Franklin Templeton Trustees Services Pvt. Ltd. and Anr. v. Amruta Garg and Ors.- Clarity Should Be To Mutual Funds Regulations

DATE: 12^th February, 2021

JUDGES:

• Abdul Nazeer
• Sanjeev Khanna

PARTIES:

• Franklin Templeton Trustees Services Pvt. Ltd. and Anr. (APPELLANT)
• Amruta and Anr. (RESPONDENT)

SUBJECT

This judgement deals with the interpretation of regulation 18(15)(c) of Mutual Funds Regulation which covers rights and obligations of trustees. The question before the curt was whether the consent of the majority unit holders will be binding on those who did not agree with majority or participate in the voting or not.

AN OVERVIEW

1. In this case the court is hearing an appeal filed against the decision of Karnataka High Court in which the court decided that winding up of debt schemes require approval of unitholders.
2. The appellant called for a meeting of unitholders. In the meeting, the winding up of schemes was approved by a simple majority. However, some of the unitholders did not agree with this majority decision and a petition was filed by unitholders in Delhi High Court and Gujarat High Court against the decision of Franklin Templeton Trustees Services which after direction from Supreme Court was transferred to Karnataka High Court.
3. After which the high court held that Franklin Templeton Trustees Services cannot prematurely wind up open ended debt oriented Mutual Fund services, and the consent of all unitholders is necessary.
4. This decision is challenged before the Supreme Court of India
5. The prime contention of the objecting party was made referring to the expression ‘consent’ in regulation 18(5)  that the winding of schemes would be binding only on the consenting unitholders and not on all the unitholders.  
6. Further, it was contended that none of the other Mutual Funds House took drastic measure of winding up of schemes. This is just a camouflage by trustees using COVID as an excuse.

IMPORTANT PROVISIONS

SEBI MUTUAL FUNDS REGULATIONS

• Regulation 18(15) - The trustees shall obtain the consent of the unitholders
• whenever required to do so by the Board in the interest of the unitholders; or
• whenever required to do so on the requisition made by three-fourths of the unitholders of any scheme; or
• when the majority of the trustees decide to wind up or prematurely redeem the unit

ISSUES

• Whether consent is binding on all unitholders or only on those who consented for it?
• Whether majority means majority of all unitholders or majority of unitholders who had participated in the voting?

ANALYSIS OF THE JUDGEMENT

• The key issue before the court was the interpretation of the expression ‘consent of unitholders’. It was contended that winding up scheme would be binding only on those who had consented for it. Rejecting this contention the Supreme Court observed that consent in the regulation 18(15) means consent by way of simple majority and not by majority of all.
• If interpreted as majority of all, it would lead to absurdity and impossibility as there are lakhs of unitholders and it would not be possible for all to participate in the poll.
• The unitholders who did not exercise their choice cannot be counted as either negative or positive votes as either denying or giving consent to the proposal for winding up. Thus, under clause (c), consent means a simple majority.
• Regarding the issue of the meaning of majority, the Supreme Court observed that in the regulation it is nowhere mentioned about the ratio of unithoders required for a valid consent of winding up.
• Also, the expression ‘all’ or ‘entire’ in terms of majority are also not incorporated in the regulation. Thus, majority would mean a simple majority and not majority of all.
• However, the Court also stated that the regulation lacks clarity and cause inconvenience and confusion which might create adverse economic consequences. Therefore, the legislature should take steps to bring clarity to the Mutual Funds Regulations.

CONCLUSION

• The Supreme Court’s interpretation of the expression ‘consent of unitholders’ as a simple majority is very practical. If majority of unitholders do not participate in voting process, the cause of the Mutual Fund House could not be entertained. Also, in terms of no decision can be arrived upon if all the unitholders do not participate. Thus, the contended interpretation would serve the purpose of the minority only. Therefore, the Apex Court was rational in its decision.
• The issue was majorly an interpretational issue. The words of the regulation lacked precision and needs to be revised.

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