In view of the aforesaid discussion, we hold that for the purpose of clause (c) to Regulation 18(15), consent of the unitholders would mean consent by majority of the unitholders who have participated in the poll, and not consent of majority of all the unitholders of the scheme. In view of the findings and reasons stated above, we reject the objections to poll results and hold that the unitholders of the six schemes have given their consent by majority to windup the six schemes. (Para 42)
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANR V/S AMRUTA GARG AND ORS ETC.
CIVIL APPEAL NOS. 498-501 OF 2021 (ARISING OUT OF SLP (C) NOS. 14288-14291 OF 2020) - CIVIL APPEAL NO. 502 OF 2021 (ARISING OUT OF SLP (C) NO. 14734 OF 2020) - CIVIL APPEAL NO. 503 OF 2021 (ARISING OUT OF SLP (C) NO. 14929 OF 2020) - CIVIL APPEAL NO. 508 OF 2021 (ARISING OUT OF SLP (C) NO. 15205 OF 2020) - CIVIL APPEAL NOS. 504-507 OF 2021 (ARISING OUT OF SLP (C) NOS. 15008-15011 OF 2020) - CIVIL APPEAL NO. 509 OF 2021 (ARISING OUT OF SLP (C) NO. 15206 OF 2020) -12 February 2021
The Hon’ble Supreme Court consisting of Justice S. Abdul Nazeer and Justice Sanjiv Khanna held in this court that, as per the consolidated affidavit filed by the trustees and AMC, securities equivalent to more than Rs.17,000 crores are yet to be realized. This is a substantial amount. The trustees and SEBI were not at ad idem and have given different time frames within which they felt the securities can be liquidated. However, both the trustees and SEBI, have stated in unison that the liquidation/realization has to be proceeded with caution, as an attempt to offload the securities in haste can result in losses which would be detrimental and cause a reduction in realizable value. A detailed note has been made after hearing the arguments of both parties.
This case is of the judgment under challenge inter alia interprets the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (‘Mutual Fund Regulations/ Regulations’) framed by the Securities and Exchange Board of India (‘SEBI’) to hold that clause (c) to sub-regulation (15) of Regulation 181 mandates consent of the unitholders for winding up of mutual fund schemes even when the trustees form an opinion that the scheme is required to be wound up in terms of clause (a) to sub-regulation (2) of Regulation 392 of the Mutual Fund Regulations. SEBI propounds that clause (a) of sub-regulation (2) to Regulation 39 is a standalone provision and the unitholders’ consent is not required when the trustees upon happening of the event form an opinion that the mutual fund scheme is to be wound up. The objecting unitholders’3 (also referred to as objectors) primary grievance relates to allegations of gross mismanagement, failure, and dereliction of duty by the Asset Management Company (‘AMC’) and Franklin Templeton Trustee Services Private Limited (‘trustees’ or ‘board of trustees’); violation of the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’); Mutual Fund Regulations; SEBI harmonization norms; investment horizon profiles; manipulation of Net Asset Value (NAV); disgorgement of wrongful payments, etc. In particular, it is alleged that more than Rs. 15,000 crores were withdrawn from the six schemes two weeks before the decision for winding up.
While the objecting unitholders submit that the trustees’ decision to wind up the six schemes is a smokescreen to conceal misfeasance and malfeasance, which issues along with the question of liability of the trustees/AMC should be decided first or together; the court stated that
“We have deliberately decided to segregate and examine these issues subsequently. Pertinently, after receipt of the forensic audit report, SEBI has issued show cause notice which is pending adjudication. Common people invest in mutual funds driven by factors such as simplicity in purchase and redemption of units, flexibility of holding and tenure, and liquidity by conversion into money. In the light of this, immediate directions are required as embargo prohibiting redemption of the units, affected by Regulation 404 from the date of publication of notice under Regulation 39(3)(b) on 23rd April 2020, for over ten months. Thereby the unitholders have suffered privation and harassment.”. ( Para 4)
Going through the reading prescription of a quorum as a majority of the unitholders or ‘consent’ as implying ‘consent by the majority of all unitholders’ in Regulation 18(15)(c) of the Mutual Fund Regulations will not only lead to absurdity but also an impossibility given the fact that mutual funds have thousands or lakhs of unitholders. Conscious of the problem of quorum and majority in the indefinite electorate, 1st Edition of Halsbury’s Laws of England on the question of quorum and meetings, had referred to the following principles:
“Where a corporation consists of a definite number of corporate electors, a majority of that number must be present in order to constitute a valid election. But where a corporation consists of an indefinite number of corporate electors, a majority only of those existing at the time of the election need be present. When an election is to be made by a definite body only, or the electoral assembly is to consist of a definite and an indefinite body, the majority of the definite body must, as a general rule, be present in order to render the election legal..”
With regard to the above, the court stated that “We would not read into Regulation 18(15)(c) a need to have affirmative consent of the majority of all or the entire pool of unitholders. The words ‘all’ or ‘entire’ are not incorporated and found in the said Regulation. Thus, consent of the unitholders for the purpose of clause (c) to sub-regulation (15) of Regulation 18 would mean a simple majority of the unitholders present and voting”. (Para 19)
The Court ordered and had directed SEBI to appoint an Observer for the e-voting by the unitholders scheduled between 26th and 29th December 2020. However, it was clarified that the trustees were undertaking the exercise of e-voting and that SEBI would appoint an Observer in terms of our directions. The results of the e-voting, it was directed, would not be declared and would be produced before this Court in a sealed cover along with the report of the Observer appointed by SEBI. They appointed Mr. T.S. Krishnamurthy, former Chief Election Commissioner of India, to act as the Observer ‘regarding e-voting of the unitholders’ of the six schemes. A Technical Assistance Team was also constituted by SEBI to assist Mr. T.S. Krishnamurthy. The Order of this Court dated 25th January 2021, clarified that the Court would first examine the objections to the e-voting results and the Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020, etc. issue/question whether or not disbursal/payment to the unitholders should be made. Interpretation of Mutual Fund Regulations and other aspects would be examined and decided thereafter. This order also granted liberty to the objectors to apply for a place on record new facts, which had statedly come to their knowledge on 25th January 2021. Option to file response/reply to the application disclosing new facts was given to the opposite parties.
It was noted by the court that,“ Faced with the aforesaid position, the objectors have submitted that only 38% of the unitholders had voted. On the other hand, the trustees/AMC have submitted that the votes cast represent approximately 54% of the total number of units outstanding, i.e. nearly 54% of the unitholders on proportionate/value basis. Though we have not been provided with scheme-wise break-up of the votes which should have been given, it does not matter in view of the Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. overwhelming consent for winding up of the schemes. The trustees also state that a large number of corporate votes were rejected by the Scrutiniser on technical grounds of absence of corporate formalities for authorisation of the concerned representatives. The rejected votes represent 1,997 unitholders holding approximately 68.10 crore units valued at Rs. 2,464 crores. Further, an overwhelming majority of the rejected votes – Rs. 2,420 crores by value, 98.6% by units and 97.5% by number of unitholders – were in favour of the scheme. Accordingly, if these rejected votes are taken into consideration, the total votes being polled in proportionate terms would increase from approximately 54% to approximately 62%”. ( Para 30)
Further ado, the court also stated that, “the argument does not impress us and cannot be a ground to reject the results. KFin Technologies, it has been pointed out, has been providing e-voting platform services to listed public limited companies ever since the Ministry of Corporate Affairs mandated them to secure approval of the resolutions by the shareholders through electronic voting. The e-voting platform of KFin Technologies is certified by the Ministry of Corporate Affairs approved certification Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc, viz. STQC Website Quality Certification Services. KFin Technologies has conducted more than 4,500 e-voting events since 2013. To reject the voting results on this rather specious submission would cast doubts with serious repercussions on e-voting results of several reputed companies”. ( Para 33)
The learned counsel for the objectors have drawn out the attention to the report of the Assistant Directors, CFSL, Hyderabad which has been enclosed as Annexure-11 to the Observer’s report and showed the records that complete database activity monitoring logs were not provided and that, for many votes, the IP address captured was the IP address of the Load Balancing Server of KFin Technologies.
With reference to the the present case the court stated that, “we do not think the procedure prescribed by Regulation 41 is required to be followed as the trustees themselves have stated that the process of winding up, which would include liquidation of the securities and distribution/payment to the unitholders, should be undertaken by a third party. The objectors had also made similar submissions. Accordingly, with the consent of the parties, we have appointed M/s. SBI Funds Management Private Limited to undertake the exercise of winding up, which would include liquidation of the holdings/assets/portfolio and distribution/payment to the unitholders”. ( Para 39)
In above the court held that, “As per the consolidated affidavit filed by the trustees and AMC, securities equivalent to more than Rs.17,000 crores are yet to be realised. This is a substantial amount. The trustees and SEBI were not at ad idem and have given different time frames within which they felt the securities can be liquidated. However, both the trustees and SEBI, have stated in unison that the liquidation/realisation has to be proceeded with caution, as an attempt to offload the securities in haste can result in losses which would be detrimental and cause reduction in realisable value. We would not like to enter into this debate or give any specific directions but would observe that M/s. SBI Funds Management Pvt. Ltd. shall follow the best effort principle. So as to ensure expeditious and timely payment to the unitholders and assure the best possible liquidation value of the assets/ securities to the unitholders.”. (Para 41)
Concluding the Court held that;
“In view of the aforesaid discussion, we hold that for the purpose of clause (c) to Regulation 18(15), consent of the unitholders would mean consent by majority of the unitholders who have participated in the poll, and not consent of majority of all the unitholders of the scheme. In view of the findings and reasons stated above, we reject the objections to poll results and hold that the unitholders of the six schemes have given their consent by majority to windup the six schemes. Winding up and disbursements would be in terms of our directions in earlier orders dated 2nd February, 2021 and 9th February, 2021 and paragraph 41 above. We, however, clarify that this order does not examine and decide other aspects and issues including the questions whether Regulation 18(15)(c) would apply when the trustee’s form an opinion that the scheme should be wound up in accordance with Regulation 39(2)(a) and the contention of the objecting unitholders regarding misfeasance, malfeasances, fraud and the effect thereof.” (Para 42)
To view/ download judgment: FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANR V/S AMRUTA GARG AND ORS ETC.
Aaron Varughese
