un-listed documents. He submitted that it was

imprudent conduct on the part of AMC to contend that requests

for large-scale redemption were due to COVID-19, inasmuch as

the same started from October, 2019. He submitted that the

Trustees were under an obligation to act in trust and for the

41 2011 SCC Online Cal 2913 97

benefit of the unit-holders, but they have failed to do so. From

the joint statement of objections filed by the Trustees and AMC, it

is crystal clear that the Trustees have not acted independently

and therefore, the decision of the Trustees was influenced by

AMC and hence, an adverse inference is required to be drawn.

96. By pointing out the averments made in paragraphs 66 and

67 of the counter affidavit jointly filed by the Trustees and AMC,

he submitted that after 23rd April, 2020, the loan amounts of the

creditors have been illegally cleared, which could not have been

done in the teeth of Regulation 40. He submitted that on 24th

April, 2020, redemptions were made contrary to Regulation 40,

inasmuch as, after the publication of notice under sub-clause (3)

of Regulation 39, no redemption could have been made. He

submitted that mandate of clause (15A) of Regulation 18 was not

complied with by obtaining consent of the unit-holders or by

providing them exit option. The learned counsel invited our

attention to Section 11 of SEBI Act and in particular, sub-section

(1) which lays down that the duty of the Board is to protect the

interests of the investors in securities and to take measures for

that purpose. He invited our attention to sub-section (4) of 98 Section 11 which confers wide powers on SEBI to take various

measures provided therein either pending investigation/inquiry or

on completion of such investigation or inquiry. He also invited

our attention to Section 11B which confers wide power on SEBI

to issue directions to any company, in respect of the matters

specified in Section 11A.

97. He submitted that in view of clause (2) of Regulation 44, a

Mutual Fund is not entitled to borrow more than 20% of the net

assets of the Scheme and the duration of such a borrowing

cannot exceed a period of more than six months. He submitted

that SEBI does not have power to enhance the limit of borrowing

to more than 20%. He pointed out that notwithstanding the said

express provision, SEBI has permitted borrowing in excess of

20% by its letter dated 22nd April, 2020.

98. The learned counsel invited our attention to the statement

of objections filed by AMC and Trustees and in particular, the

contentions raised that in case of two Schemes out of six, all

borrowings of these Schemes have been paid off in accordance

with Regulation 41. He submitted that in the teeth of Regulation

40, the borrowings could not have been paid off by AMC. He 99

pointed out from the document No.181 issued by AMC on 10th

July, 2020 which records that even on 24th April 2020, certain

redemptions have been made.

99. He submitted that clause (15A) of Regulation 18 is also

attracted, inasmuch as, winding up of the Schemes amounts to

change in the fundamental attributes of any Scheme. Thereafter,

he invited our attention to Section 78 of the Trusts Act which lays

down that a Trust cannot be revoked without the consent of the

beneficiaries. He submitted that the unit-holders are the

beneficiaries of the Trust and hence, the principles of natural

justice will apply, as the rights of several unit-holders have been

affected. He relied upon the annexures to the order of the Ministry

of Home Affairs dated 24th March, 2020 and submitted that action

of the Trustees of winding up could not have been taken in the

teeth of the said guidelines, as all commercial establishments

were ordered to remain closed.

100. He submitted that COVID-19 is not at all a ground for

winding up and in any case, the Trustees could have taken a

decision for postponement of redemption for meeting the

exigency created large scale requests for redemption. 100

101. He submitted that the relationship between the unit-holders

and Trustees is that of principal and agents and, therefore, the

provisions of Section 211 and 212 of the Indian Contract Act,

1872 will apply. He submitted that the stand of SEBI regarding

Forensic Audit is also confusing. He stated that it is not clear

whether it is an investigation or it is an audit. He invited our

attention to clauses 4A, 17 and 18 of Regulation 18 and

submitted that compliance with the said statutory provisions in

respect of these Schemes has not been made and no material

has been placed on record in that behalf. He submitted that

what action was taken after 1st October, 2019 is not placed on

record.

102. He submitted that on the issue of maintainability, a very

elitist stand has been taken by SEBI. He submitted that Rupees

twenty five lakhs crores is the total investment made in the Mutual

Funds and therefore, element of public interest is certainly

involved.

103. Now turning to the Criminal Petition No.3206/2020, he

submitted that the first respondent, the Economic Offence Wing 101

of SEBI is a police station within the meaning of sub-clause (s) of

Section (2) of the Code of Criminal Procedure, 1973 (for short,

'the Cr.P.C'). He pointed out that in the complaint made by the

petitioner, the allegation against AMC and the Trustees and their

Directors was of commission of the offences under the provisions

of the Tamil Nadu Protection of Interest of Investors (in financial

establishments) Act, 1970 (for short, 'the Tamil Nadu Act') as well

as the offences punishable under the provisions of the Indian

Penal Code. He submitted that despite such a complaint, no

action was taken by the respondents on the basis of the said

complaint. We must note here that during the course of hearing,

it was pointed out that on the basis of the complaint of the

petitioner, a First Information Report has been registered.

Therefore this petition has been disposed of by passing a

separate order.

SUBMISSIONS OF THIRD PARTY-APPLICANTS:

104. The learned counsel appearing for the applicants in I.A.III

of 2020 in Writ Petition No.8644 of 2020 urged that this is a case

of complete violation of the Mutual Funds Regulations. He

invited our attention to Section 15JB of SEBI Act as well as 102 Section 15-I thereof. He submitted that considering the Scheme

of SEBI Act, there is no remedy available to the investors even

after adjudication is made by adjudicating authority in accordance

with the provisions of Section 15-I of SEBI Act and the unit-

holders have no other remedy except approaching a Writ Court.

He submitted that on 7th May 2020, a direction was issued by

SEBI to the FTMF to pay the amounts to the unit-holders, but the

said direction has not been complied with. He would urge that

SEBI has not acted in the best interests of the investors.

Though, he relied upon additional affidavit filed by the intervener,

he was not permitted to rely upon the same, as it has been filed

without permission of the Court. He submitted that clause (15A)

of Regulation 18 will have to be implemented by affording an

opportunity to the unit-holders to exercise an option to exit by

taking the Net Asset Value without any exit load. He submitted

that the liquidity issue can never be a ground under sub-clause

(a) of clause (2) of Regulation 39 to initiate winding up of the

Scheme. He submitted that sub-clause (a) of clause (2) of

Regulation 39 will have to be read with clauses (15) and (15A) of

Regulation 18. He submitted that the interplay between

Regulation 39 and clause 15 of Regulation 18 is very important. 103

105. He submitted that the investment of the unit-holders does

not become asset of either Trustees or AMC. He submitted that

the investment is held by the Trustees in fiduciary capacity in trust

and for the benefit of the unit-holders. He submitted that the

Scheme is founded on trust. He placed reliance on a decision of

the Apex Court in the case Charan Lal Sahu -vs- Union of

India42. He has also relied upon Shafin Jahan vs. Asokan K.M.

and others.43 He invoked parens patriae doctrine. He submitted

that this Court as a constitutional Court has to act as parens

patriae and protect the investors of FTMF.

106. The learned counsel appearing for the applicants in IA No. I

and II of 2020 in writ petition No.8748/2020 made submissions

contending that there is no enquiry made by SEBI about the

legality of the decision of the Trustees. He also invited our

attention to various provisions of SEBI Act. He submitted that

sub-clause (c) of clause (15) of Regulation 18 will apply to

winding up of the Scheme under sub-clause (a) of clause (2) of

Regulation 39 and, therefore, without the consent of the unit-

holders, the winding up could not have proceeded. He also

42 (1990) 1 SCC 613 43 (2018) 16 SCC 368 104

pointed out the correspondence between AMC and SEBI and

Trustees and SEBI.

SUBMISSIONS OF SEBI

107. Shri. Arvind Datar, learned senior counsel appearing for

SEBI also made detailed submissions. At the outset, he

submitted that the criticism made by the petitioners about the

inaction on the part of SEBI is un-called for, inasmuch as, every

possible action which could be taken under SEBI Act and the

Mutual Funds Regulations has been initiated by SEBI. He

submitted that in the year 2011, the total investment in the Mutual

Funds was of Rupees ten lakh crores which has gone up to

Rupees twenty seven lakh crores in the year 2020. He

submitted that more than 2000 Mutual Funds are in existence and

that SEBI's role is not confined only to Mutual Funds but it

extends to all kinds of securities within the meaning of Section 2

of the Securities Contracts (Regulation) Act, 1956. He submitted

that the role played by SEBI is being examined in these cases

only as regards six Schemes run by one of the several Mutual

Funds.

105

108. While answering the queries made by the Court, he

submitted that the Forensic Auditors have submitted an interim

report on 3rd August, 2020 which has been furnished to AMC and

Trustees. He submitted that after reply submitted by AMC and

Trustees is considered by the Auditors, final report will be

submitted. He submitted that after the letter dated 20th April

2020 was forwarded by the Trustees, SEBI had received a

request on 22nd April 2020 from AMC for enhancement of

borrowing limit stipulated by clause (2) of Regulation 44 of the

Mutual Funds Regulations. He pointed out that in case of three

Schemes, the request was acceded to by SEBI which was

communicated by a letter dated 22nd April 2020. As regards

compliance of clause (3) of Regulation 39, he submitted that

necessary compliance will have to be shown by the Trustees.

On a specific query made by the Court, he stated that though for

taking action under sub-clause (a) of clause (2) of Regulation 39,

a resolution has to be passed by the Board of Directors of the

Trustees, SEBI is not aware whether in this case, any such

resolution has been passed. He submitted that after the decision

was taken by the Trustees, action has been taken by SEBI

starting investigation in accordance with the regulation 61 by 106

ordering a Forensic Audit. He submitted that further action will

be taken after receipt of the final Forensic Audit report.

109. Thereafter, he dealt with the arguments addressed by the

petitioners regarding applicability of clause 15 (c) of Regulation

18 to sub-clause (a) of clause (2) of Regulation 39. He submitted

that Regulations 39 to 42 form a part of Chapter-V which deal

with the winding up of the Schemes of Mutual Fund and

Regulation 18 which is a part of Chapter-III of the Regulations

deals with constitution and management of Mutual Fund and

obligations of the Trustees etc. He submitted that action sub-

clause (a) of clause (2) of Regulation 39 does not require consent

of the unit-holders. He urged that whenever consent of unit-

holders is required, the Regulations specifically provide for it. He

submitted that sub-clause (c) of clause (15) of Regulation 18

comes into operation only after the Trustees decide that a

Scheme should be wound up in accordance with sub-clause (a)

of clause (2) of Regulation 39. He pointed out that only under

sub-clause (1) of Regulation 41, an approval of the unit-holders

by simple majority is contemplated for authorising the Trustees or

any other person to take steps for winding up of the Scheme. He 107

submitted that consent referred in sub-clause (c) of clause (15) of

Regulation 18 is referable to approval under clause (1) of

Regulation 41.

110. He submitted that clause 15A of Regulation 18 will have no

application to winding up, as it applies only when the Trustees

want to make a change in the fundamental attributes of any

Schemes or any other change which amounts to the modification

of the Scheme and affects the interest of the unit-holders. He

urged that clause 15A of Regulation 18 operates in a totally

different field.

111. He submitted that the Trustees always act in fiduciary

capacity and therefore, they are in best position to take a decision

on the existence of circumstance which requires winding up of the

Scheme. He submitted that if the consent of the unit-holders is

read into sub-clause (a) of clause (2) of Regulation 39, it will have

disastrous consequences. He submitted that in a given case, if

the Trustees find that there are large scale requests for

redemption by unit-holders which cannot be met without making

distress sale of the assets, the Trustees will be well within their

power to take a decision for winding up of a Scheme. He 108

submitted that if such freedom is not given to the Trustees, they

will have to sell the assets by making a distress sale which will

affect the capacity of AMC to borrow and ultimately NAV will be

substantially reduced thereby causing prejudice to the unit-

holders. He submitted that the investment in Mutual Fund is

always subject to risks and when the unit-holders make

investment by purchasing units, they always take a risk. He

submitted that in case, the requirement of consent is read in sub-

clause (a) of clause (2) of Regulation 39, if the majority of the

unit-holders decline to grant consent, there will be no option but

to make a distress sale of the assets of the Scheme to meet the

demand for redemption and the same will cause prejudice to the

other unit-holders. He submitted that sub-clause (b) of clause (2)

of Regulation 39 contains specific provision where seventy-five

percent of the unit-holders can decide to wind up a Scheme and if

interpretation put to sub-clause (c) of clause (15) of Regulation 18

is accepted, even 50% of the unit-holders will be able to prevent

the Trustees from the winding up a Scheme. He invited our

attention to the provisions of Section 29 of the Trusts Act which

always empowers the Trustees to do the acts which are 109

reasonable for protection of the trust property and for protection

or support of the beneficiaries.

112. Now coming to the writ petition filed in the High Court at

Madras, he submitted that the said Public Interest Litigation is not

maintainable. He submitted that the unit-holders are not in a

helpless position and they can always approach the Court of law

for redressal of their grievances. He placed reliance on a

decision of the Apex Court in the case of S.P. Gupta -vs- Union

of India and another44 and in particular, paragraph 17 of the said

decision in support of his plea that Public Interest Litigation is not

maintainable. He submitted that the Public Interest Litigation

should be dismissed with costs. He submitted that while dealing

with the case of the investors, it must be also remembered that

investment in market is always involves a risk and, therefore, the

investment made in the Mutual Funds is also subject to risks. He

submitted that if the entire Scheme of the Mutual Funds, as

envisaged by the Mutual Funds Regulations is considered, the

unit-holders are not entitled to refund of their investment and they

will get the returns as per the provisions of the Scheme. He

submitted that under the Mutual Funds Regulations, SEBI is the 44 AIR 1982 SC 149 110

regulator and in fact, the running of a Mutual Fund is highly

regulated. He submitted that SEBI had initiated action by ordering

Forensic Audit and after receiving the final report, SEBI is bound

to take action in accordance with the Regulations and SEBI Act.

He submitted that a perusal of the said Regulations will show that

the same were brought into force with effect from 9th December,

1996 and thereafter, several amendments thereto have been

made from time to time. Inviting our attention to the averments

made in the writ petitions filed in Delhi and Madras High Courts,

he submitted that there are no allegations that SEBI has not done

its statutory duties under the Regulations. He submitted that there

are no specific allegations in the writ petitions that SEBI has not

abided by a particular Regulation and therefore, a writ of

mandamus cannot be issued against SEBI. He relied upon

various paragraphs of the statement of objections filed by SEBI

dealing with the actions taken by SEBI. He submitted that in

case of Mutual Funds, the process of investment to be made by

AMC is highly regulated.

113. He submitted that the Court will have to adopt an approach

which will ensure that the remedy is not worse than the disease. 111

He submitted that there is a vast difference between winding up

of the Schemes of a Mutual Fund and winding up of a company.

In case of winding up of a company, there are statutory provisions

which require the involvement of the shareholders in the process

of winding up. But, there is no such requirement under the Mutual

Funds Regulations in case of the unit-holders. In support of his

contention, he relied upon a decision of the Apex Court in the

case of Poineer Urgan Land and Infrastructure Limited and

another -vs- Union of India and others and also another

decision of the Apex Court in the case of Swiss Ribbon Private

Limited and another -vs- Union of India and others which are

referred earlier.

114. He submitted that SEBI is willing to produce a copy of

report submitted by the Forensic Auditor on 3rd August 2020. He,

however, submitted that it is not a final report and the

investigation by the Forensic Auditor is not yet completed. He

states that the response of AMC and Trustees has been sought

for and after considering their response, final report will be

submitted by the Forensic Auditor. He submitted that when the

investigation is not yet completed, if the report submitted on 3rd

August, 2020 is made public, it will prejudice the investigation. 112

He submitted that there are annexures consisting of more than

one thousand pages to the said report and when the Forensic

Auditor is yet to complete the investigation, it will be improper for

SEBI to disclose its contents. He submitted that at this stage, no

conclusion can be drawn on the basis of the said report. He

submitted that he has no objection if for the purposes of deciding

this contention raised by SEBI, a copy of the report can be made

available to this Court. He submitted that the Court can always

go through the report which will be filed in the Court in a sealed

cover without making it public. He urged that the Court can go

through the report and decide whether it should be made

available to the petitioners. At this stage, learned Senior Counsel

appearing for the petitioners in Delhi petition submitted that the

report cannot be withheld in such a manner from the petitioners.

Shri. Janak Dwarakadas, the learned Senior Counsel appearing

for AMC and the Trustees submitted that he has a strong

objection for SEBI filing the report in sealed cover and for this

Court going through the said report even for a limited purposes

of deciding the contention of SEBI that under any circumstances,

the said report should not be made public.

113

115. Shri. Arvind Datar, learned Senior counsel relied upon a

decision of the Apex Court in the case of G. Veerappa Pillai,

Proprietor, Sathi Vilas Bus Service, Porayar, Tanjore District,

Madras -vs- Raman and Raman Limited, Kumbakonam,

Tanjore District and three others45. He also relied upon a

decision of the Apex Court in the case of Board of Control for

Cricket in India -vs- Cricket Association of Bihar and

others46. He submitted that no reliefs can be granted in these writ

petitions as against SEBI and prays for dismissal of the writ

petitions. Lastly, he submitted that further submissions will be

canvassed by Shri. Tushar Mehta, learned Solicitor General of

India, on the prayer for challenging the constitutional validity of

the provisions of Regulations 39 to 42 of the Mutual Funds

Regulations.

SUBMISSIONS OF AMC AND TRUSTEES

116. Shri. Harish Salve, learned Senior Counsel appearing for

AMC and the Trustees has made detailed submissions. Firstly,

he submitted that on instructions, he is making a statement that

his clients have no objection, if SEBI appoints an independent

45 AIR 1952 SC 192 46 (2014) 7 SCC 383 114

agency to conduct the process of winding up of said Schemes in

accordance with the provisions of Regulation 41 and that AMC

and the Trustees will co-operate with such agency appointed by

SEBI. He submitted that SEBI has powers under Section 11B of

the SEBI Act to stop the process of winding up commenced

pursuant to sub-clause (a) of clause (2) of Regulation 39. He

submitted that in any case, a Mutual Fund is an intermediary, as

contemplated by Section 11 (2) (b) of the SEBI Act. He relied

upon the provisions of sub-section (2) of Section 2 of the SEBI

Act.

117. Shri. Harish Salve, learned Senior Counsel submitted that

the writ petitions filed by the petitioners are based on

misconception. A Mutual Fund is not a company which is holding

the deposits of the investors. He submitted that on the one

hand, the unit-holders have strong objection to the actions of the

Trustees and AMC and on the other hand, the unit-holders want

to compel AMC and the Trustees to continue to run the Schemes.

He submitted that every unit-holder has taken a risk, while

making an investment in the Mutual Fund which is always subject

to market risks. He submitted that unit-holders are not in a 115

position of either customers of a bank or shareholders of a

company.

118. The learned Senior Counsel has invited our attention to

various Regulations and submitted that all the actions done by

AMC and the Trustees are in private domain. He invited our

attention to Regulation 38 which specifically lays down that no

guaranteed returns can be provided to unit-holders in a Scheme

unless such returns are fully guaranteed by the sponsor or AMC

and unless the name of the person who will guarantee the returns

and the manner in which the guarantee is to be met is specifically

mentioned in the offer document. He submitted that unless the

Scheme is governed by Regulation 38 where the returns are

guaranteed, there is an inherent risk in the Mutual Fund

transactions.

119. He submitted that the nature of winding up of a Scheme

and the nature of winding up of a company are completely

different and in fact, winding up of a Scheme is not in that sense

winding up, but it is winding down. On the interplay between

clauses 15 (c) and 15A of Regulation 18 and sub-clause (a) of

clause (2) of Regulation 39, he heavily relied upon sub-clause (d) 116

of clause (15) of Regulation 18 which was omitted by an

amendment with effect from 22nd May 2000. He submitted that

sub-clause (c) of clause (15) of Regulation 18 operates post the

decision of winding up and therefore, the consent mentioned in

sub-clause (c) has a direct co-relation with the approval under

clause (1) of Regulation 41. He submitted that there is no

difference between the word approval and consent. He urged

that clause (15A) of Regulation 18 operates in a different sphere.

120. He reiterated that the decision of winding up under

Regulation 39 (2) (a) is always subject to power to issue

directions by SEBI under Section 11B of SEBI Act. He submitted

that after sending the letter dated 20th April 2020, even if an

indication would have been given by SEBI that the Trustee should

hold their hands, the Trustees would not have taken action of

winding up. However, that has not been done. He stated that he

is not disputing the existence of power vesting in SEBI even to

stop the process of winding up on the basis of the action initiated

by the Trustees in accordance with the Regulation 39 (2) (a). He

stated that this Court or SEBI may appoint any agency for

conducting the process of winding up and that the Trustees and 117

AMC will cooperate with such agency appointed either by SEBI or

by the Court.

121. He submitted that requests for redemption received by the

said Schemes on 23rd April 2020 had to be honoured by AMC,

inasmuch as, payment redemption amount has to be made within

a period of ten days from the date of receipt of redemption

request. On a query made by the Court, he stated that

borrowing made after 23rd April 2020 is either for the purpose of

payment of redemption or for clearing overdue loan. He

submitted that even the investments made by the Mutual Fund

are regulated under Regulations 43 and 44. He invited our

attention to key information memorandum of Franklin India Credit

Risk Fund, which is one of the Schemes under winding up. He

pointed out that in the investment objectives of the said Scheme

specifically stated therein, it is clearly stated that the investments

will be made in AA and below rated corporate bonds (excluding

AA+ rated corporate bonds). He stated that even on page two of

the said document, this is reiterated. He pointed out from the

same document that the investors were fully aware about the risk

factors involved in the investment. He submitted that considering 118

the investment objective, the unit-holders were fully aware of the

risks involved in the investment.

122. He invited our attention to e-mail sent by AMC to SEBI on

14th April 2020. The said e-mail contains various factual

statements. It is pointed out in the said e-mail that though RBI

stepped in with a package of rate cuts and Targeted Long-Term

Repo Operations (TLTRO), the same created liquidity only for

public sector undertakings and the liquid private sector issuers in

the industry. He pointed out that in the e-mail it was specifically

mentioned that the moratorium will create significant stress on

non-banking financial corporations. It was mentioned in the said

e-mail that in case of said Schemes, the maturities of Rs.4,500/-

crores were stipulated per quarter and continued liquidity stress

was anticipated for the reasons stated in the said e-mail. He

pointed out that it was stated therein that in view of the circular

dated 1st October 2019 issued by SEBI, unlisted convertible

debentures become illiquid and untradeable. He pointed out that

a request was made by e-mail to grant permission to the Mutual

Funds to trade unlisted papers for a temporary period of one

year. It was also requested that non-banking financial 119

corporations be permitted to avail moratorium on payments to

banks. It was requested that SEBI may consider of removing

restrictions by allowing postponement of redemption for forty days

out of every ninety days. He pointed out that a request was also

made through e-mail to SEBI to take proactive and urgent steps

to help the industry. He submitted that there was no response

from SEBI to this e-mail. He submitted that SEBI did not come

out with any concrete steps, in response to the said e-mail. He

pointed out that on 20th April 2020, the Trustees had sent a

detailed letter to the whole time member/director of SEBI by

pointing out the facts and figures in respect of the seven

Schemes. He pointed out that the figures of net outflow were

stated and it was specifically stated in the letter that two Schemes

out of six had only a couple of days' worth of liquidity remaining

and the third Scheme will exhaust its borrowing limit in five days.

He pointed out that the present scenario of economic was also

set out in the said letter. He submitted that in the said detailed

letter, the options considered by the Trustees to meet the

situation such as suspension of redemption and/or distress sale

were also mentioned. He pointed out that the letter records that

there will be no other option except to go for winding up of the 120

Schemes. He stated that in fact, by the said letter, guidance of

SEBI was sought and forbearance was also sought. A

permission was sought for winding up of the said Schemes

mentioned in the said letter. He urged that there was no

response from SEBI to the said letter and in fact, SEBI did not

react at all. He pointed out that through the e-mail and the letter,

SEBI was informed about the impact on the Mutual Fund

operations of pandemic of COVID-19. He submitted that the

details and figures given in the letter dated 20th April, 2020 clearly

show that the decision of the Trustees to wind up the said

Schemes is not based only on what had happened due to

COVID-19, but it is based on prognosis. He invited our attention

to the letter dated 30th March, 2020 addressed by the

Associations of Mutual Funds in India. He submitted that the

Association, by the said letter, brought to the notice of the

Executive Director of SEBI the impact on Mutual Funds

operations on account of COVID-19 pandemic and requested

SEBI to relax certain guidelines applicable to Mutual Funds. By

the said letter, the Association sought exemption from the

guidelines issued by SEBI on 30th September 2020 effective from 121

1st October 2020. He submitted that SEBI did not respond to the

said request.

123. He urged that the consent as contemplated by Regulation

18 (15) (c) cannot be read into Regulation 39 (2) (a). He urged

that if consent of the unit-holders is considered as a requirement

under Regulation 39 (2) (a), the difference between Regulation 39

(2) (a) and Regulation 39 (2) (b) will be completely obliterated.

Moreover, Regulation 40 does not provide that the restrictions

thereunder will be triggered only on the unit-holders consenting

for winding up as contemplated by sub-clause (a) of clause (2) of

Regulation 39. In fact, the restrictions imposed by Regulation 40

trigger immediately after compliance with clause (3) of

Regulation 39. He submitted that sub-clause (d) of clause (15) of

Regulation 18 which provided for consent of the unit-holders has

been deleted. He submitted that superimposition of sub-clause (c)

of clause (15) of Regulation 18 on sub-clause (a) of clause (2) of

Regulation 39 is not at all called for. He submitted that sub-

clause (c) of clause (15) of Regulation 18 refers to a decision

already taken by the Trustees for winding up and therefore, what

is contemplated by sub-clause (c) of clause (15) of Regulation 18 122

is nothing but an approval under clause (1) Regulation 41. He

submitted that there is no difference between the meaning of the

words 'approval' and 'consent'. He submitted that if textual

interpretation is given to the provisions of the Regulations, there

is no scope to read the word 'consent' into the provisions of sub-

clause (a) of clause (2) of Regulation 39 and in fact, the 'consent'

as contemplated by sub-clause (c) of clause (15) of Regulation 18

is the approval contemplated under clause (1) of Regulation 41.

124. He invited our attention to the minutes of the meeting dated

23rd April 2020. He submitted that none of the petitioners had

called upon the Trustees to produce the said minutes and in fact,

in none of the writ petitions, there is a challenge to the decision

taken by the Board of Trustees on 23rd April 2020. He submitted

that the writ petition filed as a public interest litigation in Madras

High Court is not maintainable, especially when the unit-holders

who are directly affected have filed petitions in Delhi and Gujarath

High Courts. He submitted that the petitions filed before the

Delhi and Gujarat High Courts are not public interest litigations

and therefore, the proceedings are adversarial in nature. Hence,

the normal rules of pleadings will apply.

123

125. He submitted that essentially, the Court is dealing with the

contract between the unit-holders and the Mutual Fund which is a

regulated contract which can be put to an end to as a contract,

but the right to terminate the contract is constricted by

Regulations 39 to 41. He submitted that the contractual

relationship between the Trustees and the unit-holders is strictly

regulated by the said Regulations. He submitted that if the

prayer sought in clause-A in the petition filed before the Delhi

High Court (WP.No.8545/2020) is granted, the said contractual

relationship will become unregulated.

126. He submitted that each Scheme of a Mutual Fund is a

separate trust. The reason is that the assets of Schemes run by

the same Mutual Fund are not pooled. He submitted that the

assets of different Schemes run by the Mutual Funds are like

watertight compartments. He submitted that under none of the

Schemes, the returns are guaranteed. He submitted that even

after winding up of the Schemes, the provisions regarding

disclosure of half yearly reports and annual reports will continue

to be applicable till the process of winding up is completed. 124

127. He requested the Court to again go through the figures

reflected in the letter dated 20th April 2020 and submitted that if

the figures of AUM (Assets Under Management) of the Schemes

as on 1st March 2020 are considered, it is apparent that between

1st March, 2020 till 20th April 2020, the redemption amounts are

1/3rd or more than 1/3rd of AUM as on 1st March, 2020. He

invited our attention to the provisions of the Trusts Act and

submitted that winding up of a Scheme does not amount to

revocation of the Trust and in fact, it is an execution of the Trust.

128. He, submitted that the prayer made in the writ petition for

investigation will not survive for consideration, inasmuch as, the

Forensic Auditor has been appointed by SEBI to investigate in

accordance with Regulation 66.

129. He, thereafter, invited our attention to a written note by

which, a reference has been made to the factual allegations in the

petitions filed in three High Courts. He submitted that the

allegations of violation of Mutual Funds Regulations are not at all

substantiated by the petitioners. Thereafter, he invited our

attention to relevant allegations in the petitions and the response

of AMC and the Trustees in their statement of objections. He 125

submitted that each and every factual allegation has been

specifically dealt with in the statement of objections filed by AMC

and the Trustees. He pointed out that the pleadings made by

AMC and the Trustees in the petition filed before the Delhi High

Court will show that the Assets Under the Management of the

Schemes were to the extent of Rs.52,000 crores in October, 2019

which have been reduced to Rs.25,000 crores as on 23rd April

2020.

ARGUMENTS OF SEBI ON CHALLENGE TO VALIDITY OF REGULATIONS 39 TO 41:

130. Shri. Tushar Mehta, the learned Solicitor General of India

made a detailed submissions on behalf of SEBI essentially on the

challenge to the constitutional validity of the Regulations 39 to 41.

While inviting attention of the Court to Regulations 39 to 41, he

dealt with the arguments canvassed by the petitioners that it is

the duty of SEBI to adjudicate on the correctness of the decision

of the Trustees for winding up of a Scheme under sub-clause (a)

of clause (2) of Regulation 39. He submitted that as provided in

sub-clause (b) of clause (2) of Regulation 39, seventy five percent

(75%) of the unit-holders can take a decision to wind up the

Scheme and hence, if the contention of the petitioners is 126

accepted, then less than 75% of the unit-holders who are

opposing the winding up will be entitled to approach SEBI, calling

upon it to adjudicate upon the correctness of the decision of the

Trustees. He pointed out that the Regulations provide three

modes of winding up. The first mode can be adopted by the

Trustees, the second mode can be adopted by 75% of the unit-

holders and the third mode can be adopted by SEBI. The

Scheme of the Regulations is such that SEBI cannot interfere

with the decision making power conferred on the Trustees or on

75% of the unit-holders, as the case may be, to wind up a

Scheme. The role of SEBI is under Regulation 42 which requires

SEBI to verify as to whether all measures for winding up of the

Scheme, as provided under the Regulations have been complied

with. He submitted that if the requirement of consent is read into

sub-clause (a) of clause (2) of Regulation 39, effectively, the

process of winding up of the Schemes under sub-clauses (a) and

(b) will be winding up as per the desire of the unit-holders.

131. The learned Solicitor General of India submitted that it is

well settled that the scope of judicial review of economic

decisions is considerably narrow. He submitted that the Mutual 127

Funds Regulations constitute a specialized delegated legislation

belonging to the sphere of the economic policy and therefore, the

scope of judicial review is considerably narrow. In support of his

submissions, he relied upon the law laid down by the Apex Court

in the case of Swiss Ribbon Private Limited (supra) and in

particular, the decision of justice Holmes quoted therein. He also

relied upon a decision of the Apex Court in the case of Bhavesh

D. Parish and others -vs- Union of India and another47. He

submitted that the Mutual Funds Regulations constitute the

Regulations framed by an expert body like SEBI dealing with the

Mutual Funds. He submitted that the laws relating to economic

activities are required to be viewed with greater latitude by the

Courts than the laws touching the civil rights. He relied upon a

decision of the Apex Court in the case of R.K. Garg -vs- Union

of India and others48. He submitted that when it comes to a

petition involving challenge to economic and fiscal regulatory

measures, the Courts will have to show restraint, as the Judges

are not experts in the field. He submitted that it is not the case of

the petitioners that SEBI lacks the competence to frame the

Mutual Funds Regulations. The said Regulations will have to be

47 (2000) 5 SCC 471 48 (1981) 4 SCC 675 128

shown to be contrary to SEBI Act or contrary to the constitution of

India.

132. Coming to the arguments of the petitioners as regards the

manifest arbitrariness, he submitted that the exhaustive Scheme

of the said Regulations is required to be considered while dealing

with the argument of the arbitrariness. He submitted that there is

an eligibility criteria for registration of a Mutual Fund. The Mutual

Funds Regulations also provide for what should be the contents

of the Trust Deeds. Regulation 17 provides that no Trustee shall

be initially or anytime thereafter be appointed without prior

approval of the Board. The disqualification for being appointed

as Trustees are also laid down under Regulation 16 which are

very stringent provisions. He submitted that Regulation 18 lays

down the rights and obligations of the Trustees. He pointed out

that even the Investment Management Agreement between the

Trustees and AMC is regulated and the contents of the same are

provided in the fourth Schedule. He submitted that one of the

clauses therein empowers the Trustees to dismiss AMC with the

approval of SEBI. He submitted that a detailed Code of Conduct

for Trustees and AMC has been laid down. He submitted that

there are several restrictions on investments to be made by AMC 129

and there are strict investment norms provided therein and

therefore, the Trustees will have to pass through the stringent

tests which are laid down in the Regulations and that is how a

latitude is given to the Trustees when it comes to taking a

decision regarding winding up. He submitted that the conduct of

the Trustees is highly regulated by the Mutual Funds Regulations.

He submitted that three tier structure constituting 'sponsor',

'Trustees' and 'AMC' is provided under the Regulations. He

invited our attention to Regulation 38 which provides that no

guaranteed returns can be provided in a Scheme unless such

returns are fully guaranteed by the sponsor or AMC and unless a

statement indicating the name of the person who will guarantee

the returns and the manner in which the guarantee is to be met

are specifically mentioned in the offer document. He submitted

that the decision of the Trustees of winding up of the said

Schemes is a commercial decision and when the Trustees have

to act in a highly regulated regime, it cannot be said that the

provisions giving freedom to the Trustees to wind up the said

Schemes is manifestly arbitrary. He relied upon a decision of the

Apex Court in the case of Joseph Shine -vs- Union of India49.

49

(2019) 3 SCC 39 130

He submitted that the provisions can be manifestly arbitrary, only

when something is done by the Legislature capriciously,

irrationally and in disproportionate manner. He submitted that

this type of manifest arbitrariness is not attracted in these

petitions. He submitted that the same is the test laid down by the

Apex Court in the case of Shayara Bano -vs- Union of India

and others50.

133. He submitted that as far as violation of Article 14 is

concerned, mathematical nicety or perfect equality are not

required under Article 14, as held by the Apex Court in the case

of Kedar Nath Bajoria, Son of Ramjidas Bajoria -vs- State of

West Bengal51. He submitted that it is not the requirement of

Article 14 of the Constitution of India that classification should be

scientifically perfect. He relied upon a decision of the Apex Court

in the case of Venkateshwara Theatre -vs- State of Andhra

Pradesh and others52. He submitted that the provisions of the

Regulations regarding winding up of the Schemes sub-serve

larger public interest of safeguarding commercial interests of

majority of the unit-holders. He relied upon a decision of the

50 (2017) 9 SCC 1 51 1954 SCR 30 52 (1993) 3 SCC 677 131

Apex Court in the case of Internet and Mobile Association of

India -vs- Reserve Bank of India53.

134. He submitted that under the Scheme of the Mutual Funds

Regulations, the Trustees act in a fiduciary capacity, in trust and

for the benefit of the unit-holders. He submitted that the Mutual

Funds Regulations further provide for execution of written

instrument of trust deed duly registered under the provisions of

the Indian Registration Act, 1908 and the provisions thereof must

be in consistent with the Regulations.

135. He submitted that the words "repaying the amounts due to

the unit-holders" used in clause (2) of Regulation 39 suggest that

the amount due to the unit-holders must be paid before the

winding up of process is formally completed. He submitted that

once the compliance is made by the Trustees with clause (3) of

Regulation 39, Regulation 40 (c) triggers in and redemption must

be stopped and only after winding up of the Scheme is

completed, the amounts available will be distributed amongst the

unit-holders.

53

2020 SCC Online SC 275 132

136. Lastly he submitted that the power of regulatory body like

SEBI cannot be questioned unless it is shown to have been used

for extraneous reasons. He would, therefore, submit that there is

absolutely no merit in the challenge to the constitutional validity of

Regulations 39 to 41.

SUBMISSIONS OF AMC AND TRUSTEES:

137. Shri. Janak Dwarakadas, learned Senior Counsel

appearing for AMC and the Trustees submitted that the

relationship between the unit-holders, AMC and the Trustees is

purely contractual and therefore, the issue involved in these

petitions is purely in a private domain. He firstly dealt with the

issue of borrowings made by AMC after 23rd April 2020. He

submitted that the borrowings were made firstly for meeting the

demand made by Bank of Baroda and secondly for meeting the

redemption requests for which requisitions were made upto 23rd

April 2020. He submitted that making such borrowing will not

amount to carrying on business activities. He relied upon a

decision of the Apex Court in the case of State of Gujarat -vs-

Raipur Manufacturing Co. Ltd54 for the purposes of interpreting

54 AIR 1967 SC 1066 133

the word 'business'. He relied upon another decision of the Apex

Court in the case of Director of Supplies and Disposals,

Calcutta -vs- Member, Board of Revenue, West Bengal,

Calcutta55 and in the case of Girdharilal Jivanlal Maheswari -

vs- The Assistant Commissioner of Sales Tax, Nagpur56. He

submitted that on 24th April 2020, only one borrowing was made.

He also pointed out from the affidavit filed on 18th September

2020 the circumstances under which the borrowings were made.

138. He invited our attention to clause (12) and (25) of

Regulation 18. He submitted that it is the duty of the Trustees to

ensure that the Trust properties are properly protected, held and

administered by a proper person. He invited our attention to key

information memorandum of the said Schemes and submitted

that there was no investment made after 23rd April 2020, in view

of clause (a) of Regulation 40, as making investment of the funds

will amount conducting business activity. He submitted that for

protecting the interest of the unit-holders and for meeting the

demand by the creditors, such steps were required to be taken by

making borrowings. He submitted that the disclosure of the said

55 AIR 1967 SC 1826 56 (1957) 59 Bom LR 710 134

fact has been made in accordance with clause (4) of Regulation

41. He has taken us through the contents of the affidavit filed by

AMC and the Trustees on 18th September 2020 and pointed out

the manner in which the borrowings were made. He submitted

that there is no compromise made on the interest of the unit-

holders. He invited our attention to paragraph 12 of the affidavit

filed by SEBI, dealing with the Forensic Audit report. He urged

that the report is only a preliminary report which is subject to

modification and it is a part of the investigation. He submitted

that the copies of the report should not be made available to any

of the parties. He submitted that it is for SEBI to take a final

decision on the basis of the final report which may be submitted

by the Auditors. He relied upon the decisions of the Apex Court

in the case of Khatri and others -vs- State of Bihar and

others57, Pratibha -vs- Rameshwari Devi and others58, Renu

Kumari -vs- Sanjay Kumar and others59, Shri. Ram Krishna

Dalmia -vs- Shri. Justice S.R. Tendolkar and others60 and

T.T. Antony -vs- State of Kerala and others61. Lastly he relied

57 (1983) 2 SCC 266 58 (2007) 12 SCC 369 59 (2008) 12 SCC 346 60 AIR 1958 SC 538 61 (2001) 6 SCC 181 135

upon a decision of the Apex Court in the case of Sidhartha

Vashisht -vs- State (NCT of Delhi)62.

SUBMISSIONS OF SEVENTH AND EIGHTH RESPONDENTS:

139. Shri. K.G. Raghavan, learned Senior Advocate appearing

for 7th Respondent (the sponsor) and the 8th respondent in

W.P.No. 8545/2020 and for the 4th respondent in W.P.No.

8644/2020 urged that there are no allegations made against the

companies which he is representing. He urged that in paragraph

44 of the petition filed before the Gujarat High Court, there are

only vague allegations. He submitted that really no action was

prayed for against the companies which he is representing. He

submitted that as far as the unit-holders are concerned, his

clients will have no role to play. Inviting our attention to the

Regulation 38 (a) he submitted that in case of none of the said

Schemes, the returns were guaranteed to the unit-holders and

therefore, the said companies have no role to play.

62 (2010) 6 SCC 1 136

SUBMISSIONS OF THE DIRECTORS OF AMC AND TRUSTEES:

140. Shri. Udhay Holla, learned Senior Counsel representing the

Directors of AMC and Trustees invited attention of the Court to

the averments made in paragraph 8 of the writ petition filed

before the Madras High Court and submitted that the averments

made therein are not tenable. He also invited our attention to

paragraph 32 of the Statement of objections filed in the said writ

petition. He invited our attention to Regulations 16, 18 and 49R

and submitted that there is adequate system of internal control

and risk management in AMC. He submitted that AMC is strictly

maintaining the books of accounts, records and the documents,

as required by Regulation 50.

REJOINDER OF THE PETITIONERS:

141. Shri. Ravindra Srivatsava, the learned Senior Counsel

appearing for the petitioners in W.P.No.8545/2020 gave a brief

rejoinder and submitted that the requirement of obtaining consent

of the unit-holders is not only found in sub-clause (c) of clause

(15) of Regulation 18 but it is very much a part of the Scheme

document. He invited our attention to the statement of additional 137

information and in particular, page 714 of the common

compilation and submitted that the requirement of obtaining

consent of the unit-holders is accepted by FTMF itself, as the

statement of additional information is issued by it. He submitted

that some meaning will have to be assigned to the consent

referred in sub-clause (c) of clause (15) of Regulation 18. He

submitted that SEBI which has framed the Regulations is now

trying to disown it by contending that the unit-holders will have no

say in the matter of decision of winding up taken by the Trustees.

He submitted that in exercise of its powers under Section 11B,

SEBI can interfere with the decision of the Trustees under sub-

clause (a) of clause (2) of Regulation 39. He submitted that if the

contention raised by AMC, the Trustees and SEBI that winding up

at the instance of the Trustees does not require consent of the

unit-holders is accepted, sub-clause (c) of clause (15) of

Regulation 18 will become superfluous and redundant.

142. He submitted that sub-clause (c) of clause (15) of

Regulation 18 specifically refers to consent of the unit-holders to

the decision of the Trustees of winding up of a Scheme and the

approval contemplated by clause (1) of Regulation 41 is for 138

authorizing the Trustees or any other person to take steps for

winding up. He submitted that the approval under clause (1) of

Regulation 41 is not to the decision of the winding up but it is for

appointing an agency to do the work of winding up.

143. As regards the decision of the Trustees under sub-clause

(a) of clause (2) of Regulation 39, he submitted that no opinion is

formed by the Trustees, as can be seen from the minutes of

meeting dated 24th April 2020. He submitted that though the

notice of 23rd April 2020 refers to recommendation of AMC, a

copy of the recommendation is also not placed on record. He

submitted that the minutes only reflect approval of the Trustees to

the decision of AMC. He submitted that the minutes do not

reflect happening of an event which is contemplated by sub-

clause (a). He submitted that the event contemplated by the

sub-clause (a) is akin to public interest. He submitted that the

large number of requests for redemption is mainly a ground for

suspension of redemption. He pointed out that the copies of the

minutes of the meeting of the Board of Trustees do not bear

signatures. He submitted that the averments made in the

statement of objections filed by the Trustees and AMC are not 139

supported by verification and by an affidavit. He has taken us

through the minutes of meeting dated 23rd April 2020 and

submitted that the minutes clearly show that the Trustees have

acted under the influence and dictates of AMC which completely

defeats the very Scheme of the Mutual Funds Regulations

regarding functional and decisional separation between AMC and

the Trustees in the matter of a winding up decision. He submitted

that the deliberations recorded in the minutes on the adverse

impact of COVID 19 cannot be a ground for winding up. Relying

upon a decision of the Apex Court in the case of Commissioner

of Police, Bombay -vs- Gordhandas Bhanji63, he submitted

that though the Trustees could have taken factual inputs from

AMC, the Directors of AMC could not have been a part of the

decision making process of AMC. He submitted that on careful

scrutiny of the minutes of meeting dated 20th April 2020 and 23rd

April 2020, it is apparent that the decision of Mr. Sanjay Sapre,

head of AMC carried the day.

144. He submitted that the minutes show that some officers of

SEBI were interacting with AMC and the Trustees and there

63 AIR 1952 SC 16 140

appears to be a tacit approval to the decision of winding up by

SEBI. He submitted that surprisingly, SEBI has not at all placed

on record any documents to show the action taken by SEBI on

the basis of the letter of AMC dated 14th April 2020 of AMC and

the letter dated 20th April 2020 of the Trustees. He submitted

that SEBI, being a statutory body has not done its duty.

145. The learned counsel submitted that this Court can always

examine the decision making process of the Trustees leading to

winding up of the said Schemes. He stated that process shows

undue, haste and colourable exercise of power by misusing

COVID-19 situation as an opportunity for the collateral purpose of

winding up. He submitted that there are sufficient grounds to

believe that the situation was created largely due to

mismanagement/mishandling of the investments made by AMC,

violation of the Regulations committed by AMC and due to the act

of creating risk by ill-thought investments. He submitted that the

minutes disclose that the decision for winding up was solely on

the basis of the so-called commercial expediency.

146. He urged that there is no absolute discretion conferred on

any person including the Trustees to take a unilateral decision as 141

per their whims and fancies. He submitted that such a discretion

cannot emanate from a contract or a trust. He submitted that the

sine qua non for a trust is a creation of fiduciary relationship.

147. He was critical of the role played by SEBI. He submitted

that the failure of the statutory authority like SEBI to respond to

the letters dated 14th April 2020 and 20th April, 2020 is very

significant. He submitted that SEBI has shown totally indifferent

approach and has not done anything for protecting the interest of

the unit-holders. He submitted that SEBI has not even examined

whether the Trustees had complied with the statutory requirement

of clause (3) of Regulation 39 and it has failed to ascertain as to

whether there was a compliance with sub-clause (b) of clause (3)

of Regulation 39. He submitted that if the minutes of meeting

dated 20th April 2020 and 23rd April 2020 were forwarded by the

Trustees to SEBI, it was the duty of SEBI to place the same on

record. He submitted that perusal of the minutes of board

meetings will show that the official business between statutory

body like SEBI on the one hand and the Trustees and AMC on

the other hand was conducted telephonically instead of

transacting the official business by written communications. He 142

submitted that inaction on the part of SEBI is very glaring, as it

did not object to the borrowings made by the Mutual Fund after

23rd April 2020. He submitted that the argument to the effect

that the Trustees have an unfettered discretion to take a decision

of winding up is completely fallacious, as can be seen from

paragraph 23 of a decision of the Apex Court in the case of Delhi

Transport Corporation -vs- D.T.C. Mazdoor Congress and

others64. He submitted that the arguments canvassed by the

petitioners about the arbitrariness of the decision have not been

rebutted by any of the respondents.

148. He submitted that the argument that the petitioners want to

compel the Trustees to run the Scheme is completely unfounded.

He submitted that the petitioners being the unit-holders are

entitled to seek the relief of quashing of the illegal decision taken

by the Trustees. He submitted that the argument of AMC and

the Trustees that there is nothing wrong in the investments made

is only based on the document of a Scheme which does not

pertain to the Scheme in which the petitioner has made

investment. He submitted that the petitioner is concerned only

with the Short Term Income Mutual Fund which is a debt Scheme 64 1991 Supp (1) SCC 600 143

and in the document relating to the said Scheme, it is specifically

mentioned that the investments objective is to seek stable returns

and no information is provided in the said document about the

proposal to make investments in low rated portfolios.

149. He submitted that the argument that even in the teeth of

clause (a) of Regulation 40, borrowings can be made by Mutual

Fund after action is taken under clause (3) of Regulation 39 is

completely erroneous and untenable. He submitted that the

cases relied upon for interpreting the word 'business' arose out of

the taxing statutes. He submitted that both the contextual and

textual interpretation of clause (a) of Regulation 40 will clearly

indicate that all the business activities including borrowing and

substitution of creditors is completely prohibited. He submitted

that the question is whether the action of borrowing is contrary to

clause (a) of Regulation 40. The question whether the decision to

borrow is right or wrong is irrelevant.

150. As regards the maintainability of the writ petition against

AMC and the Trustees, he submitted that the decisions relied

upon by the respondent in the case of Federal Bank Ltd -vs- 144

Sagar Thomas and others65 is not applicable to the facts of the

case. Lastly he submitted that a privilege as regards the

document Forensic Audit report has to be specifically claimed, as

held by the Apex Court in the case of S.P. Gupta -vs- Union of

India66. He submitted that in judicial proceedings, the disclosure

of facts is a rule and withholding the disclosure is an exception.

He submitted that the document can be withheld only on the

ground of overwhelming public interest. He submitted that even

in a most sensational/sensitive case like purchase of Rafael

Aircrafts, the Apex Court directed to supply of the documents

which were required to be filed in a sealed cover to the parties.

In support of his submission, he referred to a decision of the Apex

Court in the case of Manohar Lal Sharma -vs- Narendra

Damodardas Modi and others67. He submitted that the

petitioners needed to go through the audit report only for assisting

the Court. He submitted that the investigation by Forensic

Auditors cannot be on par with the investigation in a criminal

case. He submitted that unfortunately, SEBI, in paragraph 14 of

its affidavit dated 2nd September 2020 has taken a stand for

65 (2003) 10 SCC 733 66 1981 Supp SCC 87 67 (2019) 3 SCC 25 145

protecting the interests of FTMF. He submitted that the order

dated 8th June 2020 passed by the Delhi High Court will indicate

that by simply placing reliance on the fact that the Forensic Audit

was ordered, SEBI wanted the Court to throw out the petition.

He submitted that the affidavit of SEBI also shows that the

summary of the complaints of the investors was forwarded to the

Forensic Auditors which includes the complaints made by the

petitioners and other investors.

151. Shri. Adithya Sondhi, learned Senior Counsel submitted

that the report on Forensic Audit is not an evidence and therefore,

privilege cannot be claimed. In any case, the privilege has to be

specifically claimed. He relied upon the decisions of the Apex

Court in the case of State of Punjab -vs- Sodhi Sukhdev

Singh68 and Reserve Bank of India -vs- Jayantilal N. Mistry69.

He invited attention of the Court to the provisions of Section 179

and 180 of the Companies Act to contend that the borrowing is a

part of day to day business of a company. He relied upon a

decision of the Apex Court in the case of Official Trustee of

68 AIR 1961 SC 493 69 (2016) 3 SCC 525 146

Tamil Nadu -vs- Udavumkarankal and others70. He submitted

that the fact that four Schemes out of six Schemes under winding

up have become cash rich shows that the decision of the

Trustees of winding up was erroneous or flawed. He also

countered the submissions made by the respondents regarding

maintainability of the writ petitions.

152. Shri. Puneeth Jain and Shri. Ashish Kamath, the learned

counsel made submissions on behalf of the intervener, supporting

the claim of the petitioners.

CRIMINAL PETITION

153. As regards criminal petition filed before the Madras High

Court, after the submissions made by the learned counsel were

concluded, it was pointed out that the respondents in the above

criminal petition have registered a first information report and

accordingly, the criminal petition has been disposed of by a

separate order.

WRIT APPEAL

As regards Writ Appeal, we are not dealing with it

separately as it arises out of an interim order passed in writ

70 AIR 1993 SC 1472=1993 Supp (3) SCC 509 147

petition filed in Gujarat High Court and as the interim order will

merge with the final order.

MAIN ISSUES INVOLVED

154. There are various factual and legal issues which arise for

consideration. Upon considering the pleadings and the

submissions made by the learned counsel for the respective

parties, the following main questions arise for consideration:

i) Whether Regulations 39, 40, and 41 of the Mutual Funds Regulations are ultra vires the provisions of the Securities and Exchange Board of India Act, 1992 and unconstitutional being vague, manifestly arbitrary, unreasonable? Whether the Regulations 39, 40 and 41 are violative of Articles 14 and 21 of the Constitution of India?

ii) Whether obtaining consent of the unit-holders in accordance with the provision of sub-clause (c) of clause (15) of Regulation 18 of the Mutual Funds Regulations is a condition precedent for winding up of a Scheme in accordance with the provision of sub-clause

(a) of clause (2) of Regulation 39 of the Mutual Funds Regulations?

iii) Whether compliance with clause (15A) of Regulation 18 of the Mutual Funds Regulations is a condition 148

precedent for winding up of a Scheme in accordance with sub-clause (a) of clause (2) of Regulation 39?

iv) Whether the writ petitions filed by the petitioners by invoking the Article 226 of the Constitution of India are maintainable for challenging the impugned notices dated 23rd April 2020 and 28th May, 2020 issued by Franklin Templeton Trustee Services private Ltd?

v) If the answer to question (iv) is in the affirmative, whether this Court in exercise of its writ jurisdiction under Article 226 of the Constitution of India, can go into the merits of the decision of the Trustees to wind up the said Schemes? Whether the notices dated 23rd April, 2020 and 28th May, 2020 are valid and legal?

vi) Assuming that the decision of winding up is valid, whether the Trustees have established that they have complied with sub-clauses (a) and (b) of clause (3) of Regulation 39?

vii) Assuming that the decision of the Trustees of winding up is lawful, whether AMC could have lawfully made the borrowings after 24th April 2020 for the purposes for meeting the demands for redemption and for the purposes of repaying the outstanding loans notwithstanding the provision of clause (a) of Regulation 40? Whether AMC could have lawfully paid the 149

redemption amount after 24th April, 2020 in case of redemption requests received prior to 24th April, 2020?

viii) Whether the petitioners are entitled to have a copy of report of the Forensic Auditor which is produced on record by SEBI in a sealed envelope and whether any privilege can be claimed in respect of the said document by SEBI, AMC and Trustees?

ix) Whether the petitioners are entitled to have un-redacted copy of the Resolutions dated 20th April 2020 and 23rd April 2020 passed by the Board of Directors of the Trustees, redacted copies of which are placed on record by the Advocate for AMC and the Trustees?

x) Whether SEBI has jurisdiction under Section 11B of SEBI Act to interfere with the decision of winding up of a Scheme, taken pursuant to sub-clause (a) of clause (2) of Regulation 39?

xi) Whether any directions are required to be issued against SEBI?

155. We have carefully considered the submissions. We have

carefully gone through all the decisions relied upon by the learned

counsel appearing for the parties. Multiple decisions have been

relied upon laying down the same principles. We have

specifically referred only those decisions which are relevant for 150

consideration of the questions which are required to be decided.

Even otherwise, we are following the settled principles laid down

therein.

THE OVERVIEW OF THE RELEVANT PROVISIONS OF SEBI ACT

156. The Securities and Exchange Board (for short 'SEBI') was

established in the year 1988 by the Government of India under a

Government Resolution with the object of promoting orderly and

healthy growth of the securities market and for investors'

protection. At that time it was not a statutory body. The

Securities and Exchange Board of India Ordinance, 1992

(Ordinance No.5 of 1992) was promulgated on 30th January,

1992. The SEBI Act was subsequently enacted which shall be

deemed to have come into force on 30th January, 1992. It is

necessary to firstly refer to the statement of objects and reasons

of the SEBI Act which read thus:

"Statement of Objects and Reasons.--

Securities and Exchange Board of India (SEBI) was established in 1988 through a Government Resolution to promote orderly and healthy growth of the securities market and for investors' protection. SEBI has been monitoring the activities of stock 151

exchanges, Mutual Funds, merchant bankers, etc., to achieve these goals.

The capital market has witnessed tremendous growth in recent times, characterised particularly by the increasing participation of the public. Investors' confidence in the capital market can be sustained largely by ensuring investors' protection. With this end in view, Government decide to vest SEBI immediately with statutory powers required to deal effectively with all matters relating to capital market. As Parliament was not in session, and there was an urgent need to instill a sense of confidence in the public in the growth and stability of the market, the President promulgated the Securities and Exchange Board of India Ordinance, 1992 (Ord.No. 5 of 1992) on 30th January, 1992.

The Bill seeks to replace the aforesaid Ordinance".

(Underline supplied)

157. As can be seen from the preamble of SEBI Act, the same

has been enacted to provide for the establishment of a Board

(SEBI) to protect the interests of investors in securities and to

promote the development of and to regulate the securities market

and for matters connected therewith or incidental thereto. 152

158. Section 3 of SEBI Act provides for establishment of SEBI.

Chapter-IV of the said Act deals with the powers and functions of

SEBI. Section 11 of SEBI Act is relevant which read thus:

"11. Functions of Board - (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interest of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.

(2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for--

(a) regulating the business in stock exchanges and any other securities markets;

(b) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, Trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner;

(ba) registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf;

153 (c) registering and regulating the working of venture capital funds and collective investment Schemes, including Mutual Funds;

(d) promoting and regulating self-regulatory organisations;

(e) prohibiting fraudulent and unfair trade practices relating to securities markets;

(f) promoting investors' education and training of intermediaries of securities markets;

(g) prohibiting insider trading in securities;

(h) regulating substantial acquisition of shares and takeover of companies;

(i) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, Mutual Funds, other persons associated with the securities market, intermediaries and self-regulatory organisations in the securities market;

(ia) calling for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act which, in the opinion of the Board, shall be relevant to any investigation or inquiry by the Board in respect of any transaction in securities;

154 (ib) calling for information from, or furnishing information to, other authorities, whether in India or outside India, having functions similar to those of the Board, in the matters relating to the prevention or detection of violations in respect of securities laws, subject to the provisions of other laws for the time being in force in this regard:

Provided that the Board, for the purpose of furnishing any information to any authority outside India, may enter into an arrangement or agreement or understanding with such authority with the prior approval of the Central Government;

(j) performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), as may be delegated to it by the Central Government;

(k) levying fees or other charges for carrying out the purposes of this section;

(l) conducting research for the above purposes;

(la) calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions;

(m) performing such other functions as may be prescribed.

155 (2-A) Without prejudice to the provisions contained in sub-section (2), the Board may take measures to undertake inspection of any book, or register, or other document or record of any listed public company or a public company (not being intermediaries referred to in Section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market.

(3) Notwithstanding anything contained in any other law for the time being in force while exercising the powers under clause (i) or clause (ia) of sub-section (2) or sub-section (2A) the Board shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit, in respect of the following matters, namely:--

(i) the discovery and production of books of account and other documents, at such place and such time as may be specified by the Board;

(ii) summoning and enforcing the attendance of persons and examining them on oath;

156 (iii) inspection of any books, registers and other documents of any person referred to in Section 12, at any place;

(iv) inspection of any book, or register, or other document or record of the company referred to in sub-

section (2-A);

(v) issuing commissions for the examination of witnesses or documents;

(4) Without prejudice to the provisions contained in sub-section (1), (2), (2-A) and (3) and Section 11-B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:--

(a) suspend the trading of any security in a recognised stock exchange;

(b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities;

(c) suspend any office bearer of any stock exchange or self-regulatory organisation from holding such position;

(d) impound and retain the proceeds or securities in respect of any transaction which is under investigation;

157 (e) attach, for a period not exceeding ninety days, bank accounts or other property of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder:

Provided that the Board shall, within ninety days of the said attachment, obtain confirmation of the said attachment from the Special Court, established under Section 26-A, having jurisdiction and on such confirmation, such attachment shall continue during the pendency of the aforesaid proceedings and on conclusion of the said proceedings, the provisions of Section 28-A shall apply:

Provided further that only property, bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached.

(f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation:

Provided that the Board may, without prejudice to the provisions contained in sub-section (2) or 158

sub-section (2-A), take any of the measures specified in clause (d) or clause (e) or clause (f), in respect of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market:

Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned.

(4-A) Without prejudice to the provisions contained in sub-sections (1), (2), (2A), (3) and (4), Section 11-B and Section 15-I, the Board may, by an order, for reasons to be recorded in writing, levy penalty under Sections 15-A, 15-B, 15-C, 15-D, 15- E, 15-EA, 15-EB, 15-F, 15-G, 15-H, 15-HA and 15- HB after holding an inquiry in the prescribed manner.

(5) The amount disgorged, pursuant to a direction issued, under Section 11-B of this Act or Section 12-A of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or Section 19 of the Depositories Act, 1996 (22 of 1996) or under 159

a settlement made under Section 15-JB or Section 23-JA of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or Section 19-IA of the Depositories Act, 1996 (22 of 1996), as the case may be, shall be credited to the Investor Protection and Education Fund established by the Board and such amount shall be utilised by the Board in accordance with the regulations made under this Act."

(Underlines supplied)

159. Sub-section (1) of Section 11 specifically lays down that

one of the duties of SEBI is to protect the interest of investors in

securities. Considering the objects and reasons of SEBI Act, the

duty to protect the investors is the paramount duty of SEBI. The

second duty is to promote the development of securities market

and the third duty is to regulate the securities market. The

measures which can be taken by SEBI have been enlisted in sub-

section (2) which provides for registering and regulating the

working of Mutual Funds. Sub-section (4) also confers vast

powers on SEBI to take various measures in the interests of

investors or securities market. Section 11-A empowers SEBI to

issue regulations for protection of investors in the matters

relating to issue of capital, transfer of securities and other 160

matters incidental thereto and the manner in which certain

matters shall be disclosed by the companies. Clause (b) of sub-

section (1) of Section 11-A also confers a power on SEBI to issue

general and special orders prohibiting companies from issuing of

prospectus, or any other document, soliciting money from the

public for the issue of securities. At this stage, we may note here

that the words 'securities' has been defined in clause (i) of

Section 2 of SEBI Act. It provides that securities has the same

meaning assigned to it in Section 2 of the Securities Contracts

(Regulation) Act, 1956. Clause (h) of Section 2 of the Securities

Contracts (Regulation) Act, 1956 defines the securities which

include the units or any other instruments issued to the investors

under any Mutual Fund Scheme.

160. Section 11-B of SEBI Act provides for vesting of plenary

powers in SEBI to issue directions. Section 11-B reads thus:

11B. Power to issue directions and levy penalty - (1) Save as otherwise provided in Section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary--

(i) in the interest of investors, or orderly development of securities market; or 161

(ii) to prevent the affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the interests of investors or securities market; or

(iii) to secure the proper management of any such intermediary or person,

it may issue such directions,--

(a) to any person or class of persons referred to in Section 12, or associated with the securities market;

or

(b) to any company in respect of matters specified in Section 11-A,

as may be appropriate in the interests of investors in securities and the securities market.

(2) Without prejudice to the provisions contained in sub-section (1), sub-section (4-A) of Section 11 and Section 15-I, the Board may, by an order, for reasons to be recorded in writing, levy penalty under Sections 15-A, 15-B, 15-C, 15-D, 15-E, 15-EA, 15- EB, 15-F, 15-G, 15-H, 15-HA and 15-HB after holding an inquiry in the prescribed manner.

Explanation.--For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by 162

indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.

(Underlines supplied)

161. Various directions can be issued under Section 11B (1)

against the persons mentioned in Section 12. Perusal of Section

12 shows that the trustees of trust deed and intermediaries are

included therein. Clause (g) of Regulation 2 of the Securities and

Exchange Board (Intermediaries) Regulations, 2008 specifically

includes AMC under the Mutual Funds Regulations in the

definition of intermediaries. Therefore, SEBI has a power to issue

directions under Section 11B (1) against the Trustees and AMC.

Whether, SEBI can interfere with the decision of the Trustees of

winding up is an issue which is discussed separately.

162. Section 11-C confers powers on SEBI to appoint

investigating authority to investigate, when SEBI has a

reasonable ground to believe that the transactions in securities

are being dealt with in a manner detrimental to the investors or

the securities market or any person associated with securities 163

market has violated the provisions of SEBI Act, the Rules framed

thereunder and the Regulations made thereunder or the

directions issued by SEBI thereunder. The investigating authority

has been conferred with the vast powers as set out in sub-section

(3) onwards of Section 11C. There are various penal provisions

incorporated in Chapter VI-A of SEBI Act. Section 15D provides

for imposition of the penalties in case of certain defaults in

relation to Mutual Funds. Section 15E provides for imposition of

penalty on AMCs, on account of its failure to comply with any of

the Rules and Regulations providing for restrictions on the

activities of AMCs. The minimum penalty prescribed is of Rupees

one lakh. Section 15HB provides for imposition of penalty on

whoever fails to comply with any provision of SEBI Act, the Rules

and Regulations made thereunder or the directions issued by

SEBI, for which, no separate penalty has been specifically

provided. Such person shall be liable to a penalty which shall not

be less than Rupees one lakh but it may extend to Rupees one

crore. The procedure for imposing penalties is laid down under

Section 15-I. 164

163. Another relevant provision of SEBI Act is Section 30 which

confers powers to make Regulations, which reads thus:

30. Power to make regulations - (1) The Board may, by notification, make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely:--

(a) the times and places of meetings of the Board and the procedure to be followed at such meetings under sub-section (1) of Section 7 including quorum necessary for the transaction of business;

(b) the term and other conditions of service of officers and employees of the Board under sub-

section (2) of Section 9;

(c) the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which such matters shall be disclosed by the companies under Section 11-A;

(ca) the utilisation of the amount credited under sub-section (5) of Section 11;

165

(cb) the fulfilment of other conditions relating to collective investment Scheme under sub-section (2-A) of Section 11-AA;

(d) the conditions subject to which certificate of registration is to be issued, the amount of fee to be paid for certificate of registration and the manner of suspension or cancellation of certificate of registration under Section 12.

(da) the terms determined by the Board for settlement of proceedings under sub-section (2) and the procedure for conducting of settlement proceedings under sub-section (3) of Section 15- JB;

(db) any other matter which is required to be, or may be, specified by regulations or in respect of which provision is to be made by regulations.

164. On conjoint reading of the objects and reasons of SEBI Act

and its various provisions especially Sections 11, 11A, 11B and

11C, it can be said that SEBI is required to act as a watchdog of

securities market. Apart from regulating and promoting growth of

securities market, the paramount duty of SEBI is to protect the

interest of investors. It is the duty of SEBI to keep a constant

vigil on securities market for safeguarding the interest of

investors.

166

MUTUAL FUNDS REGULATIONS

165. The Mutual Funds Regulations have been framed by

exercising powers under Section 30 read with clause (c) of sub-

section (2) of Section 11 of SEBI Act. As noted earlier, clause

(c) of sub-section (2) of Section 11, inter alia, provides for

registering Mutual Funds and regulating the working of Mutual

Funds.

166. Some of the definitions under the Mutual Funds

Regulations are very relevant for deciding the issues involved in

this group of writ petitions. The first relevant definition is of

'Mutual Fund' which is in clause (q) of Regulation 2 of the Mutual

Funds Regulations which reads thus:

"(q) "Mutual Fund" means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more Schemes for investing in securities including money market instruments or gold or gold related instruments or real estate assets.

Provided that infrastructure debt fund Schemes may raise monies through private placement of units, subject to conditions specified in these regulations;

167

Provided further that Mutual Fund Schemes investing in exchange treaded commodity derivatives may hold the underlying goods in case of physical settlement of such contracts."

(underlines supplied)

167. The word "sponsor" is defined in clause (x) of Regulation 2

which reads thus:

"(x) "sponsor" means any person who, acting alone or in combination with another body corporate, establishes a Mutual Fund;"

There are three other relevant definitions of 'Trustees', 'unit' and

'unit-holder' under clause (y), (z) and z (i) of Regulation 2 which

read thus:

"(y) "Trustees" mean the Board of Trustees or the Trustee Company who hold the property of the Mutual Fund in trust for the benefit of the unit-

holders;]

(z) "unit" means the interest of the unit-holders in a Scheme, which consists of each unit representing one undivided share in the assets of a Scheme;

(z)(i) "unit holder" means a person holding unit in a Scheme of a Mutual Fund."

(underlines supplied) 168

Clause (u) of Regulation 2 defines a "Scheme" to mean a

Scheme of a Mutual Fund launched under Chapter-V of the

Mutual Funds Regulations. In this group of writ petitions, we are

concerned with 'open-ended Scheme' which is defined in clause

(s) of Regulation 2. It is defined as a Scheme of a Mutual Fund

which offers the units for sale without specifying any duration for

redemption.

168. Chapter II of the Mutual Funds Regulations provides for

registration of a Mutual Fund. Chapter III provides for constitution

and management of Mutual Fund and operation of Trustees.

Chapter IV provides for constitution and management of Asset

Management Company and custodian. Chapter V provides for

Schemes of Mutual Fund.

169. The sponsor is required to apply for registration of a Mutual

Fund in accordance with the provisions of Regulation 3 in the

prescribed form. Along with the application form, the sponsor is

required to submit a draft trust deed, a draft investment

management agreement and a draft custodian agreement.

Regulation 9 provides for grant of a registration certificate in Form 169

No.B. Regulation 10 is relevant, which provides for terms and

conditions of registration. It reads thus:

"10. Terms and conditions of registration.--The registration granted to a Mutual Fund under regulation 9, shall be subject to the following terms and conditions--

(a) the Trustees, the sponsor, the asset management company and the custodian shall comply with the provisions of these regulations;

(b) the Mutual Fund shall forthwith inform the Board, if any information or particulars previously submitted to the Board was misleading or false in any material respect;

(c) the Mutual Fund shall forthwith inform the Board, of any material change in the information or particulars previously furnished, which have a bearing on the registration granted by it;

(d) payment of fees as specified in the regulations and the Second Schedule."

(underlines supplied)

170. Regulation 14 provides for constitution of a Mutual Fund in

the form of a Trust. It provides that the instrument of trust which

shall be in the form of a deed shall be executed by the sponsor in

favaour of the Trustees and the same is required to be registered

under the provisions of the Indian Registration Act, 1908. Thus, a 170

Mutual Fund is a trust within the meaning of the Trusts Act. The

contents of the deed should be as provided in the Third Schedule.

171. In view of clause (y) of Regulation 2, the Trustees within

the meaning of the Mutual Funds Regulations will be either a

Board of Trustees or a Trustee Company. The Trustees within

the meaning of Regulation 2 (y) have fiduciary relationship with

the unit-holders of the Mutual Fund. As per Regulation 17, the

appointment of a Trustee can be made only with the prior

approval of SEBI. As far as the duties, responsibilities and

obligations of the Trustees are concerned, we are discussing the

same at a subsequent stage.

The appointment of the Trustees is to be made by the

sponsor with the prior approval of SEBI. After the Trust Deed is

executed under the Indian Registration Act in accordance with the

Regulation 14, the Trustees and AMC are required to execute an

investment management agreement containing the clauses as

provided in the fourth schedule to the Mutual Funds Regulations.

The investment management agreement is required to be

executed with the prior approval of SEBI.

171

172. As per Regulation 19, an application for approval of Asset

Management Company is required to be made in Form No.D.

Clause (1) of Regulation 20 provides that the sponsor or, if so

authorized by the trust deed, the trustees shall appoint AMC

subject to approval by SEBI. Regulation 22 provides for

imposition of conditions for grant of approval. The job of AMC is

to make the investment of funds of the Schemes of the Mutual

Fund. Apart from the sponsors, the Trustees and AMC, there is

a fourth player involved in the management of a Mutual Fund

which is the custodian appointed by the Mutual Fund to carry out

the custodial services. The custodian is defined in clause (h) of

Regulation 2 to be a person who has been granted a certificate of

registration to carry on the business of custodian of securities

under the provisions of the Securities and Exchange Board of

India (Custodian of Securities) Regulations, 1996.

173. Now we come to the 'Schemes' of Mutual Fund. There

can be various Schemes of a particular Mutual Fund. As

provided in clause (1) of Regulation 28, every Scheme shall be

launched by AMC. But it is provided that no such Scheme shall

be launched by AMC unless it is approved by the Trustees and a 172

copy of the offer document is filed with SEBI. What should be

the contents of offer document is also specified. There is a

provision for listing of units of a Scheme of a Mutual Fund on a

recognized stock exchange, as provided in Regulation 31-B.

174. Regulations 39 to 41 which are most material for deciding

the questions involved in this group of writ petitions provide for

winding up of a Scheme. We are elaborately dealing with the

same separately.

175. Chapter VI under the heading 'Investments Objectives and

Valuation Policies' provides for computation of Net Asset Value

(for short 'NAV') in accordance with the Regulation 48. This

chapter also provides for the manner in which investments should

be made by a Mutual Fund and incorporates restrictions on

investments.

176. We may note here that in the Mutual Funds Regulations,

there is no specific provision for cancellation of registration of a

Mutual Fund or winding up of a Mutual Fund. The provisions

contained in Regulations 39 to 42 are only in respect of winding

up of a particular Scheme of a Mutual Fund. A Mutual Fund can 173

float various Schemes of various categories such as 'open ended

Schemes', 'close ended Schemes', 'capital protection oriented

Schemes' and 'real estates Mutual Fund Schemes' etc. Chapter

VI-A is a chapter which deals with the 'Real Estate Mutual Funds

Schemes'.

177. From the Mutual Funds Regulations, it appears that a

Mutual Fund can have one or more Scheme. The monies

collected from the investors/unit-holders under a Mutual Fund

Scheme can be invested by Mutual Fund in accordance with

Regulation 43 in (i) securities, (ii) money market instruments, (iii)

privately placed debentures, (iv) securitised debt instruments,

which are either asset backed or mortgage backed securities, (v)

gold or gold related instruments, or (vi) real estate assets as

defined in clause (a) of regulation 49A or (vii) infrastructure debt

instruments and assets as specified in clause (1) of regulation

49L. The investments so made under Regulation 43 are subject

to restrictions specified in the Eighth Schedule. Regulation 48 is

about computation of NAV of each Scheme to be made by a

Mutual Fund. Under the Scheme of the Regulations, AMC, by

exercising due diligence and care, is required to take decisions 174

regarding investments by a Mutual Fund. The Code of Conduct

prescribed for AMC is also a part of the Regulations.

178. Chapter VIII deals with inspection and audit. Under

Regulation 61, SEBI has powers to investigate into the affairs of a

Mutual Fund and inspect its records by appointing one or more

persons as inspecting officers. Regulation 61 reads thus:

"61. Board's right to inspect and investigate.--(1) The Board may appoint one or more persons as inspecting officer to undertake the inspection of the books of account, records, documents and infrastructure, systems and procedures or to investigate the affairs of a Mutual Fund, the Trustees and asset management company for any of the following purposes, namely:--

(a) to ensure that the books of account are being maintained by the Mutual Fund, the Trustees and asset management company in the manner specified in these regulations;

(b) to ascertain whether the provisions of the Act and these regulations are being complied with by the Mutual Fund, the Trustees and asset management company;

175 (c) to ascertain whether the systems, procedures and safeguards followed by the Mutual Fund are adequate;

(d) to ascertain whether the provisions of the Act or any rules or regulations made thereunder have been violated;

(e) to investigate into the complaints received from the investors or any other person on any matter having a bearing on the activities of the Mutual Funds, Trustees and asset management company;

(f) to suo motu ensure that the affairs of the Mutual Fund, Trustees or asset management company are being conducted in a manner which is in the interest of the investors or the securities market."

(underlines supplied)

Under Regulation 66, SEBI has power to appoint an

Auditor to inspect and investigate into books of accounts and

affairs of AMC and the Trustees. The Auditors, in view of

proviso to Regulation 66, can act as inspecting officer for the

purpose of investigation and inspection contemplated by

Regulation 61. After a report is submitted on investigation or

inspection in accordance with Regulation 64, it is the duty of the 176

Chairman of SEBI or SEBI to take action as laid down in

Regulation 65. This power is apart from the plenary power

vesting in SEBI under Section 11C of SEBI Act to appoint

Investigating Authority to investigate into affairs of an

intermediary. Chapter IX of the Mutual Funds Regulation lays

down the procedure for action in case of default. The defaults for

which action can be taken have been set out in Regulation 68.

Other defaulters are laid down in Regulation 75A. Regulation 76

is relevant which reads thus:

"76. Adjudication, etc..--The Board may for the offences specified in sections 15A to 15E of the Act initiate action under section 15-I of the Act and in case of violation of any of the provisions of the Act or the regulations, initiate action under section 11, 11B or section 24 of the Act.

(2) The Board may in addition to suspension or cancellation of certificate, order suspension of launching of any scheme of a mutual fund for a period not exceeding one year for violation of any of the provisions of these regulations after following procedure under this Chapter.

(3) The Board may during the pendency of any proceeding of suspension or cancellation under this 177

Chapter also order suspension for launching of any scheme not exceeding three months without following procedure under this Chapter:

Provided that no order shall be passed without giving an opportunity of hearing."

179. Before we deal with the specific submissions made across

the Bar, we must elaborately consider the role of (i) the sponsor,

(ii) the Asset Management Company (AMC), (iii) the Trustees and

especially their obligations to the investors. We have already

outlined the Scheme of the Mutual Funds Regulations. We must

also consider the interplay amongst the three players namely,

the sponsors, AMC and the Trustees. The sponsor in this case

is the Templeton International Inc (7th respondent in WP.

No.8545/2020) which is a subsidiary company of Franklin

Resources Inc, USA (8th respondent in W.P.No. 8545/2020).

The role of sponsor, going by the Mutual Funds Regulations, is

limited to making an application for registration of a Mutual Fund.

The eligibility criteria for becoming the sponsor is laid down in

chapter II with which we are not concerned. In understanding 178

the relationship amongst the three players i.e., the sponsor, AMC

and Trustees, Regulation 7B is relevant which reads thus:

"7B. (1) No sponsor of a Mutual Fund, its associate or group company including the asset management company of the fund, through the Schemes of the Mutual Fund or otherwise, individually or collectively, directly or indirectly, have -

(a) 10% or more of the share-holding or voting rights in the asset management company or the trustee company of any other Mutual Fund; or

(b) Representation on the board of the asset management company or the trustee company of any other Mutual Fund.

(2) Any shareholder holding 10% or more of the share-holding or voting rights in the asset management company or the trustee company of a Mutual Fund, shall not have directly or indirectly, -

a) 10% or more of the share-holding or voting rights in the asset management company or the trustee company of any other Mutual Fund; or

b) Representation on the board of the asset management company or the trustee company of any other Mutual Fund.

(3) Any person not in conformity with the sub-

regulations (1) and (2) of this regulation, as on the date of the coming into force of this regulation shall comply with the sub-regulations (1) and (2) within a 179

period of one year from the date of the coming into force of this regulation:

Provided that in the event of a merger, acquisition, Scheme of arrangement or any other arrangement involving the sponsors of the Mutual Funds, shareholders of the asset management companies or trustee companies, their associates or group companies which results in the incidental acquisition of shares, voting rights or representation on the board of the asset management companies or trustee companies, this regulation shall be complied with within a period of one year of coming into force of such an arrangement."

180. The Regulation 7B ensures that there is no conflict of

interest. Therefore, the Regulation 7B provides that a sponsor of

a Mutual Fund and even its associate and group companies

including AMC of the fund through the Schemes of Mutual Fund

cannot have 10% or more shareholding or voting rights in AMC or

Trustee company or any other Mutual Fund. Similarly, the

sponsor or its associates or group of companies cannot have the

representation on the board of AMC or Trustee company or any

other Mutual Fund. A trust deed, as contemplated by Regulation

14 has to be registered as an instrument of trust executed by the 180

sponsor in favour the Trustees or Trustee company. The third

schedule lays down the mandatory clauses to be incorporated in

the trust deed. One of the most important clauses therein is

clause (3) which requires that the trust deed must provide that the

Trustees shall take into their custody, or under their control, all

the property of the Schemes of the Mutual Fund and hold it in

trust for the unit-holders. The second important clause in the third

schedule is that the trust deed must specifically provide that the

unit-holders would have beneficial interest in the trust property to

the extent of individual holding in respective Schemes. Thus, all

the property of the Schemes of a Mutual Fund is in custody and

under control of the Trustees and that the Trustees hold the same

in fiduciary capacity for the benefit of the unit-holders. Moreover,

it is provided that the unit-holders would have beneficial interest

in the trust property.

181. As regards the obligations of the Trustees to the

beneficiaries, there are important mandatory clauses required to

be incorporated in the trust deed. As far as the duties and

responsibilities of the Trustees are concerned, clauses (8) to (10)

of the third schedule are relevant which read thus: 181

"8. The Trust Deed shall provide for the duty of the trustee to take reasonable care to ensure that the funds under the Schemes floated by and managed by the asset management company are in accordance with the Trust Deed and Regulations.

9. The Trust Deed must provide for the power of the Trustees to dismiss the asset management company under the specific events only with the approval of Board in accordance with the Regulations.

10. The Trust Deed shall provide that the Trustees shall appoint a custodian and shall be responsible for the supervision of its activities in relation to the Mutual Fund and shall enter into a custodian Agreement with the custodian for this purpose."

The above clauses must be incorporated in a Trust Deed in

view of Regulation 15 which reads thus:

"15. Contents of trust deed.--(1) The trust deed shall contain such clauses as are mentioned in the Third Schedule and such other clauses which are necessary for safeguarding the interests of the unit- holders.

(2) No trust deed shall contain a clause which has the effect of--

182 (i) limiting or extinguishing the obligations and liabilities of the trust in relation to any Mutual Fund or the unit-holders; or

(ii) indemnifying the Trustees or the asset management company for loss or damage caused to the unit-holders by their acts of negligence or acts of commission or omission."

182. Basically, the duty to take care of the interest of the unit-

holders is the most important duty of the Trustees, as they hold

the assets of the Schemes in fiduciary capacity. Sub-clauses (i)

and (ii) of clause (2) of Regulation 15 make it clear that by

making a provision in the trust deed, the liabilities and obligations

of the Trustees to any Mutual Fund cannot be limited or

extinguished. Sub-clause (ii) clause (2) of Regulation 15 clearly

indicates that the Trustees or AMC are responsible for any loss or

damage caused to the unit-holders by their acts of negligence or

acts of commission or omission. The reason is that it is provided

that there cannot be a clause indemnifying the Trustees for such

a loss or damage. There is a salutary provision in the third

schedule in the form of clause 17 which lays down that the trust

deed shall contain a clause to the effect that no amendment to

the trust deed shall be carried out without the prior approval of 183

SEBI and unit-holders. Thus, amendment to the trust deed is

impermissible without the prior approval of the unit-holders.

183. Before we go into the provisions contained in Regulation

18 which lay down the rights and obligations of the Trustees,

there is one more clause in the third schedule which is clause 12

which also gives an idea about the role of the Trustees. Clause

12 read thus:

"12. The Trust Deed shall provide for the responsibility of the Trustees to supervise the collection of any income due to be paid to the Scheme and for claiming any repayment of tax and holding any income received in trust for the holders in accordance with the Trust Deed, Regulations."

We must also refer to clause 7 of the third schedule which reads

thus:

"7. The Trust Deed shall provide that the Trustees shall appoint an asset management company approved by the board, to float Schemes for the Mutual Fund after approval by the Trustees and Board, and manage the funds mobilised under various Schemes, in accordance with the provisions of the Trust Deed and Regulations. The 184

Trustees shall enter into an Investment Management Agreement with the asset management company for this purpose, and shall enclose the same with the Trust Deed."

.

(Underlines supplied)

184. Thus, AMC is to be appointed by the Trustees after seeking

approval of SEBI. AMC so appointed is empowered to launch

Schemes of a Mutual Fund after approval of SEBI and manage

the funds mobilized under various Schemes in accordance with

the provisions of the trust deed and the Mutual Funds

Regulations. It is the duty of AMC to invest the funds collected

under the Schemes.

185. Now we come to the rights and obligations of the Trustees

as laid down in Regulation 18. The first and foremost obligation

is to enter into an investment management agreement containing

the clauses which are provided in the fourth schedule. As laid

down in clause (4) of the Regulation 18, the duty of the Trustees

is that they should ensure before the launch of any Scheme that

AMC complies with the various requirements provided therein,

such as having the systems in place for its back office, dealing 185

room and accounting, appointment of all key personnel including

fund managers for the Schemes, appointment of Auditors,

appointment of registrars etc. There are very important duties

assigned to the Trustees in sub-clauses (8) to (15) of Regulation

18 of the Mutual Funds Regulations which read thus:

"(8) The Trustees shall ensure that the asset management company has been managing the Mutual Fund Schemes independently of other activities and have taken adequate steps to ensure that the interest of investors of one Scheme are not being compromised with those of any other Scheme or of other activities of the asset management company.

(9) The Trustees shall ensure that all the activities of the asset management company are in accordance with the provisions of these regulations.

(10) Where the Trustees have reason to believe that the conduct of business of the Mutual Fund is not in accordance with these regulations and the Scheme they shall forthwith take such remedial steps as are necessary by them and shall immediately inform the Board of the violation and the action taken by them.

186 (11) Each trustee shall file the details of his transactions of dealing in securities with the Mutual Fund on a quarterly basis.

(12) The Trustees shall be accountable for, and be the custodian of, the funds and property of the respective Schemes and shall hold the same in trust for the benefit of the unit-holders in accordance with these regulations and the provisions of trust deed.

(13) The Trustees shall take steps to ensure that the transactions of the Mutual Fund are in accordance with the provisions of the trust deed.

(14) The Trustees shall be responsible for the calculation of any income due to be paid to the Mutual Fund and also of any income received in the Mutual Fund for the holders of the units of any Scheme in accordance with these regulations and the trust deed.

(15) The Trustees shall obtain the consent of the unit-holders--

(a) whenever required to do so by the Board in the interest of the unit-holders; 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.

187 (d) [* * *]

[(15A) The Trustees shall ensure that no change in the fundamental attributes of any Scheme or the trust or fees and expenses payable or any other change which would modify the Scheme and affects the interest of unit-holders, shall be carried out unless,--

(i) a written communication about the proposed change is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Office of the Mutual Fund is situated; and

(ii) the unit-holders are given an option to exit at the prevailing Net Asset Value without any exit load.]

(underlines supplied)

186. We are considering clause (15) of Regulation 18 in the

subsequent part of the judgment, when we consider the

provisions of Regulations 39 to 42. Clause (18) of Regulation 18

provides that the Trustees shall quarterly review the networth of

AMC. Thereafter, there are other clauses regarding Due

Diligence and Specific Due Diligence, as contained in clause (25).

188 As a part of specific due diligence, it is provided that it is the duty

of the Trustees to prescribe and adhere to the Code of ethics.

187. Now we come to the duties and responsibilities of AMC.

As pointed out earlier, AMC is required to be appointed by the

Trustees. The form of application for appointment/approval of

AMC is as per Form-D. It must be clarified here that the power to

appoint AMC is with the sponsor, but if it is so authorized by the

trust deed, the Trustees are empowered to appoint AMC. The

qualifications for appointment of AMC are also laid down in Regulation 21.

188. The fourth schedule lays down what should be the

mandatory clauses in the investment management agreement

executed by and between the Trustees and AMC, as provided in

clause (2) of Regulation 18. The role of AMC is reflected from the

contents of the fourth schedule.

What is important is clause (20) of the Regulation 25 which

reads thus:

"(20) The asset management company and the sponsor of the Mutual Fund shall be liable to compensate the affected investors and/or the 189

Scheme for any unfair treatment to any investor as a result of inappropriate valuation."

The said clause means that if any investor gets unfair

treatment as a result of inappropriate valuation, AMC and

sponsor of the Mutual Fund are liable to pay the compensation to

the investors. Regulation 26 provides for Mutual Fund appointing

a custodian to carry out the custodial services for the Schemes of

the said fund. Regulation 27 provides that Mutual Fund is

required to enter into a custodial agreement with the custodian

with the prior approval of the Trustees.

189. Now, we come to the provisions of the Mutual Funds

Regulations which lay down the procedure for launching the

Schemes. The procedure for launching the Schemes of a Mutual

Fund is laid down in Chapter-V. Regulation 28 makes it clear that

no Schemes can be launched by AMC unless it is approved by

the Trustees and a copy of offer document is filed with SEBI. It is

provided that the sponsor or AMC shall invest not less than 1% of

the amount which would be raised in the new fund offer or

Rupees fifty lakhs, whichever is less. It is provided that such

investment shall not be redeemed unless the Scheme is wound 190

up. In what manner the disclosure should be made in the offer

document is laid down in Regulation 29. SEBI has power to

require AMC to carry out such modification in the offer document

as it may be deem fit in the best interest of investors. There are

provisions regarding listing the 'close ended Scheme' and re

purchase of 'close ended Scheme'. In case of open ended

Scheme, the unit-holders can apply for redemption at any time.

190. Thus, to summarize, a Mutual Fund is registered at the

instance of the sponsor. The sponsor is required to execute a

trust deed in favour of the Trustees. It can be a Board of Trustee

or a Trustee company. The appointment of Trustees is to be

made with the prior approval of SEBI. The Trustees have to

appoint AMC by entering into investment management

agreement. Perusal of the fourth schedule which describes the

contents of the investment management agreement shows that it

is the responsibility of AMC to float the Schemes for the Mutual

Fund with the approval of the Trustee. It is the responsibility of

AMC to manage the funds mobilized under various Schemes

which shall be invested by AMC in accordance with the provisions

of the Trust Deed and the Mutual Funds Regulations. There is 191

also a power vesting in the Trustees to dismiss AMC with the

prior approval of SEBI. Before doing so, AMC must be asked to

submit a report, as may be required by the Trustees or SEBI.

There is a right vested in the Trustees of obtaining the information

from AMC concerning the various Schemes of the Mutual Fund

and quarterly reports on the functioning of the various Schemes

of the Mutual Fund and it is the responsibility of the Trustees to

ensure that AMC is diligent and the activities of AMC are

conducted in accordance with the provisions of the Regulations.

191. As provided in the third schedule, the property of the

Schemes is in the custody and/or under control of the Trustees

and that the Trustees are required to act in trust for the interest of

the unit-holders. The unit-holders are having the beneficial

interest in the trust property. Thus, it can be broadly said that it is

the duty of the Trustees to safeguard the interests of the

investors in the Scheme, as the assets of a Scheme are held by

the Trustees in trust for the benefit of the investors.

192. Various provisions of the Regulations contemplate that

there should not be any conflict of interest amongst key players

and therefore, it is provided that no AMC or its Directors, Officers, 192

or employee of any AMC shall be eligible to be appointed as a

Trustee of any other Mutual Fund. It is also provided that no

person who is appointed as a Trustee of a Mutual Fund shall be

eligible to be appointed as a Trustee of any other Mutual Fund.

It is provided that two third (2/3rd) of the Trustees shall be

independent persons and they shall not be associated with the

sponsors. If a trustee company is appointed as a trustee, its

directors cannot act as a Trustee of any other Trustee company

unless the object of the Trust is not in conflict of interest with the

object of the Mutual Fund. It is also provided that the Trustee

company and AMC cannot have the same Auditor.

193. Before we turn to the interpretation of the relevant

provisions of the Mutual Funds Regulations, it is necessary to

summarize the obligations and duties of AMC and the Trustees

under the Mutual Funds Regulations. We enlist some of the

important duties and obligations.

A. Obligations of the Trustees:

(i) To ensure that AMC enters into transactions in accordance with the Mutual Funds Regulations and the Scheme [Regulation 18 (7);

193

(ii) To ensure that AMC takes adequate steps to ensure that interests of investors of one Scheme are not being compromised with those of any other Scheme or activities of AMC [Regulation 18 (8)];

(iii) To ensure that all the activities of AMC are conducted in accordance with the provisions of the Mutual Funds Regulations [Regulation 18 (9)];

(iv) To take remedial steps and to inform SEBI about the violations of the Mutual Funds Regulations committed by AMC [Regulation 18 (10)];

(v) The Trustees shall be accountable for and be the custodian of the funds and property of the respective Schemes and shall hold the same in trust for the benefit of the unit-holders in accordance with the Mutual Funds Regulations and the provisions of the Trust Deed [Regulation 18 (12)];

(vi) Obligation to take steps to ensure that the transactions of the Mutual Fund are in accordance with the provisions of the trust deed [Regulation 18 (13)];

(vii) The Trustees shall be under an obligation to obtain consent of the unit-holders when the majority of the Trustees decide to wind up or prematurely redeem the units [Regulation 18 (15) (c)];

194

(viii) Obligation not to effect change in the fundamental attributes of any Scheme or any other change which would modify the Scheme and which affects the interests of the unit-holders, without complying with the requirements of clause 15A of Regulation 18 [Regulation 18 (15A)];

(ix) Obligation to review all transactions carried out by and between the Mutual Funds, AMC and its associates [Regulation 18 (17)];

(x) To abide by the Code of Conduct as specified in the fifth Schedule [Regulation 18 (22)];

(xi) To periodically review the investor's complaints received and redressal of the same by AMC [Regulation 18 (21)];

(xii) To exercise General Due Diligence, as incorporated in clause (25) of Regulation 18 which includes maintaining of the records of the decisions of the Trustees at their meetings and minutes of the meetings and prescribing as well as adhering to a code of ethics [Clause-A and B under Regulation 18 (25)];

(xiii) To take into custody or under their control all the property of the Schemes of the Mutual Fund and hold it in trust for unit-holders [clause (3) of Third Schedule];

(xiv) To act in the interest of the unit-holders [clause (5) of Third Schedule];

195

(xv) To dismiss AMC under specific events with the approval of SEBI [clause (9) of Third Schedule];

(xvi) To appoint a custodian and shall remain responsible for the supervision of its activities in relation to the Mutual Fund and to enter into an agreement with the custodian [clause (10) of Third Schedule];

(xvii) To perform the duties as specified in Regulation 49-I of the Mutual Funds Regulations (applicable to real estate Mutual Fund Scheme); and

(xviii) To produce to the inspecting officer such books of accounts, records and other documents and to furnish such statements and information relating to the activities of the Mutual Fund in its custody or control [Regulation 63 (1)].

B. Obligations of the AMC:

i) To invest the funds raised under various Schemes in

accordance with the provisions of the Trust Deed and Regulations [ clause (iii) of fourth Schedule];

ii) Not to acquire any of the assets out of the Scheme property which involves the assumption of any liability which is unlimited or which may result in encumbrance of the Scheme property [clause (iv) fourth schedule];

196

iii) Not to take up any activity in contravention of the Mutual Funds Regulations [clause (v) of fourth schedule];

iv) To disclose the basis of calculating the repurchase price and NAV of various Schemes of the fund to the investors at such intervals, as may be specified by the Trustees and SEBI [clause (viii) of fourth schedule];

v) To furnish information to the Trustees concerning the operations of various Schemes of the Mutual Fund managed by it at such intervals and in such a manner, as may be required by the Trustees [clause

(ix) of fourth schedule];

vi) To submit quarterly reports on functioning of the Schemes to the Trustees [clause (x) of fourth schedule];

vii) To take all reasonable steps and exercise due diligence to ensure that investment of funds pertaining to any Scheme is not contrary to the provisions of the Mutual Funds Regulations and the Trust Deed [clause (1) of Regulation 25];

viii) To exercise due diligence and care in all its investments decisions as would be exercised by 197

other person engaged in the same business [clause (2) of Regulation 25];

ix) To abide by the provisions of the Code of Conduct, as specified in fifth schedule;

x) To report and disclose all the transactions in debt and money market securities including inter Scheme transfers, as may be specified by SEBI [clause (21) of Regulation 25];

xi) Not to launch any Schemes unless it is approved by the Trustees and a copy of the offer document is filed with SEBI [clause (1) of Regulation 28];

xii) To follow the Advertisement Code set out in the sixth schedule [Regulation 30];

xiii) To make stipulated disclosures in the offer document [Regulation 29];

xiv) To despatch the redemption or repurchase proceeds within ten working days from the date of redemption or repurchase [clause (b) of Regulation 53];

xv) To prepare in respect of each financial year, an annual report and annual statement of accounts of the Schemes [Regulation 54 read with 11th schedule]; and 198

xvi) To make periodical and half yearly disclosures [Regulations 58 and 59].

INTERPRETATION OF PROVISIONS REGARDING WINDING UP OF A SCHEME (ISSUE NOs (ii) and (iii):

194. Now, we go to the relevant provisions regarding winding up

of Schemes. The specific provisions regarding winding up of a

Scheme are contained in Regulations 39 to 42 which read thus:

"39. Winding up.--(1) A close-ended Scheme shall be wound up on the expiry of duration fixed in the Scheme 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,--

(a) on the happening of any event which, in the opinion of the Trustees, requires the Scheme to be wound up; or

(b) if seventy-five per cent of the unit-holders of a Scheme pass a resolution that the Scheme be wound up; or

(c) if the Board so directs in the interest of the unit-holders.

199

(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:--

(a) to the Board; and

(b) in two daily newspapers having circulation all over India, a vernacular newspaper circulating at the place where the Mutual Fund is formed.

40. Effect of winding up.--On and from the date of the publication of notice under clause (b) of sub-regulation (3) of regulation 39, the trustee or the asset management company as the case may be, shall--

(a) cease to carry on any business activities in respect of the Scheme so wound up;

(b) cease to create or cancel units in the Scheme;

(c) cease to issue or redeem units in the Scheme.

41. Procedure and manner of winding up.--

(1) The trustee shall call a meeting of the unit- holders to approve by simple majority of the unit- holders present and voting at the meeting resolution for authorising the Trustees or any other person to take steps for winding up of the Scheme:

200

Provided that a meeting of the unit-holders shall not be necessary if the Scheme is wound up at the end of maturity period of the Scheme.

(2)(a) The trustee or the person authorised under sub-regulation (1) shall dispose of the assets of the Scheme concerned in the best interest of the unit-holders of that Scheme.

(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 unit-holders 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) On the completion of the winding up, the trustee shall forward to the Board and the unit-

holders a report on the winding up containing particulars such as circumstances leading to the winding up, the steps taken for disposal of assets of the fund before winding up, expenses of the fund for winding up, net assets available for distribution to the unit-holders and a certificate from the Auditors of the fund.

(4) Notwithstanding anything contained in this regulation, the provisions of these regulations in 201

respect of disclosures of half-yearly reports and annual reports shall continue to be applicable until winding up is completed or the Scheme ceases to exist.

42. Winding up of the Scheme.--After the receipt of the report under sub-regulation (3) of regulation 41, if the Board is satisfied that all measures for winding up of the Scheme have been complied with, the Scheme shall cease to exist.

(underlines supplied)

195. Apart from the question of validity of the provisions of

Regulations 39 to 41, another issue is whether for winding up a

Scheme, the requirement of obtaining the consent of the unit-

holders, as provided in clause (15) of Regulation 18 can be read

into sub-clause (a) of clause (2) of Regulation 39. Another issue

is regarding interplay between, clause (15A) of Regulation 18 and

sub-clause (a) of clause (2) of Regulation 39. For the sake of

convenience, we are reproducing herewith both clauses (15) and

(15A) of Regulation 18 which read thus:

"(15) The Trustees shall obtain the consent of the unit-

holders--

202

(a) whenever required to do so by the Board in the interest of the unit-holders; 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.

(d) [* * *]"

(15A) The Trustees shall ensure that no change in the fundamental attributes of any Scheme or the trust or fees and expenses payable or any other change which would modify the Scheme and affects the interest of unit-holders, shall be carried out unless,--

(i) a written communication about the proposed change is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Office of the Mutual Fund is situated; and

(ii) the unit-holders are given an option to exit at the prevailing Net Asset Value without any exit load."

(Underlines supplied)

196. The argument of the petitioners is that the consent, as

contemplated by sub-clause (c) of clause (15) of Regulation 18

is mandatory and it is a condition precedent for winding up of 203

a Scheme pursuant to sub-clause (a) of clause (2) of

Regulation 39.

197. On the other hand, the contention of the respondents is

that Regulations 39 to 42 which are a part of Chapter-V of the

Mutual Funds Regulations constitute a complete code for winding

up of a Scheme and, therefore, what is provided in clauses (15),

and (15A) of Regulation 18 which form a part of Chapter-III of the

Mutual Funds Regulations cannot be imported into Regulation 39.

It is contended that if the consent of the unit-holders as

contemplated by sub-clause (c) of clause (15) of Regulation 18 is

made applicable to winding up of a Scheme pursuant to sub-

clause (a) of clause (2) of Regulation 39, sub-clause (b) of clause

(2) of Regulation 39 will become redundant, inasmuch as, it

provides that if 75% of the unit-holders of a Scheme pass a

resolution for winding up of a Scheme, it can be wound up. It is

submitted that if the interpretation as per the case of the

petitioners is accepted, the difference between sub-clauses (a)

and (b) of clause (2) of Regulation 39 will be completely

obliterated. It is also contended by the respondents that the entire

business of Mutual Funds is highly regulated in terms of the 204

Mutual Funds Regulations and an expert statutory body like SEBI

is the regulatory authority. There are several safeguards and

safety rails provided in the Mutual Funds Regulations which

ensure that the Trustees act for the benefit of the unit-holders and

investors. The provisions of the Regulations require the Trustees

and AMC to maintain arms' distance. The Trustees are the

experts in the field and by using their expertise, they have to

decide what is in the interest of the unit-holders. If the Trustees

are of the considered view that the interests of the unit-holders

will be sub served by winding up of a Scheme, they should have

freedom to take a decision of winding up. Except when

compliance is made with the provisions of Regulation 38, the

investment in Mutual Fund never has guaranteed returns and the

investment in the Mutual Fund is always subject to risks. Those

investors who wants fixed returns normally take recourse to safe

investments like Government securities, bank deposits etc.

Moreover, it was argued that the Trustees cannot be forced to

continue to run the Schemes. One of the arguments made was

that on the one hand, the petitioners have made very serious

allegations against the Trustees and AMC of mismanaging the

funds of not acting in fiduciary capacity in the interest of the unit- 205

holders etc, and on the other hand, by filing these writ petitions,

they want to force the Trustees and AMC to run the said

Schemes. An argument is also canvassed by the respondents

that the Trustees and AMC were never put to notice that even for

winding up of the Schemes under sub-clause (a) of clause (2) of

Regulation 39, consent of the unit-holders will be required. If they

were made aware of the said position, they would not have

floated the said Schemes at all. It was also submitted that the

consent referred in sub-clause (c) of clause 15 of Regulation

18 is an approval as contemplated by clause (1) of Regulation

41(1). It was submitted that there was no difference between the

concept of 'consent' and 'approval' and in fact, it is one and the

same.

198. There is a serious doubt whether the aforesaid arguments

are open to FTMF, in view of the Statement of Additional

Information published by it. We find that the fact that the consent

of unit-holders is required for winding up of a Scheme pursuant to

sub-clause (a) of clause (2) of Regulation 39 is accepted by

FTMF in the Statement of Additional Information published by it. 206

But, still we will have to do the exercise of interpreting

relevant Regulations. Now the question is in what manner sub-

clause (c) of clause (15) of Regulation 18 can be interpreted. On

the approach of the Court, we will be guided by the law laid down

by the Apex Court in the case of Ajay Agarwal (supra). That

was a case where the issue was of the interpretation of Section

11B of the SEBI Act, in the context of invocation of the said

provision by the Chairman of SEBI for restraining the

respondents before the Apex Court from associating with any

corporate body in accessing the securities market and

prohibiting/restraining them from buying and selling in the

securities market. The issue was of retrospective operation of

Section 11B. In paragraph 34, the Apex Court held thus:

"34. The said Act is pre-eminently a social welfare legislation seeking to protect the interests of common men who are small investors. It is a well-known canon of construction that when the court is called upon to interpret provisions of a social welfare legislation the paramount duty of the court is to adopt such an interpretation as to further the purposes of law and if possible eschew the one which frustrates it. Keeping this principle in mind if 207

we analyse some of the provisions of the Act it appears that the Board has been established under Section 3 as a body corporate and the powers and functions of the Board have been clearly stated in Chapter IV and under Section 11 of the said Act."

(emphasis added)

199. In the case of Securities and Exchange Board of India -

vs- Kishore R. Ajmera71, the Apex Court has dealt with the

objects of SEBI Act. In paragraph 25 of the said decision, the

Apex Court held thus:

"25. The SEBI Act and the Regulations framed thereunder are intended to protect the interests of investors in the Securities Market which has seen substantial growth in tune with the parallel developments in the economy. Investors' confidence in the capital/securities market is a reflection of the effectiveness of the regulatory mechanism in force. All such measures are intended to pre-empt manipulative trading and check all kinds of impermissible conduct in order to boost the investors' confidence in the capital market. The primary purpose of the statutory enactments is to provide an environment conducive to increased participation and investment in the securities market 71 (2016) 6 SCC 368 208

which is vital to the growth and development of the economy. The provisions of the SEBI Act and the Regulations will, therefore, have to be understood and interpreted in the above light".

(emphasis added)

200. Regulation 18 is titled as "Rights and Obligations of the

Trustees" which is a part of Chapter-III titled as "Constitution and

management of Mutual Fund and operation of Trustees etc".

Regulation 18 sets out several obligations of the Trustees. In

clause (15), the word 'shall' has been used. When Regulation 18

contains several obligations of the Trustees, one cannot argue

that the obligations mentioned therein need not be performed. An

obligation is a legal duty to do or not to do any act. The Trustees

have no choice but to discharge their obligations. Moreover, the

Trustees have to act in fiduciary capacity qua unit-holders.

Regulation 18 does not provide for any exceptions. Therefore,

strict interpretation of the clauses in Regulation 18 is called for.

Mutual Funds Regulations, being framed under SEBI Act, is a

piece of subordinate/delegated Social Welfare Legislation as

SEBI Act, as held by the Apex Court, is itself a Social Welfare

Legislation. There are as many as twenty seven clauses in 209 Regulation 18. Clause (15) of Regulation 18 provides that the

Trustees shall obtain the consent of the unit-holders in three

contingencies which are enlisted in sub-clauses (a), (b) and (c)

thereof. Sub-clause (a) is applicable whenever the Board requires

the Trustees to do so in the interest of the unit-holders. The

Board is defined in clause (a) of Section 2 of the SEBI Act to

mean SEBI. Thus, for doing a particular act, if SEBI wants the

Trustees to take consent of the unit-holders in the interest of the

unit-holders, it is the obligation of the Trustees to obtain their

consent. Under sub-clause (b), when a requisition is made by

three-fourth of the unit-holders of any Scheme providing that for

the purposes of doing a particular act, the consent of the unit-

holders is necessary, the Trustees are under a mandate to obtain

consent of the unit-holders. Sub-clause (c) is applicable when

"the majority of the Trustees decide to wind up or prematurely

redeem the units". Thus, sub-clause (c) requires the Trustees to

obtain consent of the unit-holders when the majority of the

Trustees decide to wind up or prematurely redeem the units.

201. An argument is tried to be canvassed on behalf of the

respondents that sub-clause (c) does not deal with winding up of 210

a Scheme. The said argument is fallacious for more than one

reason. Firstly, the Mutual Funds Regulations do not provide for

winding up of a Mutual Fund, but it only provide for winding up of

a Scheme. Secondly, Regulation 14 provides that a Mutual Fund

shall be constituted in the form of a trust under a deed which is

registered in accordance with the Indian Registration Act, 1908.

As, a Mutual Fund is a trust which is governed by the Trusts Act,

obviously, there is no provision made in the Mutual Funds

Regulations for winding up of a Mutual Fund. As stated earlier,

sub-clause (c) of clause (15) of Regulation 18 applies to a

decision to wind up or a decision to prematurely redeem the units.

The word 'unit' as defined in clause (z) of Regulation 2 to mean

the interest of the unit-holders in a Scheme. Thus, the decision of

majority of the Trustees to redeem the units is a decision to

redeem units in a particular Scheme. This indicates that sub-

clause (c) deals with a Scheme of a Mutual Fund. On the one

hand, there is no specific provision incorporated in the Mutual

Funds Regulations for winding up of a Mutual Fund and on the

other hand, there is a specific provision for winding up of a

Scheme. Therefore, there is no manner of doubt that sub-clause

(c) of clause (15) of Regulation 18 refers to a decision of majority 211

of the Trustees to wind up a Scheme. No other winding up is

contemplated by the Regulations. As per the definition of

'Trustees' contained in clause (y) of Regulation 2, the Trustees

can be a Board of Trustees or a Trustee Company. In this case,

the Trustees are a Trustee Company. Therefore, in this case, the

decision to wind up a Scheme will be always by majority of the

Board of Directors of the Trustees. As stated earlier, the Mutual

Funds Regulations do not provide for winding up of any of the

entities, save and except a Scheme. Hence, clause (c)

undoubtedly refers to winding up of a Scheme.

202. Whenever the Trustees exercise powers which are

conferred on them or whenever the Trustees take actions which

are permissible to be taken under the Mutual Funds Regulations,

they remain bound by their obligations laid down under

Regulation 18. There are no exceptions carved out to the

obligations contained in Regulation 18. There is no specific

provision in the Mutual Funds Regulations which overrides the

obligations of the Trustees as provided in Regulation 18. The

reason appears to be that it is the obligation of the Trustees to

take in their control the property of Schemes of a Mutual Fund 212

and hold it in trust and for the benefit of the unit-holders. They

always act in fiduciary capacity. Such a clause is required to be

incorporated in the trust deed which is required to be executed as

per Regulation 14. The said mandatory clause is clause (3) in

third schedule.

203. Now, we come to sub-clause (a) of clause (2) of Regulation

39 which provides that a Scheme of the Mutual Fund may be

wound up on happening of any event which in the opinion of the

Trustees requires a Scheme to be wound up. It is obvious that

such an opinion has to be of majority of the Board of Trustees or

of majority of Directors of a Trustee company, as the case may

be. Clause (3) of Regulation 39 provides that where a Scheme is

to be wound up under sub-clause (2), the Trustee shall give

notices as provided therein. Once such notices are published,

Regulation 40 triggers in, as a result of which, the Trustees and

AMC are under an obligation to stop carrying on any business

activities in respect of the Scheme and not to create or cancel the

units of the Scheme and to stop issuing or redeeming the units.

Therefore, the first step towards winding up triggers in after a 213

publication is made as per clause (3) of Regulation 39. Clause (1)

of Regulation 41 reads thus:

"41. Procedure and manner of winding up.--

(1) The trustee shall call a meeting of the unit-

holders to approve by simple majority of the unit- holders present and voting at the meeting resolution for authorising the Trustees or any other person to take steps for winding up of the Scheme:

Provided that a meeting of the unit-holders shall not be necessary if the Scheme is wound up at the end of maturity period of the Scheme."

204. The approval contemplated by clause (1) of Regulation 41

is for limited purposes of authorizing either the Trustees or any

other persons to take steps for winding up of the Scheme. Thus,

clause (1) of Regulation 41 comes into picture only after a valid

decision is taken to wind up a Scheme in accordance with one of

the three sub-clauses (a), (b) and (c) of clause (2) of Regulation

39 and after due compliance is made with clause (3) of

Regulation 39. The approval contemplated by said provision is

not to the decision of the winding up of a Scheme. The approval

is only on the issue who will take steps for winding up of the 214

Scheme. Whether the Trustees will take steps or any other

person. The approval under clause (1) of Regulation 41 has

nothing to do with the decision to wind up a Scheme. The

approval is only for authorising the Trustees or any other person

to take steps for actual winding up.

205. Coming back to sub-clause (c) of clause (15) of Regulation

18, the consent of the unit-holders contemplated therein is at a

stage when the majority of the Trustees decide to wind up a

Scheme or prematurely redeem the units. This consent is to the

decision to wind up a Scheme. It has nothing to do with the

approval granted by the unit-holders under Regulation 41 (1) for

authorizing either the Trustees or any other person to take steps

for winding up of the Scheme. The steps for winding up of a

Scheme are provided in clause (2) of Regulation 41. The first

step is to dispose of the assets of the Scheme in the best interest

of the unit-holders. The second step is to apply the sale proceeds

towards discharge of liabilities as are due and payable under the

Scheme. The third step is to set apart the amount of the

expenditure likely to be required for liquidation. The fourth step is

to distribute the balance to the unit-holders in proportion to their 215

respective interest in the assets of the Scheme as on the date of

the decision of winding up. Even assuming that the word

'approval' and 'consent' convey the same meaning, the approval

contemplated by clause (1) of Regulation 41 is completely

different from the 'consent' contemplated by sub-clause (c) of

clause (15) of Regulation 18. Thus, the 'consent' contemplated in

sub-clause (c) of clause (15) of Regulation 18 cannot be equated

with or read as an 'approval' contemplated by clause (1)

Regulation 41. As there is an express provision of approval of

unit-holders in clause (1) of Regulation 41, there was no reason

for the framers of the Regulations to provide for the same

approval in some other Regulation.

206. As the word consent used in sub-clause (c) of clause (15)

of Regulation 18 has nothing to do with approval under

Regulation 41 (1), some meaning will have to be assigned to the

word 'consent' contemplated by sub-clause (c) of clause (15) of

Regulation 18, in view of the well settled law regarding the

interpretation of statutes. In the case of O.P. Singla and another 216

-vs- Union of India and others72, in paragraph 17, the Apex

Court held thus:

"xxxx However, it is well recognised that, when a rule or a section is a part of an integral Scheme, it should not be considered or construed in isolation. One must have regard to the Scheme of the fasciculus of the relevant rules or sections in order to determine the true meaning of any one or more of them. An isolated consideration of a provision leads to the risk of some other inter-related provision becoming otiose or devoid of meaning. xxxx"

(emphasis added)

Therefore, the provision of sub-clause (c) of clause (15) of

Regulation 18 cannot be read in isolation. We have to consider

the entire Scheme of the Mutual Funds Regulations for assigning

meaning to the consent contemplated by sub-clause (c) of clause

(15) of Regulation 18.

207. In the case of Hardeep Singh (supra), in paragraph 44 of

the said decision, the Apex Court held thus:

72

(1984) 4 SCC 450 217

"44. No word in a statute has to be construed as surplusage. No word can be rendered ineffective or purposeless. Courts are required to carry out the legislative intent fully and completely. While construing a provision, full effect is to be given to the language used therein, giving reference to the context and other provisions of the statute. By construction, a provision should not be reduced to a "dead letter" or "useless lumber". An interpretation which renders a provision otiose should be avoided otherwise it would mean that in enacting such a provision, the legislature was involved in "an exercise in futility" and the product came as a "purposeless piece" of legislation and that the provision had been enacted without any purpose and the entire exercise to enact such a provision was "most unwarranted besides being uncharitable".

(emphasis added)

Therefore, sub-clause (c) of clause (15) of Regulation 18

has to be interpreted in such manner that the 'consent'

contemplated therein does not become ineffective or

purposeless. It cannot be allowed to become redundant. There is

another decision on the subject which is in the case of Union of 218

India -vs- Brigadier P.S. Gill73, in paragraph 17, the Apex Court

held thus:

"17. Each word used in the enactment must be allowed to play its role howsoever significant or insignificant the same may be in achieving the legislative intent and promoting legislative object. Although it is unnecessary to refer to any decisions on the subject, we may briefly recount some of the pronouncements of this Court in which the expression "subject to" has been interpreted."

(emphasis added)

208. Thus, it is the duty of this Court to assign some significant

meaning to the word 'consent' contemplated by sub-clause (c) of

clause (15) of Regulation 18. Moreover, a provision of law must

be construed in such a manner that it subserves the purpose of

law. Even if contextual or textual interpretations are adopted, only

one conclusion is possible that the consent contemplated by sub-

clause (c) is to the majority decision of the Trustees for winding

up of a Scheme or premature redemption of units in a Scheme.

As stated earlier, sub-clause (a) of clause (2) of Regulation 39

provides that a Scheme of Mutual Fund may be wound up if, in

the opinion of the Trustees, an event has occured which requires 73 (2012) 4 SCC 463 219

the Scheme to be wound up. Clause (3) of Regulation 39 uses

the words "where a Scheme is to be wound up". On mere

formation of opinion by the Trustees as provided in sub-clause (a)

of clause (2) of Regulation 39, it cannot be said that the Scheme

can be termed as 'a Scheme to be wound up' within the meaning

of clause (3). When the majority of the Trustees form an opinion

as contemplated by sub-clause (a) of clause (2) of Regulation 39,

the Trustees are under a mandate to take consent of the unit-

holders as contemplated by sub-clause (c) of clause (15) of

Regulation 18. Only after such consent is taken, it can be said

that the Scheme is to be wound up as provided in clause (3) of

Regulation 39. It is only after obtaining such consent that

recourse to clause (3) of Regulation 39 can be taken.

209. Obviously, there can be a 'consent' of the unit-holders 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 220

(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 -

vs- District Magistrate, Nanital and others74. 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 half still continues to be majority. Majority cannot be said only confining to more than half. Majority of three-fourths of the total number, two-thirds of the total number would all come within the sphere of the word "majority". A person is said to have won by a majority of fifty thousand votes or thirty thousand votes. All speak about the extent of majority. A majority may start from a number which is more than half and would continue till the balance of the number excluding one number. In the matter of votes if a resolution is carried either in favour or against by all it is said to be unanimous. Majority is used in contradiction to minority. Thus, there must exist a minority vote. So, even where one vote is cast in favour or against resolution the balance of the total number of votes cast would all be a number of majority vote."

(emphasis added)

74 1993 SCC Online All 175 221

210. The meaning assigned by the Allahabad High court to the

word majority appears to be most correct meaning. The Black's

Law Dictionary provides that a majority means a number that is

more than half of a total. Therefore, consent, as contemplated by

sub-clause (c) of clause (15) of Regulation 18 will have to be by a

simple majority of the unit-holders of a particular Scheme which is

decided to be wound up.

FTMF HAS ACCEPTED THE REQUIREMENT OF CONSENT

211. There is one very important factual aspect which goes to

the root of the matter. It is not as if FTMF was unaware of this

mandatory requirement. Statement of Additional Information

published by FTMF is placed on record at page 707 of the

common compilation. The title of the Statement of Additional

Information reads thus:

"FRANKLIN TEMPLETON MUTUAL FUND STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information (SAI) contains details of Franklin Templeton Mutual Fund, its constitution, and certain tax, legal and general information. It is incorporated by reference (and is legally a part of the Scheme information document).

222 Asset Management Company: Franklin Templeton Asset Management (India) Pvt. Ltd.

Trustee Company: Franklin Templeton Trustees Services Pvt. Ltd. Sponsor: Templeton International Inc., U.S.A.

Please retain this SAI for future reference. Before

investing, investors should also ascertain about any further changes in this SAI after the date of SAI from the Mutual Fund's Investor Service Centres/Website/Distributors or Brokers.

This SAI is dated June 30, 2019."

(emphasis added)

Under the topic "Responsibilities and Duties of the Trustee"

incorporated in the Statements of Additional Information (SAI)

clause (b) is relevant which reads thus:-

"b) The Trustee shall obtain consent of the unit holders of the Scheme(s):

i) When the Trustee is required to do so by SEBI in the interests of the unit-holders; or 223

ii) Upon the request of three-fourths of the unit holders of any Scheme(s) under the Mutual Fund; or

iii) If a majority of the directors of the Trustee company decide to wind up the Scheme(s) or prematurely redeem the units."

(underlines and emphasis added)

Neither the Trustees nor AMC have disowned the above

clause which is in their own statement of Additional Information.

They have not placed on record any material to show that the

above clause was subsequently modified.

Sub-clause (iii) above is very specific which refers to a

contingency when majority of the directors of the Trustee

company decide to wind up Scheme(s). In such a case, as laid

down by clause (b) above, the Trustees are under a mandate to

obtain consent of the unit-holders. This is how FTMF has read

sub-clause (c) of clause (15) of Regulation 18. What is stated in

SAI is a part of the Scheme information. Thus, even in the

additional information published by FTMF itself, there is a specific

clause that the Trustees shall obtain consent of the unit-holders

of the Scheme, if a majority of the directors of the Trustee

company decide to wind up a Scheme. Thus, even FTMF clearly 224

understood and accepted that if majority of directors of the

Trustee company decide to wind up a Scheme, the consent of the

unit-holders of such Scheme is mandatory.

212. Therefore, there is no merit in the argument canvassed on

behalf of the Trustee company and AMC that the consent referred

in sub-clause (c) of clause (15) of Regulation 18 cannot be read

into sub-clause (a) of clause (2) of Regulation 39. The question

of reading it consent into sub-clause (a) of Clause (2) of

Regulation 39 is not material. Sub-clause (c) of Clause (15) of

Regulation 18 constitutes the obligation of the Trustees. The

argument canvassed that the consent referred in sub-clause (c) is

an approval as referred in clause (1) of Regulation 41 also

deserves to be rejected. Thus, we are of the considered view that

after majority of the directors of the Trustee company decide to

wind up a Scheme pursuant to sub-clause (a) of clause (2) of

Regulation 39, before taking further action under clause (3) of

Regulation 39, it is the duty of the Trustees to obtain the consent

of the unit-holders to the decision of winding up of the Scheme.

The consent will be by a simple majority of the unit-holders.

Without obtaining such a consent, action under clause (3) of

Regulation 39 cannot be taken by the Trustees. Even if such an 225

action is taken, it will be illegal. Therefore, the first stage of the

process of winding up of a Scheme will not trigger in unless such

a consent is obtained. In the facts of this case, admittedly, no

such consent is obtained by the Trustees.

213. Even if the interpretation, as aforesaid, is adopted, the

difference between sub-clauses (a) and (b) of clause (2) of

Regulation 39 will not be obliterated. Sub-clause (b) operates

when seventy five percent of the unit-holders of a Scheme pass a

resolution that a Scheme should be wound up. Sub-clause (b) will

operate when the proposal of winding up is by a minimum 75% of

the unit-holders. Sub-clause (a) will apply only when the Board of

Directors of Trustee company or the Board of Trustees decide to

wind up a Scheme. To such a winding up, the consent of the unit-

holders of the said Scheme necessary. The consent will be of

simple majority. Under clause (a), the proposal of winding up

must come from the Trustees. Under clause (b), winding up can

start even when the Trustees are not willing to wind up a

Scheme. In case of sub-clause (b), seventy five percent of the

unit-holders must agree for winding up. When the winding up is

proposed by the Trustees in accordance with sub-clause (a), it 226

will require consent of unit-holders by a simple majority. The

majority need not be of seventy five percent of the unit-holders. It

will be a simple majority of the unit-holders. Sub-clauses (a) and

(b) of clause (2) of Regulation 39 will operate in different

contingencies even if our interpretation is correct.

214. On behalf of SEBI, it was canvassed that reading the word

'consent' of the unit-holders contained in sub-clause (a) will have

disastrous consequences. As held earlier, it is the obligation of

the Trustees to take consent of the unit-holders when the Board

of Directors of the Trustee company, by majority, take a decision

to wind up a Scheme or prematurely redeem the units in a

Scheme. As the Mutual Funds Regulations lay down that this is

the obligation of the Trustees, the argument that not giving

freedom to the Trustees to wind up a Scheme will be disastrous,

will not stand to reason. In fact, the provision for consent ensures

that the Trustees do not wind up any Scheme as per their whims

and fancies. This provision is made consistent with the object of

protecting interest of the unit-holders. If such a provision of

consent is not provided, the sub-clause (a) will attract vice of

arbitrariness. The Court cannot allow the Trustees to commit 227

breach of their own obligations contemplated under Regulation 18

of the Mutual Funds Regulations solely on the ground that the

compliance with the obligations will be disastrous. The Trustees

and AMC must work within the framework of the Regulations.

The Trustees have to act in fiduciary capacity. They cannot say

that they will not perform a particular obligation set out in

Regulation 18 on the pretext that the consequences of

compliance will be disastrous. It is argued that if the unit-holders

by a simple majority do not consent to the decision of the winding

up, AMC will have to make distress sale of investments resulting

into substantial reduction of NAV and the same will cause

prejudice to the unit-holders. Even the said argument does not

have any merit, inasmuch as, not permitting the Trustees or the

Trustee company to wind up a Scheme in accordance with sub-

clause (a) of clause (2) of Regulation 39 will be a decision of the

majority of the unit-holders. Therefore, unit-holders can have no

complaint about the winding up.

215. In any case, in the facts of this case, as pointed earlier, in

the Statement of Additional Information published by FTMF itself,

it is clearly provided that the Trustees shall obtain consent of the 228

unit-holders of the Scheme, if a majority of the directors of the

Trustees Company decide to wind up the Scheme. After having

made this representation in the Statement of Additional

Information, now the Trustees cannot contend to the contrary and

say that they are not under any obligation to obtain such a

consent.

216. Some argument was canvassed on deleted sub-clause (d)

of clause (15) of Regulation 18. The deleted sub-clause (d) read

thus:

"(d) when any change in the fundamental attributes of any Scheme or the trust or fees and expenses payable or any other change which would modify the Scheme or affect the interest of the unit-holders is proposed to be carried out unless the consent of not less than three-fourths of the unit holders is obtained:

Provided that no such change shall be carried out unless three fourths of the unit holders have given their consent and the unit holders who do not give their consent are allowed to redeem their holdings in the Scheme.

229 Provided further that in case of an open ended Scheme, the consent of the unit-holders shall not be necessary if:

(i) The change in fundamental attribute is carried out after one year from the date of allotment of units.

(ii) (ii) the unit-holders are informed about the proposed change in fundamental attribute by sending

individual communication and an advertisement is given in English daily newspaper having nationwide circulation and in a newspaper published in the language of the region where the head office of the Mutual Fund is situated.

(iii) The unit-holders are given an option to exit at the prevailing Net Asset Value without any exit load.

Explanation: For the purposes of this clause "fundamental attributes" means the investment objective and terms of a Scheme."

It must be noted here that sub-clause (d) was deleted by the

SEBI (Mutual Funds) (Second Amendment) Regulations, 2000

with effect from 22nd May 2000. By the same second

Amendment Regulations, with effect from the same date, clause

15A of Regulation 18 was incorporated, which reads thus: 230

"(15A) The Trustees shall ensure that no change in the fundamental attributes of any Scheme or the trust or fees and expenses payable or any other change which would modify the Scheme and affects the interest of unit-holders, shall be carried out unless,--

(i) a written communication about the proposed change is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Office of the Mutual Fund is situated; and

(ii) the unit-holders are given an option to exit at the prevailing Net Asset Value without any exit load."

217. Sub-clause (d) of clause (15) before its deletion was

applicable only in case of change in the fundamental attributes of

a Scheme or the trust or fees and expenses payable or any other

change which would modify the Scheme or affect the interest of

the unit-holders. Such change required consent of not less than

three fourths of the unit-holders in case of Schemes other than

open ended Schemes. The deleted clause (d) had nothing to do

with the winding up of a Scheme. In fact, by deleting the said

sub-clause (d), its modified version was incorporated in the form 231

of clause (15A), which deals with the contingencies of change in

the fundamental attributes of any Scheme or the trust or fees and

expenses payable or any other change which would modify the

Scheme. Therefore, in our view, the deletion of sub-clause (d)

from clause (15) of Regulation 18 is of no consequence as far as

interpretation put to sub-clause (c) of clause (15) of Regulation 18

is concerned.

ARGUMENT BASED ON CLAUSE (15A) OF REGULATION 18

218. The petitioners have argued that when winding up of a

'open ended Scheme' is made, it ceases to be an open ended

Scheme, as the unit-holders are not entitled to redemption.

Therefore, it was submitted that the winding up of a Scheme

cannot be effected unless the unit-holders are given an option to

exit at the prevailing NAV without any exit load. However, on its

plain reading, clause (15A) does not apply to winding up of a

Scheme, but it is applicable only when there is a proposal to

change any fundamental attributes of any Scheme or the trust or

fees and expenses payable or any other change which would

modify the Scheme, affecting the interest of the unit-holders.

The effect of winding up of a Scheme is that after following the 232

procedure under Regulations 39 to 41, the Scheme comes to an

end and it is completely wiped out. In case of winding up of a

Scheme, after distribution of money to the unit-holders in

accordance with Regulation 41, the Scheme ceases to exist.

Even if the changes, as contemplated by clause (15A) of

Regulation 18 are brought about, the Scheme continues to exist.

219. In case of winding up of an 'open ended Scheme', in view

of Regulation 40, the unit-holders cannot seek redemption and

they are entitled to receive money on pro rata basis, remaining

available after sale proceeds of the assets of the Scheme are

applied for clearing all the liabilities of the Scheme. In case of

winding up of an 'open ended Scheme', the right of redemption of

the unit-holders is completely taken away due to winding up and

not due to change of fundamental attributes. The act of change

of fundamental attributes is completely different from the action of

winding up of a Scheme inasmuch as, once the winding up of a

Scheme in accordance with Regulation 39 triggers in, the

redemption comes to an end. Therefore, the argument that

winding up of an 'open ended Scheme' cannot be made unless 233

clause (15A) of Regulation 18 is complied with is completely

devoid of any merit and deserves to be rejected.

THE MEANING OF THE WORDS "AFTER REPAYING AMOUNT DUE TO UNIT-HOLDERS"

220. There are other issues concerning the provisions regarding

winding up of the Schemes. One of the arguments canvassed

was that before winding up takes place, repayment of the amount

due to the unit-holders has to be made. For that purpose, reliance

was placed on the phraseology used in clause (2) of Regulation

39 to the effect that 'a Scheme of a Mutual Fund may be wound

up, after repaying the amount due to the unit-holders......'.

clauses (1) and (2) of Regulation 39 lay down the modes or the

contingencies in which a Scheme can be wound up. Clause (1) is

applicable only to a 'close-ended Scheme'. We have already

referred to three contingencies/modes of winding up contained in

sub-clauses (a), (b) and (c) of clause (2) of Regulation 39. In

case of all the three modes, the Trustees are under an obligation

to give notice as contemplated by clause (3) of Regulation 39.

The moment notices are issued and published as provided in

sub-clause (a) and (b) of clause (3) of Regulation 39, Regulation 234

40 triggers in and therefore, the Trustees and AMC must stop

carrying on any business activity in respect of the Scheme and

the Trustees or AMC cannot create or cancel the units in the

Scheme and cannot issue or redeem the units in the Scheme.

Thereafter, the process of winding up is to be conducted either by

the Trustees, if they are authorized to do so by a simple majority

of unit-holders or by any other person authorized by a simple

majority of the unit-holders. However, in case of winding up of

the Scheme at the end of maturity period, such approval of the

unit-holders is not required. After authorization is made under

clause (1) of Regulation 41, the Trustees or the person

authorized must dispose of the assets of the Scheme in the best

interests of the unit-holders and the proceeds derived from such

sale shall be first applied to discharge of the liabilities in the

Scheme. Thereafter, a provision has to be made for meeting the

expenses in connection with the winding up. The balance amount

is to be paid to the unit-holders in proportion to their respective

interest in the assets of the Scheme as on the date when the

decision for winding up is taken. Therefore, the repayment of the

amount due to the unit-holders, as provided in clause (2) of

Regulation 39 is the amount payable to the unit-holders in 235

accordance with sub-clause (b) of clause (2) of Regulation 41. In

case of winding up of a Scheme, the amount due to the unit-

holders is the one which is payable as per sub-clause (b) of

clause (2) of Regulation 41. If the argument that the amount due

and payable as per the Scheme to the unit-holders must be paid

before taking a decision for winding up is accepted, it will

completely defeat the Scheme of Regulations 40 and 41. It will

completely defeat the very object of providing for winding up of a

Scheme. Therefore, once the process of winding up as per

clause (2) of Regulation 39 commences, the unit-holders are

entitled to claim the amounts payable only as per sub-clause (b)

of clause (2) of Regulation 41.

COMPLIANCE WITH CLAUSE (3) OF REGULATION 39 (Issue No (vi):

221. It must be noted here that though the case of AMC and

Trustees is that compliance with clause (3) of Regulation 39 was

made on 24th April 2020, there is no material placed on record to

show that a notice disclosing the circumstances leading to the

winding up of the Schemes was published in a vernacular

newspaper circulating at the place where the Mutual Fund is 236

formed. The stand specifically taken during the course of

submissions made by Shri Arvind Datar, the learned Senior

Counsel appearing for SEBI was that it is for AMC and Trustees

to show whether compliance of sub-clause (b) of clause (3) of

Regulation 39 was made. However, no documents are placed on

record by the Trustees to show such a complete compliance was

made by publication of notice in vernacular newspaper having