FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANOTHER versus AMRUTA GARG AND OTHERS ETC. on 14 July 2021

FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATELIMITED AND ANOTHER

v.

AMRUTA GARG AND OTHERS ETC.

(Civil Appeal No. 498-501 of 2021)

JULY 14, 2021

[S ABDUL NAZEER AND SANJIV KHANNA, JJ.]

Securities and Exchange Board of India (Mutual Funds)Regulation, 1996:

Regns. 18(15)(c) and 39 to 42 – Interpretation of – Windingup of six mutual fund schemes – High Court interpreting Regn18(15)(c) and Regn 39(2)(a) held that the decision of the trusteesto wind up a scheme under clause (a) to Regn 39(2) must muster theconsent of the majority of the unitholders as per Regn 18(15)(c) –Case of SEBI, the trustees and the Asset Management Companythat prior consent of the unitholders is not envisaged when thetrustees, or SEBI directs winding up of a scheme in the interest ofthe unitholders; and that the decision of the trustees and SEBI towind up a scheme is final and binding on the unitholders – Appealbefore this Court – This Court in its earlier order accepting the pollresults, directed winding up of six mutual fund schemes – As regards,interpretation of Regns 39 to 42 and their interrelation with Regn18(15)(c) and constitutional validity of Regns 39 to 42, held:Regulations of 1996 do not suffer from the vice of manifestarbitrariness, thus, Regulations of 1996 constitutionally valid –Applying principle of harmonious construction to Regn 18(15)(c)with Regns 39 to 42, would mean that the opinion of the trusteeswould stand, but the consent of the unitholders is a pre-requisitefor winding up – Securities and Exchange Board of India Act, 1992.

Constitutional validity of 1996 Regulations – Held:Regulations of 1996 do not suffer from the vice of manifestarbitrariness – Since the Regulations are in the nature of economicRegulations, while exercising the power of judicial review, restraintwould be exercised unless clear grounds justify interference – Viewswould not be supplanted for that of the experts as this can put the

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Amarketplace into serious jeopardy and cause unintendedcomplications – Regs. 18(15)(c) and 39 to 42.

Regn 18(15)(c) with Regns 39 to 42 – Interpretation of Regns39 to 42, their interplay and harmonious construction with Regn18(5)(c) – Held: Under clause (a) of Regn 39(2) the power ofBwinding up of a scheme is vested with the trustees, under clause (b)with the unitholders and under clause (c) with the SEBI, however,under Regn 18(15)(c), the trustees are required to seek consent ofthe unit holders, when they by majority decide to wind up a scheme– Use of the word ‘shall’ in Regn 18(15)(c) is couched as a command– Expression ‘when the majority of the trustees decide to wind up’Cin Regn 18(15)(c) manifestly refers to clause (a) to Regn 39(2) asthis is the only Regulation which entitles the trustees to wind up thescheme – Regn 18(15)(c), when it refers to trustees’ decision to windup, it implies the trustees’ opinion to wind up the scheme – Applyingprinciple of harmonious construction in the context of theDRegulations of 1996, would mean that the opinion of the trusteeswould stand, but the consent of the unitholders is a pre-requisitefor winding up – This interpretation does not in any way dilute orrender clause (b) to Regn 39(2) meaningless or redundant – Thisclause applies where the winding up process is initiated at theinstance of 75% of the unitholders – Clause (b) does not in anyEmanner reflect that clause (c) to Regn 18(15) should not be read asit ordains in simple words – Regn 41 refers to and relates to theprocedure and manner of winding up which cannot be equated withthe requirement of consent as postulated by Regn 18(15)(c) – Regn41(1) applies even in cases where 75% unitholders have passedFthe resolution for winding up of the scheme under Regn 39(2)(b) orwhere SEBI directs the scheme to be wound up in the interest of theunitholders under Regn 39(2)(c) – On the other hand Regn 18(15)(c)applies only when majority of the trustees form an opinion anddecide to wind up or prematurely redeem the units in entirety, asituation covered by Regn 39(2)(a) – To ignore the mandate of RegnG18(15)(c) would nullify the legislative intent – Need to obtain consentof the unitholders is mandated under clause (c) to sub-Regn 15 toRegn 18 when the trustees under clause (a) to Regn 39(2) decide towind up a scheme – To deny the unitholders a say, when Regn18(15)(c) requires their consent, debilitates their role and right toH

participate – ‘Consent’ for the purpose of Regn 18(15)(c) refers tothe consent of the majority of the unitholders present and voting –Harmoniously interpreting Regns 39 to 42, it is held that the consentof the unitholders, is not required before publication of the noticesunder Regn 39(3) – Consent of the unitholders should be soughtpost publication of the notice and disclosure of the reasons forwinding up under Regn 39(3) – Thus, the High Court rightly heldthat the consent of unitholders of the scheme would be necessary ifthe majority of the directors of the trustee company decide to windup a scheme.

Regn 39(2)(a), 39(3) – Trustees – Power of – Held: There aresufficient guidance and safeguards in the Regulations itself on thepower of the trustees to decide on winding up of the fund – It cannotbe accepted that the trustees under clause (a) to Regn 39(2) havebeen given absolute and unbridled power to wind up a scheme –Language of clause (a) to Regn 39(2) states that the trustees mustform an opinion on the happening of any event which requires thescheme to be wound up – Further, as per Regn 39(3), the trusteesare bound to give notice disclosing the circumstances leading tothe winding up of the scheme – Trustees are, thus, required to cometo a conclusion that due to specific circumstances articulated inwriting, the scheme is required to be wound up – Trustees hold theassets of the scheme in fiduciary capacity on behalf of the investors– They are experts in the field and, thus, conferred the power underRegn 39(2)(a) to decide whether or not a scheme should be woundup – Expression ‘occurrence of any event’ is not to be read inisolation but with the words ‘requires the scheme to be wound up’ –Read in this manner, there is no vagueness which can be describedas transcending into realm of arbitrariness, on the other hand, theprerequisite statutory mandate is clear – This is not a case ofexcessive delegation wherein the legislative function has beenabdicated and passed on to the trustees who can act as per theirwhims and fancies – Thus, the High Court’s holding that the opinionof the trustees under clause (a) to Regn 39(2) must be consented toby the unitholders in terms of the mandate of Regn 18(15)(c) isaccepted.

Unitholders and creditors – Difference between – Held:Regulations rightly draw the distinction between creditors and the AB

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Aunitholders – Unit holders are investors who take the risk and,thus, entitled to profits and gains and they must also bear the losses,if any – Unitholders are not entitled to fixed return or protection ofthe principal amount whereas creditors are entitled to fixed returnas per mutually agreed contracts – Their rate of return is in thenature of interest and not profit or loss – Creditors are not riskBtakers as is the case with the unitholders – To equate the unitholderswith either the creditors or the home buyers will be unsound andincongruous.

Regn 53 – Provision regarding despatch of dividend warrentsor proceeds by mutual fund and asset management company-AMCC– Interpretation of – Clause (b) to Regn 53 requires that the AMC todespatch the redemption or repurchase proceeds within ten workingdays from the date of redemption or repurchase – Issue as regardswhether the AMC or the trustees are bound to honour and pay theredemption or repurchase proceeds for requests received before theDdate of publication of notice in terms of Regn 39(3) – High Courtheld the expression ‘business’ in clause (a) of Regn 40 refers tobusiness activity and, thus, would include payment of redemptionproceeds to the unit holders, which would include the request forredemption received prior to the date of publication under Regn39(3) – On appeal, held: There is a need for greater clarity on theEfactual matrix, which would be possible once the pendingproceedings are concluded – In view thereof, several issues leftopen at this stage – Observations in the instant Order and the earlierOrder not to be read as binding factual findings or conclusions onany disputed facts, which could be a subject matter of a show- Fcause notice and consequent decision, though legal interpretationof Regn 18(15)(c) and Regns 39 to 42 are conclusive and binding.

Securities and Exchange Board of India Act, 1992: s. 11, 11B– Functions of Securities and Exchange Board of India-SEBI –Power to issue directions and levy penalty – Explained.G

Interpretation of statutes: Process of interpretation – Threestage, literal interpretation, propositional interpretation andpurposive interpretation – Held: Interpretation is sometimes a three-stage process – At first, the words being interpreted should beunderstood according to their grammatical meaning in their literalHand popular sense – In the second stage, it is considered whether FRANKLIN TEMPLETON TRUSTEE SERVICES PVT. LTD. v.AMRUTA GARG

in the given context the plain meaning is obscure as the text givesrise to choice of more than one interpretation, or the propositionalinterpretation fails to achieve the manifest purpose of the legislation– In such cases at the third stage, the court applying interpretativetools selects an interpretation advancing the legislative intent withoutrewriting the provision – Legislative intent is gathered from the objectand purpose of the provision and the legislation – Courts do leantowards a pragmatic and purposive interpretation as there is anassumption that the draftsmen legislate to bring about a functionaland working result.

Alka Synthetics and Trading v. SEBI (1999) 95 CompCas 663; Nikhil T. Parikh v. Union of India (2014) 2GLH 582 – approved.

State of Tamil Nadu and Another v. T. Krishnamurthyand Others (2006) 4 SCC 517 : [2006] 3 SCR 396;Shayara Bano v. Union of India and Others (2017) 9SCC 1 : [2017] 9 SCR 797; Senior Superintendent ofPost Offices, Allahabad and Others v. Izhar Hussain(1989) 4 SCC 318 : [1989] 3 SCR 796; DirectorGeneral, Central Reserve Police Force and Others v.Janardan Singh and Others. (2018) 7 SCC 656 : [2018]5 SCR 81; Pioneer Urban Land and InfrastructureLimited and Another v. Union of India and Others(2019) 8 SCC 416 : [2019] 10 SCR 381; SterliteIndustries (India) Ltd. v. SEBI 2001 SCC OnLine SAT28; Nisha Priya Bhatia v. Union of India and Another(2020) 13 SCC 56; B.K. Educational Services PrivateLimited v. Parag Gupta and Associates, (2019) 11 SCC633 : [2018] 12 SCR 794; Union of India v. RamanIron Foundry (1974) 2 SCC 231 : [1974] 3 SCR 556 –referred to.

[2006] 3 SCR 396[2017] 9 SCR 797[1989] 3 SCR 796[2018] 5 SCR 81

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CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 498-501 of 2021.

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From the Judgment and Order dated 24.10.2020 of the High Courtof Karnataka, at Bengaluru in Writ Petition Nos. 8545, 8644, 8748 of2020 and Writ Appeal No. 399 of 2020.

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Civil Appeal Nos.502, 503, 504-507, 508, 509 of 2021, SpecialLeave Petition (Civil) No. 1486 Of 2021 And Special Leave Petition(Civil) (D) No.1563 of 2021.

Tushar Mehta, SG., Harish Salve, Dr. Abhishek Manu Singhvi,Arvind P. Datar, Ms. Meenakshi Arora, Ravindra Shrivastava, V. Giri,ESr. Advs., Ashish Bhan, Mohit Rohatgi, Jasmeet Singh, Asim Sood,Rajendra Dangwal, Saif Ali, Ms. Madhavi Khanna, Pratap Venugopal,Ms. Surekha Raman, Akhil Abraham, Vijay Valsan, For M/S. K J Johnand Co., Nithyaesh Natraj, Vaibhav R. Venkatesh, Gopal Singh, PuneetJain, Harshit Khanduja, Harsh Jain, Akshat Maheshwari, HarshvardhanFSharma, Neeraj Sharma, Ms. Christi Jain, Arjun Garg, AbhinavShrivastava, Abhijeet Shrivastava, Ms. Garima Tiwari, Arpit Jain, KaranKohli, Nirmal Prasad, Ms. Aditi Shrivastava, Shivam Singh, Sahil Raveen,Jaideep Khanna, Manish Kumar, Paritosh Gupta, Ms. Supriya Juneja,Aditya Singla, Ms. Aishwarya Reddy, Ms. Cheshta Jetly, Ms. MadhumitaGBhattacharjee, Ms. Arti Jain, Ms. Srija Choudhury, Rajat Nair, Ms. GarimaPrasad, Ms. Priyanka Das, Arvind Kumar Sharma, Anirudh Sriram,Dheeraj Nair, Kumar Kislay, Angad Baxi, Sanjay Kapur, Ms. MeghaKarnwal, V. M. Kannan, Sambit Panja, Arjun Bhatia, Advs. for theappearing Parties.

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The Order of the Court was passed by

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SANJIV KHANNA, J.

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The Order of the Court was passed by

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SANJIV KHANNA, J.

1. By the order dated 12[th] February 2021, interpreting Regulation18(15)(c) of the Securities and Exchange Board of India (Mutual Funds)Regulations, 1996 (hereafter referred to as ‘Regulations’) and acceptingthe poll results, we have directed winding up of six mutual fund schemes:

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(i) Franklin India Low Duration Fund (Number of Segregatedportfolios – 2),

(ii) Franklin India Ultra Short Bond Fund (Number ofSegregated portfolios – 1),C

(iii) Franklin India Short Term Income Plan (Number ofSegregated portfolios – 3),

(iv) Franklin India Credit Risk Fund (Number of Segregatedportfolios – 3), D

(v) Franklin India Dynamic Accrual Fund (Number ofSegregated portfolios – 3), and

(vi) Franklin India Income Opportunities Fund (Number ofSegregated portfolios – 2).

2. We would now proceed to interpret Regulations 39 to 42 andtheir interrelation with Regulation 18(15)(c). We shall also examine anddecide the challenge to the constitutional validity of Regulations 39 to42. As elucidated in the course of hearings and reflected in the orderdated 12[th] February 2021, it would be inopportune to decide and disposeof these appeals, as facts remain disputed and are sub-judice along withother substantive issues in the adjudication proceedings under theSecurities and Exchange Board of India Act, 1992 (hereafter referredto as the ‘SEBI Act’). The forensic report of the auditors, possibly thefoundation of the show cause notice(s), is a subject matter ofconsideration before the statutory authorities that are bestowed withwide powers. It is not anyone’s case that the statutory adjudicationproceedings should be eschewed or nullified. At the same time, we arenot inclined to dispose of these appeals as this would not be in the interestof the unitholders, who are hopeful, yet concerned and apprehensive.Final and conclusive adjudication, on contested factual and related issues,post the statutory adjudication would be in the interest of the parties. No EF

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Aprejudice should be caused. Directions to await the orders in theadjudication proceeding have been incorporated in the order dated 12[th]February 2021. We hope and trust that the proceedings under the SEBIAct would conclude expeditiously.

General overview of the RegulationsB

3. We shall begin with an overview of the Regulations as theywould aid us in deciding the two issues; though, to avoid prolixity, we arenot reproducing the Regulations. We would subsequently selectively quotethe Regulations requiring interpretation.

4. The Regulations envisage a three-tier structure for mutual fundsCin the form of the sponsor, the board of trustees or the trustee company,and the asset management company (the AMC). The sponsor, as definedby Regulation 2(x), means a person who, acting alone or in combinationwith another body corporate, establishes a mutual fund. For this purpose,the sponsor is required to make an application to the Securities andDExchange Board of India (hereinafter referred to as the ‘SEBI’) in theprescribed form for registration of the mutual fund. Chapter II of theRegulations spells out the eligibility criteria and requirements forregistration of a mutual fund.

5. The term ‘trustees’ has been defined in Regulation 2(y) to meanEthe board of trustees or the trustee company who hold the property ofthe mutual fund in trust for the benefit of the unitholders. The expression‘unit’ has been defined in Regulation 2(z) to mean the interest of theunitholders in the scheme, which consists of each unit representing oneundivided share in the assets of the scheme, and the term ‘unitholder’has been defined in Regulation 2(z)(i) to mean a person holding a unit inFthe scheme of a mutual fund.

6. The AMC is a company, approved by SEBI under Regulation21(2), which undertakes business activities in the nature of managementand advisory services provided to the pooled assets. The services maybe specified by SEBI from time to time. The AMC is forbidden by theGRegulations from acting as a trustee of any mutual fund.

7. Chapter III relates to the constitution and management ofmutual funds and operation of trustees etc. Regulation 14 stipulates thata mutual fund shall be constituted in the form of a trust and the instrumentof the trust shall be in the form of a deed, registered under the provisionsHof the Indian Registration Act, 1908, executed by the sponsor in favour of the trustees. Regulation 15(1) requires that the trust deed shallincorporate such clauses as are mentioned in the Third Schedule of theRegulations, and such other clauses as are necessary for safeguardingthe interests of the unitholders. Regulation 15(2) mandates that no trustdeed shall contain a clause which has the effect of – (a) limiting orextinguishing the obligations and liabilities of the trust in relation to anymutual fund or the unitholders; or (b) indemnifying the trustees or theAMC for loss or damage caused to the unitholders by acts of negligenceor acts of commission or omission on part of the trustees or the AMC.Regulation 16 itemises the criteria for disqualification from appointmentas a trustee. In effect, it stipulates the eligibility requirements forappointment of the trustees. In particular, it states that two-thirds of thetrustees shall be independent persons, not associated with the sponsorsin any manner. Further, a person appointed as a trustee of a mutual fundis not eligible to be appointed as a trustee of another mutual fund. AnAMC and its directors (including independent director), officers oremployees are ineligible to be appointed as a trustee of any mutual fund.Regulation 17 requires prior approval of SEBI before a person is appointedas a trustee. In the case of existing trustees of any mutual fund, theymay form a trustee company to act as a trustee, albeit with prior approvalof SEBI. The trustees are bound by the Code of Conduct specified inthe Fifth Schedule, as well as general and specific due diligence mandates.

8. Regulation 18 is critical as it elaborately enlists the rights andobligations of the trustees, in as many as 29 sub-regulations. The trusteesand the AMC, as per Regulation 18(1), can enter into an investmentmanagement agreement with the prior approval of SEBI. Such anagreement must contain clauses mentioned in the Fourth Schedule andother clauses as are necessary for the purpose of making investments.The sub-regulations enumerate the requirements to be satisfied before ascheme is launched by the AMC. They obligate that the trustee shallensure that the AMC has been diligent in empanelling the brokers, and inmonitoring securities transactions with the brokers and in avoiding undueconcentration of business with any broker. The trustees have to alsoensure and check that the AMC has not given any undue or unfairadvantage to any associates or dealt with any of its associates in anymanner detrimental to the interest of the unitholders and that thetransactions entered into by the AMC are in accordance with theregulations and the scheme. The trustees are entitled to call for detailsof transactions in securities by the key personnel of the AMC in their AB

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Aown name or on behalf of the AMC and report the same to SEBI, as andwhen required. The sub-regulations require the trustees to carry outquarterly reviews of all transactions between the mutual funds, the AMCand its associates. The trustees are to also review the net worth of theAMC on a quarterly basis. In case of any shortfall in net worth, thetrustees were to ensure that the AMC makes up for the shortfall inBterms of Regulation 21(1)(f).[1] The trustees are to furnish to SEBI, on ahalf-yearly basis, a report on the activities of the mutual fund withcertificates that there have been no instances of self-dealing or frontrunning by any of the trustees, directors or key personnel of the AMC,and that the AMC has been managing the schemes independently ofCany other activities, and in case any activities of the nature referred to inRegulation 24(b) have been undertaken by the AMC, that it has takenadequate steps to ensure that the interests of the unitholders areprotected.[2]

9. Chapter IV of the Regulations relates to the constitution andDmanagement of the AMC and the custodian. The AMC is appointed bythe sponsor, or by the trustee, if so authorised by the trust deed. However,the appointment needs approval by SEBI under Regulation 21(2). Asper Regulation 20(2), the appointment of the AMC can be terminated bymajority of the trustees or by 75% of the unitholders of the scheme.Regulation 20(3) states that any change in the appointment of the AMCEis subject to the approval of SEBI and the unitholders. Regulation 21enumerates the eligibility criteria for appointment as an AMC. Thedirectors of the AMC should be persons having adequate professionalexperience in finance and financial services related fields and should notbe found guilty of moral turpitude or convicted of any economic offenceFor violation of any securities laws. The key personnel of the AMC shouldnot have been found to be guilty of the above, nor should they haveworked for any AMC/mutual fund/intermediary during the period whenits registration was suspended or cancelled by SEBI. The board ofdirectors of the AMC must have at least 50% of directors who are not associates, or associated in any manner with the sponsor or any of itsGsubsidiaries or the trustee. The net worth of the AMC should not be lessthan Rs.50 crores. Regulation 24 specifies the restrictions on the businessactivities of the AMC. Regulation 25 specifies the obligations and the 1 The position post the SEBI (Mutual Funds) (Amendment) Regulations, 2021 witheffect from 5[th ]March 2021 has not been examined.H2 Legal effect of Regulation 24 has not been examined.

responsibilities of the AMC, which include taking reasonable steps andexercising due diligence to ensure that the investment of funds pertainingto any scheme is not contrary to the provisions of the regulations and thetrust deed. The AMC is responsible for the acts of commission or omissionby its employees, or persons whose services have been procured by theAMC. Sub-regulation (6) states that the AMC and its directors,notwithstanding any contract or agreement, shall not be absolved of theliability to the mutual fund for their acts of omission and commission,while holding such position or office.

10. There are a number of stipulations and restrictions to ensureobjectivity, fidelity and transparency in business transactions by the AMCand compliance with the Regulations. A system of regulation involvingchecks, responsibility and power of free decision is envisaged. The ChiefExecutive Officer, by whatever name called, is mandated by sub-regulation(6A)[3] to Regulation 25 to ensure that the mutual fund complies with allthe provisions of the Regulations, guidelines and circulars issued in relationthereto from time to time and that the investments made by the fundmanagers are in the interest of the unitholders. This officer is responsiblefor the overall risk management function of the mutual fund. Sub-regulation (6B)[4] to Regulation 25 states that the fund managers, whateverbe the designation, shall ensure that the funds are invested to achievethe objectives of the scheme and in the interest of the unitholders.

11. Chapter V deals with schemes of mutual funds and Regulation28(1) thereunder states that no scheme shall be launched by the AMCunless it is approved by the trustees and a copy of the offer documenthas been filed with SEBI. Regulations 32 and 33 pertain to the listingand repurchase respectively of units in close-ended schemes, whileRegulation 35 deals with the allotment of units and refunds of moneys.In terms of Regulation 38, guaranteed return is not to be provided in ascheme, unless such returns are fully guaranteed by the sponsor or theAMC, and a statement to that effect is made in the offer document,indicating the name of the person who will guarantee the return and themanner in which the guarantee is to be met. Regulation 38A permitslaunching of a capital protection-oriented scheme subject to: (a) the unitsof the scheme being rated by a registered credit rating agency from theviewpoint of the ability of its portfolio structure to attain the protection 3 SEBI (Mutual Funds) (Second Amendment) Regulations, 2020, w.e.f. 29.10.2020

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Aof the capital invested therein; (b) the scheme being close-ended; and(c) compliance with other requirements as may be specified by SEBI.Regulation 48 requires that every mutual fund shall compute the NetAsset Value of each scheme as specified and the same shall be calculatedon daily basis and disclosed in the manner as stated by SEBI.

B12. Regulation 49 is titled ‘pricing of units’ and states that theprice at which the units may be subscribed / sold / repurchased by themutual fund shall be made available to the investors in the mannerspecified by SEBI. The methodology for calculating the sale andrepurchase price of the units is to be provided by the mutual fund in themanner specified by SEBI. Sub-regulation (3) states that in determiningCthe price of the units, the mutual fund shall ensure that the repurchaseprice is not lower than 93% of the Net Asset Value and the sale price isnot higher than 107% of the Net Asset Value. As per the second provisoto sub-regulation (3), difference between the repurchase price and thesale price of the unit shall not exceed 7% calculated on the sale price.[5]

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13. Regulations 54 and 55 relate to the annual report and theauditor’s report respectively. Regulation 56 requires providing a copy ofthe annual report and the summary thereof to the unitholders. Regulation58 mandates periodic and continual disclosures by the AMC, the trustee,the sponsors, and the custodians, requiring them to make such disclosuresEand submit such documents as may be provided by SEBI and complywith sub-regulations (2) and (3). Regulation 59 deals with half-yearlydisclosures. Regulation 60 imposes a general obligation to discloseinformation and, being of some importance, is reproduced below:

“Disclosures to the investorsF60. The trustee shall be bound to make such disclosures as areessential in order to keep them informed about any informationwhich may have an adverse bearing on their investments.”

The trustees are mandated and bound to make such disclosuresto the unitholders as are essential to keep them informed about any

Ginformation that may have adverse bearing on their investments.

14. Chapter VIII relates to and empowers SEBI to authorise andconduct inspection and audit. SEBI, under Regulation 61(1), may appoint 5 Post amendment w.e.f. 5.3.2021 Regulation 49(3) states that the repurchase price ofunits of an open-ended scheme shall not be lower than 95 % of the NAV. There is noHstipulation in the Regulations regarding the sale price.

one or more persons as the inspecting officers to undertake inspectionof the books of accounts, records, documents, and infrastructure, systems,and procedures or to investigate the affairs of the mutual fund, the trustees,and the AMC for the purposes stipulated therein. Regulation 62 requiresthat SEBI shall issue not less than ten days’ notice to the mutual fund,trustees, or AMC, as the case may be, before ordering an inspection orinvestigation. However, under sub-regulation (2), notwithstanding sub-regulation (1), SEBI can direct such inspection or investigation withoutany notice when it is satisfied that in the interest of the investors no suchnotice should be given. Regulation 63 prescribes the duties and obligationsof the mutual fund/ trustees/ AMC whose affairs are being inspected orinvestigated. The investigating officer can, during the course of theinvestigation, examine or record the statements of any director, officer,or employee of the mutual fund/ trustee/ AMC and every such mutualfund/ trustee/ AMC is duty-bound to give to the investigating officer allassistance in connection with the inspection or investigation. Theinspecting officer is to submit, as soon as possible, a report to SEBI oncompletion of the investigation. Regulation 65 states that SEBI or theChairman shall after consideration of inspection or investigation reporttake such action as SEBI or the Chairman may deem fit and appropriateunder Chapter V of the Securities and Exchange Board (Intermediaries)Regulations, 2008.

Regulations 39 to 42 and 18(15) of the Securities andExchange Board of India (Mutual Funds) Regulations, 1996.

15. Regulations 39 to 42 read as under:

“Winding Up

39. (1) A close-ended scheme shall be wound up on the expiry ofduration fixed in the scheme on the redemption of the units unlessit is rolled over for a further period under sub-regulation (4) ofregulation 33.

(2) A scheme of a mutual fund may be wound up, after repayingthe amount due to the unit holders, —

“(a) on the happening of any event which, in the opinion of thetrustees, requires the scheme to be wound up; or (b) if seventy-five per cent of the unit holders of a schemepass a resolution that the scheme be wound up; or AB

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(c) if the Board so directs in the interest of the unitholders.

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(3) Where a scheme is to be wound up under sub-regulation (2),the trustees shall give notice disclosing the circumstances leadingto the winding up of the scheme:

“(a) to the Board; and

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(b) in two daily newspapers having circulation all over India, avernacular newspaper circulating at the place where the mutualfund is formed.

Effect of winding up

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40. On and from the date of the publication of notice under clause(b) of sub-regulation (3) of regulation 39, the trustee or the assetmanagement company as the case may be, shall—

“(a) cease to carry on any business activities in respect of thescheme so wound up; D

(b) cease to create or cancel units in the scheme;

(c) cease to issue or redeem units in the scheme.

Procedure and manner of winding up

41. (1) The trustee shall call a meeting of the unitholders to approveby simple majority of the unitholders present and voting at themeeting resolution for authorising the trustees or any other personto take steps for winding up of the scheme:

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Provided that a meeting of the unitholders shall not be necessaryif the scheme is wound up at the end of maturity period of theFscheme.

(2) (a) The trustee or the person authorised under sub-regulation (1)shall dispose of the assets of the scheme concerned in the bestinterest of the unitholders of that scheme.

(b) The proceeds of sale realised under clause (a), shall be firstutilised towards discharge of such liabilities as are due and payableunder the scheme and after making appropriate provision formeeting the expenses connected with such winding up, the balanceshall be paid to the unitholders in proportion to their respectiveinterest in the assets of the scheme as on the date when thedecision for winding up was taken.

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(3) On the completion of the winding up, the trustee shall forwardto the Board and the unitholders a report on the winding upcontaining particulars such as circumstances leading to the windingup, the steps taken for disposal of assets of the fund before windingup, expenses of the fund for winding up, net assets available fordistribution to the unit holders and a certificate from the auditorsof the fund.

(4) Notwithstanding anything contained in this regulation, theprovisions of these regulations in respect of disclosures of half-yearly reports and annual reports shall continue to be applicableuntil winding up is completed or the scheme ceases to exist.

Winding up of the scheme

42. After the receipt of the report under sub-regulation (3) ofregulation 41, if the Board is satisfied that all measures for windingup of the scheme have been complied with, the scheme shall ceaseto exist.”

16. Regulation 18(15)(c) reads as under:

“Rights and obligations of the trustees.

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(15) The trustees shall obtain the consent of the unitholders –

(a) whenever required to do so by the Board in the interest ofthe unitholders; or (b) whenever required to do so on the requisition made bythree-fourths of the unitholders of any scheme; or

(c) when the majority of the trustees decide to wind up orprematurely redeem the units.”

Interpretation of Regulations 39 to 42, their interplay andharmonious construction with Regulation 18(15) (c) of theSecurities and Exchange Board of India (Mutual Funds)Regulations, 1996.

17. Regulation 39, as the heading states, relates to ‘winding up’ ofa scheme of a mutual fund. Sub-regulation (1) to Regulation 39 applies A

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Ato close-ended schemes and is accordingly not relevant as the sixschemes in question are open-ended schemes.[6]

18. Sub-regulation (2) to Regulation 39 uses the expression ‘ascheme of a mutual fund,’ and accordingly applies to both open-endedand close-ended schemes.[7] It is an undisputed position that sub-regulationB(2) to Regulation 39 applies to the six schemes. In terms of sub-regulation(2) to Regulation 39, a scheme of a mutual fund can be wound up: (a) onthe happening of any event, which, in the opinion of the trustees, requiresthe scheme to be wound up; (b) if 75% of its unitholders[8] pass a resolutionfor winding up of the scheme; or (c) SEBI directs winding up of thescheme in the interest of the unitholders. Under each clause the initiatorCis different, and the condition to be satisfied is stipulated. Clause (a)empowers the trustees, while clauses (b) and (c) empower the unitholdersand SEBI respectively.

19. When a scheme “is to be wound up” under sub-regulation (2),the trustees are required by sub-regulation (3) of Regulation 39 to issueDa public notice in two daily newspapers having all India circulation and ina vernacular paper having circulation where the mutual fund is located.The public notice should state the circumstances leading to winding upof the scheme. The trustees are also required to write to SEBI anddisclose the circumstances leading to winding up of the scheme.

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20. On and from the date of publication, the cease and freezemandate of Regulation 40 triggers. Regulation 40, which is in the natureof statutory injunction, states that on and from the date of publication ofnotice under Regulation 39(3), the trustees and the AMC shall cease to(a) carry on any business in respect of the scheme to be wound up; (b)Fcreate or cancel units of the scheme; and (c) issue or redeem units ofthe scheme.

21. Regulation 41, as per the heading, relates to the procedureand manner of winding up. The trustees, in terms of sub-regulation (1)to Regulation 41, are required to call a meeting of the unitholders forGauthorising either the trustees or any other person to take steps for winding 6 Regulation 2(f) – “close-ended scheme” means any scheme of a mutual fund in whichthe period of maturity of the scheme is specified.

7 Regulation 2(s) – “open-ended scheme” means a scheme of a mutual fund which offersunits for sale without specifying any duration for redemption.

8 2(z)(i) of SEBI (Mutual Fund) Regulation 1996, “unit holder” means a person holdingHunit in a scheme of mutual fund.

up of the scheme. Voting at the meeting is by simple majority of theunitholders present and voting. In this meeting the unitholders do notexamine, affirm or reject the decision to wind up the scheme. The votingis restricted to selection of the person – either the trustee or a thirdperson – who would take ‘steps for winding up of the scheme’.

22. Regulation 41(2)(a), requires that the person or the trusteeauthorised under Regulation 41(1) must dispose of the assets of thescheme in the best interest of the unitholders. Clause (b) to sub-regulation(2) to Regulation 41, states that the sale proceeds shall be first utilisedtowards discharge of liabilities due and payable under the scheme.Secondly, appropriate provision is to be made for meeting the expensesconnected with the winding up. The balance amount shall be paid to theunitholders in proportion to their respective interests in the scheme as onthe date when the decision for winding up was taken. The clausedifferentiates between the creditors whose liability is due and payable,and the unitholders. Payment of the amount due and payable to thecreditors is prioritised and takes precedent. Thereafter, appropriateprovision is required to be made for expenses connected with the windingup. The balance amount is payable to the unitholders.

23. In terms of Regulation 42(2), the unitholders are to be paid inproportion to their respective interest in the assets of the scheme. Theinterest of the unitholders in the assets of the scheme as mentioned inRegulation 42(2) is computed on the basis of the date when the decisionfor winding up of the scheme was taken. As per Regulation 41(3), oncompletion of winding up, the trustees have to forward to SEBI and tothe unitholders a report on the winding up containing particulars such ascircumstances leading to the winding up, the steps taken for disposal ofthe assets for winding up, expenses for winding up, net assets availablefor distribution to the unitholders and a certificate from the auditors.Sub-regulation (4), a non-obstante provision, states that the requirementin respect of disclosures in the form of half-yearly report and annualreport shall continue until winding up is completed or the scheme ceasesto exist. Regulation 42 states that after receipt of the report underRegulation 41(3), if SEBI is satisfied that all measures relating to windingup have been complied with, the scheme would cease to exist.

24. Regulation 42A stipulates that the units of the mutual fundsscheme shall be delisted from the recognised stock exchange inaccordance with the guidelines as may be specified by SEBI.

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A25. Regulation 18(15)(c), which relates to rights and obligationsof the trustees, in simple words requires the trustees to take consent ofthe unitholders, when they, by majority, decide to wind up or prematurelyredeem the units. Words “winding up” in Regulation 18(15)(c), ex-facierefers to the winding up of the open-ended scheme and the expression“prematurely redeem the units” refers to premature redemption of unitsBunder the close-ended scheme.Decision of the High Court and contentions of SEBI, thetrustees and the AMC.

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26. The judgment under challenge, interpreting RegulationC18(15)(c) and Regulation 39(2)(a) holds that the decision of the trusteesto wind up a scheme under clause (a) to Regulation 39(2) must musterthe consent of the majority of the unitholders as per Regulation 18(15)(c).

27. Contesting this finding and interpretation, the argument of SEBI,the trustees and the AMC is that Regulations 39 to 42 are a completeDcode dealing with winding up of a scheme of mutual funds. Initiators andconditions to be satisfied under clauses (a), (b), and (c) to Regulation39(2) are different. It is argued that prior consent of the unitholders isnot envisaged when the trustees, on the happening of any event in termsof clause (a), form an opinion that a scheme is required to be wound up,or when SEBI under clause (c) directs winding up of a scheme in theEinterest of the unitholders. Only when the unitholders want to windup ascheme, in terms of clause (b), a resolution by 75% of the unitholders ismandated. The need to obtain the consent of the unitholders videRegulation 18(15)(c) refers to the procedure and the manner for windingup as mandated by Regulation 41(1). To put it differently, the unitholdersFdo not come into the picture when the trustees and SEBI, under clauses(a) and (c) respectively of Regulation 39(2), decide to wind up a scheme.Their decision is final and binding on the unitholders. It is submitted:

“a) Regulation 18(15)(c) requires Trustees to obtain consent ofUnit holders “when the majority of the Trustees decide to windGup”. It is thus very clear that consent is required when Trusteesdecide to wind up the scheme(s) and when read together withRegulation 41, makes it amply clear that the consent is for thepurpose of Regulation 41 i.e. to authorize the Trustee or any otherperson to dispose of the asset of scheme(s), in the interest of theunit holders.

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(b) The consent envisaged under Regulation 18(15)(c) is a general“rights and obligations” of the Trustees and that the said consentshall be read as approval required under Regulation 41(1).

(c) It is submitted that in the event consent under Regulation18(15)(c) is interpreted to mean that prior consent of unitholdersis required before a scheme is wound up pursuant to a decisiontaken by the Trustees, the provisions of Regulation 39(2)(b) to berendered otiose as under the said Regulation, a scheme may bewound up at the instance of Unit holders (upon 75% of the Unitholders of a scheme passing a Resolution for winding up).

(d) Regulation 40 comes into effect “on and from the date ofpublication of notice” by Trustees under Regulation 39(3)(b) andnot from the date of “consent of Unit holders”, which makes itabundantly clear that consent of Unit holders is not contemplatedqua decision of Trustees to wind up a scheme(s).

(e) Further, Regulation 40 (a) provides that on and from the dateof publication of notice under 39(3)(b), the Trustees or AssetManagement Company, as the case may be, shall cease to carryon any business activities in respect of the scheme so wound up.Therefore, when a decision by Trustee to wind up scheme is taken,in terms of 39(2)(a), the notice is issued and Regulation 40 comesinto operation and the requirement of obtaining consent of Unitholders at this stage cannot arise.

(f) It is submitted that Regulation 41(1) casts an obligation on theTrustees to call a meeting of the unit holders to approve a resolutionauthorising the Trustees or any other person to take steps forwinding up of the scheme. Regulation 18(15)(c) of the MFRegulations cannot be erroneously interpreted so as to concludethat before implementing Regulation 41, prior approval of the unitholders has to be taken.”

The submission accentuates, what is submitted would be theimpractical and calamitous effect of reading Regulation 18(15)(c) intoRegulations 39 to 42. Prior-consent from the unitholders if necessaryeven when the trustees ‘decide to wind up’ a scheme under Regulation39(2)(a), would inevitably delay the publication of public notices asenvisaged by Regulation 39(3). Therefore the cease and freeze legaleffect of Regulation 40 would get postponed resulting in chaos and AB

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Aconfusion, as business activities such as buying and redemption of unitsetc., would continue despite the trustees having taken the decision towind up the scheme. In panic, most unitholders would rush forredemptions, which achingly would be the reason for winding up. Theresult would be fire-sale of sound assets in a hasty and disorganisedmanner at discounted valuations in adverse market conditions. TheBtrustees who stand in a fiduciary capacity as domain experts, as mandatedby clause (a) to Regulation 39(2), act for and in the interest of theunitholders. The unitholders, a large and disparate body of lay personswithout domain expertise, have been erroneously conferred the right toveto and overrule the decision of the domain experts. Given the graveCconsequences for the sponsor, trustees and AMC, a decision to wind upa scheme is taken after in-depth analysis with great care and caution.Thus, the findings of the High Court to the contrary should be reversed.

Interpretation of the term ‘consent’ in Regulation 18(15)(c)vide order dated 12th February, 2021

D28. In our order dated 12[th] February 2021, we have interpretedRegulation 18(15)(c) and the word ‘consent’ therein in the followingmanner:

“8. However, we begin by rejecting the argument raised by someof the objecting unitholders that consent would be binding only onEthose who have consented to winding up of the mutual fundschemes and cannot be imposed on others. The word ‘consent’,in the context of the clause, clearly refers to ‘consent of themajority of the unitholders’, and not consent given by individualunitholders who alone would be bound by their consent, that is, itFexcludes unitholders who are not agreeable. To accept the secondor contra view, as pleaded by some of the objecting unitholders,would be to negate the very object and purpose of clause (c) tosub-regulation (15) of Regulation 18. In fact, the submission, ifaccepted, will make the Mutual Fund schemes and the windingup provisions in the Mutual Fund Regulations unworkable as thereGwould be two different classes of unitholders – one bound by theconsent, and others who are not bound by consent. Consequently,the scheme would not wind up. The intent behind the provision isto bind even those who do not consent.

9. Black’s Law Dictionary (10th Edition) defines the wordH‘consent’ as “a voluntary yielding to what another proposes or desires; agreement, approval, or permission regardingsome act or purpose, esp. given voluntarily by a competentperson; legally effective assent.” The dictionary also defines‘general consent’ to mean “adoption without objection,regardless of whether every voter affirmatively approves.”Shackleton on the Law and Practice of Meetings, 14th Edn.,while defining majority, and the binding effect of majority, hasopined:

“Definition

7-30. Majority is a term signifying the greater number. Inlegislative and deliberative assemblies, it is usual to decidequestions by a majority of those present and voting. This issometimes expressed as a “simple” majority, which means thata motion is carried by the mere fact that more votes are castfor than against, as distinct from a “special” majority wherethe size of the majority is critical.

The principle has long been established that the will of acorporation or body can only be expressed by the whole or amajority of its members, and the act of a majority is regardedas the act of the whole.

A majority vote binds the minority

7-31. Unless there is some provision to the contrary in theinstrument by which a corporation is formed, the resolution ofthe majority, upon any question, is binding on the majority andthe corporation, but the rules must be followed.”

The word/expression ‘consent’ in sub-regulation (15) toRegulation 18 refers to affirmative consent to winding up by‘the majority of the unitholders’. Conversely, consent is deniedwhen ‘majority of the unitholders’ do not approve the proposalto wind up the scheme.

10. However, the question which still remains to be answered iswhether ‘consent’ would mean majority of the unitholders whoexercise their right in the poll, or majority of all the unitholders ofthe scheme. Connected with the question is the concern of quorum,which means the minimum number of members of the entire bodyof members required to be present to legally transact business.

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11. Shackleton in the above quotation has referred to distinctionbetween simple and special majority. More appropriate for ourdiscussion is William Paul White’s thesis ‘History and Philosophyof the Quorum as a Device of Parliamentary Procedure’ publishedin 1967, in which he elucidates:

“Much of the controversy that has been historically associatedwith the quorum can be traced to the problem of simplydetermining just what is meant by a quorum. “From the veryearliest times it has been recognised as a general rule that amajority of a group is necessary to act for the entire group.” Inthe case of a public body, the power or authority whichestablishes the body may also determine what constitutes aquorum. Sturgis states that common parliamentary law fixesthe quorum as a “majority of the members”. The constitutionof the United States sets the quorum requirement in the Houseof Representatives at a majority of the membership. But tostate that a quorum is a majority of the membership opens theway to potential conflict; which is precisely what has happenedon numerous occasions.”

After examining the various definitions of the term quorum,the author observes that the definitions by themselves give nokey as to how to determine what is minimum number or whatconstitutes majority. The expression ‘majority’ can mean - (i)majority of total membership list; (ii) exclude or includedelinquent members; (iii) members present and voting; or (iv)those present, voting and not voting. Different meanings, heobserved, have added to the confusion around the concept ofthe quorum. Albeit referring to the position in 1967, the authorobserved:

“As we have emerged into the modern era, it is not surprisingthat by now the method, which has been legally agreed uponby the courts, to determine minimum and majority, is wellestablished.”

12. Clause (c) to sub-regulation (15) of Regulation 18 per se doesnot prescribe any quorum or specify the criterion for computingmajority or ratio of unitholders required for valid consent forwinding up. Clause (b) of Regulation 39(2), on the other hand, specifies that seventy-five per cent of the unitholders of a schemecan pass a resolution that the scheme be wound up. Similarly,Regulation 41(1) requires the trustees to call a meeting to approve,by simple majority of the unitholders present and voting, a resolutionfor authorising the trustees or any other person to take steps forwinding up of the scheme. Section 48 of the Companies Act, 2013states that where share capital of a company is divided intodifferent classes of shares, the rights attached to the shares ofany class may be varied with the consent in writing of theshareholders of not less than three-fourths of the issued shares ofthat class. Sub-section (3) to Section 55 of the Companies Act,2013 in case of failure to redeem or pay dividend refers to consentof holders of three-fourths in value of the preference shares.Section 103 of the Companies Act, 2013 prescribes minimumquorum for shareholder meetings.

13. In Shri Ishwar Chandra v. Shri Satyanarain Sinha andOthers, this Court on the question of quorum has held:

“If for one reason or the other one of them could not attend,that does not make the meeting of others illegal. In suchcircumstances, where there is no rule or regulation or any otherprovision for fixing the quorum, the presence of the majority ofthe members would constitute it a valid meeting and mattersconsidered there at cannot be held to be invalid.”

This decision had also relied on the exposition on the subject ofquorum in the Halsbury’s Laws of England, Third Edition (Vol.IX, page 48, para 95), which reads:

“95. Presence of quorum necessary. The acts of a corporation,other than a trading corporation, are those of the major part ofthe corporators, corporately assembled. In other words, in theabsence of special custom or of special provision of theconstitution, the major part must be present at the meeting,and of that major part there must be a majority in favour of theact or resolution contemplated. Where, therefore, a corporationconsists of thirteen members, there ought to be at least sevenpresent to form a valid meeting, and the act of the majority ofthese seven or greater number will bind the corporation. Inconsidering whether the requisite number is present, only those A

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members must be included who are competent to take part inthe particular business before the meeting. The power of doinga corporate act may, however, be specially delegated to aparticular number of members, in which case, in the absenceof any other provision, the method of procedure applicable tothe body at large will be applied to the select body.

If a corporate act is to be done by a definite body along, or bydefinite body coupled with an indefinite body, a majority of thedefinite body must be present.

Where a corporation is composed of several select bodies, thegeneral rule is that a majority of each select body must bepresent at a corporate meeting; but this rule will not be appliedin the absence of express direction in the constitution, if itsapplication would lead to an absurdity or an impossibility. ...”(emphasis supplied)

14. The concept of ‘absurdity’ in the context of interpretation ofstatutes is construed to include any result which is unworkable,impracticable, illogical, futile or pointless, artificial, or productiveof a disproportionate counter mischief. Logic referred to herein isnot formal or syllogistic logic, but acceptance that enacted lawwould not set a standard which is palpably unjust, unfair,unreasonable or does not make any sense. When an interpretationis beset with practical difficulties, the courts have not shied fromturning sides to accept an interpretation that offers a pragmaticsolution that will serve the needs of society. Therefore, when thereis choice between two interpretations, we would avoid a‘construction’ which would reduce the legislation to futility, andshould rather accept the ‘construction’ based on the view thatdraftsmen would legislate only for the purpose of bringing aboutan effective result. We must strive as far as possible to givemeaningful life to enactment or rule and avoid cadavericconsequences.

15. We would neither hesitate in stating the obvious, that modernregulatory enactments bear heavily on commercial matters and,therefore, must be precisely and clearly legislated as to avoidinconvenience, friction and confusion, which may, in addition, haveadverse economic consequences. The legislator in the present case must, therefore, reflect and take remedial steps to bring aboutclarity and certainty in the Mutual Fund Regulations.

16. Reading prescription of a quorum as majority of the unitholdersor ‘consent’ as implying ‘consent by the majority of all unitholders’in Regulation 18(15)(c) of the Mutual Fund Regulations will notonly lead to an absurdity but also an impossibility given the factthat mutual funds have thousands or lakhs of unitholders. Manyunitholders due to lack of expertise, commercial understanding,relatively small holding etc. may not like to participate. Consentof majority of all unitholders of the scheme with further prescriptionthat ‘fifty percent of all unitholders’ shall constitute a quorum isclearly a practical impossibility and therefore would be a futileand foreclosed exercise.

17. Conscious of the problem of quorum and majority in indefiniteelectorate, 1st Edition of Halsbury’s Laws of England on thequestion of quorum and meetings, had referred to the followingprinciples:

“791. Where a corporation consists of a definite number ofcorporate electors, a majority of that number must be presentin order to constitute a valid election. But where a corporationconsists of an indefinite number of corporate electors, a majorityonly 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 theelectoral assembly is to consist of a definite and an indefinitebody, the majority of the definite body must, as a general rule,be present in order to render the election legal. It is notnecessary that a majority of the indefinite body should be presentso long as there is majority of the definite body. If a constituentpart of a corporation refuses to be present at an election, itcannot be held, and an election by the remaining parts will bevoid. But electors present at an election and abstaining fromvoting are deemed to acquiesce in the election made by thosewho vote.”

The aforesaid exposition, for the purpose of majority andquorum, draws distinction between an electorate consisting ofdefinite number and an electorate composed of indefinitenumber. Justice Seshagiri Ayyar of the Madras High Court in A

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his concurring judgment in Syed Hasan Raza Sahib ShamsulUlama and two others v. Mir Hasan Ali Sahib and twoothers had drawn distinction between definite and indefinitenumbers in the following manner:

“…In the first class of cases, the number of the select body isfixed. In the second class of cases, the number is subject tovariation every year or at stated periods. For example, thenumber of electors of a Temple Committee or the number fora Municipality is liable to fluctuation. Residence for a particularperiod, or the attaining of age of minors can bring in newelectors. Whereas in the case of a Select Committee, thenumber is fixed…”

In the case of unitholders, the number is fluctuating and everchanging and, therefore, indefinite. Numbers of unitholders canincrease, decrease and change with purchase or redemption.Therefore, in the context of clause (c) of Regulation 18(15),we would not, in the absence of any express stipulation,prescribe a minimum quorum and read the requirement of‘consent by the majority of the unitholders’ as consent bymajority of all the unitholders. On the other hand, it would meanmajority of unitholders who exercise their right and vote insupport or to reject the proposal to wind up the mutual fundscheme. The unitholders who did not exercise their choice/option cannot be counted as either negative or positive votesas either denying or giving consent to the proposal for winding up.

18. Investment in share market, though beneficial and attractive,requires expertise in portfolio construction, stock selection andmarket timing. In view of attendant risks, diversification of portfoliois preferred but this consequentially requires a larger investment.Mutual funds managed by professional fund managers withadvantages of pooling of funds and operational efficiency are thepreferred mode of investment for ordinary and common persons.It would be wrong to expect that many amongst these unitholderswould have definitive opinion required and necessary voting in apoll on winding up of a mutual fund scheme. Such unitholders, forvaried reasons, like lack of understanding and expertise, smallholding etc., would prefer to abstain, leaving it to others to decide.

Such abstention or refusal to express opinion cannot be construedas either accepting or rejecting the proposals. Keeping in viewthe object and purpose of the Regulation with the language usedtherein, we would not accept a ‘construction’ which would leadto commercial chaos and deadlock. Therefore, silence on the partof absentee unitholders can neither be taken as an acceptancenor rejection of the proposal. Regulation 18(15)(c), upon applicationin ground reality, must not be interpreted in a manner to frustratethe very law and objective/purpose for which it was enacted. Wewould rather accept a reasonable and pragmatic ‘construction’which furthers the legislative purpose and objective. The underlyingthrust behind Regulation 18(15)(c) is to inform the unitholders ofthe reason and cause for the winding up of the scheme and togive them an opportunity to accept and give their consent or rejectthe proposal. It is not to frustrate and make winding up animpossibility. Way back in 1943, Sutherland in Statutes and StatutoryConstruction, Volume 2, Third Edition at page no. 523, in Note5109, had stated:

“Where a statue has received a contemporaneous and practicalinterpretation and the statute as interpreted is re-enacted, thepractical interpretation is accorded greater weight than itordinarily receives, and is regarded presumptively the correctinterpretation of the law. The rule is based upon the theorythat the legislature is acquainted with the contemporaneousinterpretation of a statue, especially, when made by anadministrative body or executive officers charged with the dutyof administering or enforcing the law, and therefore impliedlyadopts the interpretation upon re-enactment.”

With some modifications, the principle can be applied in thepresent case. Practical interpretation should be accorded greaterweight than it ordinarily receives, and can be regarded aspresumptively correct interpretation as the draftsmen legislateto bring about a functional and working result.

19. We would not read into Regulation 18(15)(c) a need tohave affirmative consent of majority of all or entire pool ofunitholders. The words ‘all’ or ‘entire’ are not incorporatedand found in the said Regulation. Thus, consent of theunitholders for the purpose of clause (c) to sub-regulation (15)of Regulation 18 would mean simple majority of the unitholderspresent and voting.”

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AThe above interpretation resolves several grey areas and wouldunderpin the construction of Regulations 39 to 42 and their interplaywith Regulation 18(15)(c).

29. The quotation highlights that interpretation is sometimes a three-stage process. At first, the words being interpreted should be understoodBaccording to their grammatical meaning in their literal and popular sense.In the second stage, we consider whether in the given context the plainmeaning is obscure as the text gives rise to choice of more than oneinterpretation, or the propositional interpretation fails to achieve themanifest purpose of the legislation, reduces it to futility, is practicallyunworkable or even illogical. In such cases at the third stage, the courtCapplying interpretative tools selects or blue-pencils an interpretationadvancing the legislative intent without rewriting the provision. Thelegislative intent is gathered not by restricting it to the language of theprovision, rather in the light of the object and purpose of the provisionand the legislation. The courts do lean towards a pragmatic and purposiveDinterpretation as there is an assumption that the draftsmen legislate tobring about a functional and working result.Harmonious interpretation of Regulation 18(15)(c) withRegulations 39 to 42

30. Regulation 39(2) under clause (a) vests the power of windingEup of a scheme with the trustees, and with the unitholders under clause(b) and with the SEBI under clause (c), but under Regulation 18(15)(c),the trustees are required to seek consent of the unit holders, when theyby majority decide to wind up a scheme. Regulation 18(15)(c) mirroredby use of the word ‘shall’ is couched as a command. Further, theFexpression ‘when the majority of the trustees decide to wind up’ inRegulation 18(15)(c) manifestly refers to clause (a) to Regulation 39(2)as this is the only Regulation which entitles the trustees to wind up thescheme. Regulation 18(15)(c), when it refers to trustees’ decision towind up, it implies the trustees’ opinion to wind up the scheme. Ratherthan making the decision of the trustees otiose, as suggested by SEBI,Gthe trustees and the AMC, Regulation 18(15)(c) itself would becomeotiose in case their interpretation is accepted. Principle of harmoniousconstruction should be applied which, in the context of the Regulationsin question, would mean that the opinion of the trustees would stand, butthe consent of the unitholders is a pre-requisite for winding up.

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31. We do not think that this interpretation in any way dilutes orrenders clause (b) to Regulation 39(2) meaningless or redundant. Thisclause applies where the winding up process is initiated at the instanceof the unitholders, i.e. upon 75% of unitholders of the scheme passing aresolution for winding up. Clause (b) does not in any manner reflect thatclause (c) to Regulation 18(15) should not be read as it ordains in simplewords.

32. Regulation 41, as explained above, refers to and relates to theprocedure and manner of winding up which cannot be equated with therequirement of consent as postulated by Regulation 18(15)(c). Argumentto the contrary, equating Regulation 18(15) (c) with Regulation 41(1)overlooks the difference in language, and the object and purpose behindthe two regulations. Regulation 41(1) applies even in cases where 75%unitholders have passed the resolution for winding up of the schemeunder Regulation 39(2)(b) or where SEBI directs the scheme to be woundup in the interest of the unitholders under Regulation 39(2)(c). On theother hand Regulation 18(15)(c) applies only when majority of the trusteesform an opinion and decide to wind up or prematurely redeem the unitsin entirety, a situation covered by Regulation 39(2)(a). To ignore themandate of Regulation 18(15)(c) would nullify the legislative intent byresorting to a rather disordered and knotted argument that Regulations18(15)(c) and 41(1) are identical and serve the same purpose. Clause(c) to Regulation 18(15) does not duplicate sub-regulation (1) to Regulation41.

33. Similarly, omission of clause (d) to Regulation 18(15) andinsertion of 18(15A) with effect from 22[nd] May 2000 by SEBI (MutualFunds) (Second Amendment) Regulations, 2000 is inconsequential. Priorto its omission, clause (d) to Regulation 18(15) read:

“(d) when any change in the fundamental attributes of any schemeor the trust or fees and expenses payable or any other changewhich would modify the scheme or affect the interest of theunitholders is proposed to be carried out unless the consent of notless than three-fourths of the unit holders is obtained: Providedthat no such change shall be carried out unless three fourths ofthe unit holders have given their consent and the unit holders whodo not give their consent are allowed to redeem their holdings inthe scheme.

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AProvided further that in case of an open ended scheme, the consentof the unitholders shall not be necessary if:

(i) the change in fundamental attribute is carried out after oneyear from the date of allotment of units.

(ii) the unitholders are informed about the proposed change inBfundamental attribute by sending individual communication andan advertisement is given in English daily newspaper havingnationwide circulation and in a newspaper published in the languageof the region where the head office of the mutual fund is situated.

(iii) the unitholders are given an option to exit at the prevailing NetCAsset Value without any exit load.

Explanation: For the purposes of this clause “fundamentalattributes” means the investment objective and terms of ascheme.”

DBy the same amendment[9], sub-regulation (15A) has been insertedand reads:

“(15A) The trustees shall ensure that no change in the fundamentalattributes of any scheme or the trust or fees and expenses payableor any other change which would modify the scheme and affectsthe interest of unitholders, shall be carried out, unless –E

(i) a written communication about the proposed change Is sentto each unitholder and an advertisement is given in one Englishdaily newspaper having nationwide circulation as well as in anewspaper published in the language of region where the HeadOffice of the mutual fund is situated; andF

(ii) the unitholders are given an option to exit at the prevailingNet Asset Value without any exit load.”

The distinction between Regulation 18(15A) and Regulation18(15)(c) is evident. The words ‘winding up or premature redemption ofGunits’ in Regulation 18(15)(c) refers to a situation covered by Regulation39(2)(a), that is, when the scheme is being wound up pursuant to adecision of the trustees. On the other hand, Regulation 18(15A) doesnot apply when the scheme is being wound up, rather it applies whenthere is a proposal to change the fundamental attributes of the scheme, H9 SEBI (Mutual Funds) (Second Amendment) Regulations, 2000.

fee or expense or any other change that would modify the scheme andaffect the interests of the unitholders. The effect should be not to windup the scheme thereby bringing it to an end, but to continue with thescheme as modified. Therefore, for Regulation 18(15A) to apply, thescheme should not cease to exist.

34. In cases under clause (a) to Regulation 39(2) the unitholdershave no right or option to exit or not exit the scheme and are paid interms of Regulation 41. Regulation 18(15A) gives the option to theunitholders to exit at the prevailing ‘Net Asset Value’ without any exitload or continue with the altered/modified scheme. Under the omittedclause (d) to Regulation 18(15), consent of three-fourths of the unitholdersfor fundamental changes to the scheme was sometimes necessary. Thisis not necessary under Regulation 18(15A). Omission of clause (d) tosub-regulation 18(15) and insertion of sub-regulation (15A) to Regulation18, as observed above is inconsequential and not relevant to the presentdispute. If anything, the draftsmen having retained clause (c) to 18(15),re-enforces its link with clause (a) to Regulation 39(2). Accordingly, theneed to obtain consent of the unitholders is mandated under clause (c) tosub-regulation 15 to Regulation 18 when the trustees under clause (a) toRegulation 39(2) decide to wind up a scheme.

35. The argument that the unitholders are lay persons and notwell-versed with the market conditions is to be rejected in light of theorder dated 12[th] February 2021. Relevant portion of this order, at therisk of repetition, is being reproduced below:

“18. Investment in share market, though beneficial and attractive,requires expertise in portfolio construction, stock selection andmarket timing. In view of attendant risks, diversification of portfoliois preferred but this consequentially requires a larger investment.Mutual funds managed by professional fund managers withadvantages of pooling of funds and operational efficiency are thepreferred mode of investment for ordinary and common persons.It would be wrong to expect that many amongst these unitholderswould have definitive opinion required and necessary voting in apoll on winding up of a mutual fund scheme. Such unitholders, forvaried reasons, like lack of understanding and expertise, smallholding etc., would prefer to abstain, leaving it to others to decide.Such abstention or refusal to express opinion cannot be construedas either accepting or rejecting the proposals. Keeping in view A

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Athe object and purpose of the Regulation with the language usedtherein, we would not accept a ‘construction’ which would leadto commercial chaos and deadlock. Therefore, silence on the partof absentee unitholders can neither be taken as an acceptancenor rejection of the proposal. Regulation 18(15)(c), upon applicationin ground reality, must not be interpreted in a manner to frustrateBthe very law and objective/purpose for which it was enacted. Wewould rather accept a reasonable and pragmatic ‘construction’which furthers the legislative purpose and objective. The underlyingthrust behind Regulation 18(15)(c) is to inform the unitholders ofthe reason and cause for the winding up of the scheme and toCgive them an opportunity to accept and give their consent or rejectthe proposal. It is not to frustrate and make winding up animpossibility….”

Investments by the unitholders constitute the corpus of the scheme.To deny the unitholders a say, when Regulation 18(15)(c) requires theirDconsent, debilitates their role and right to participate. It is an in-contestableposition that the unitholders exercise informed choice and discretion whenthey invest or redeem the units. Regulations envision the unitholders notas domain experts, albeit as discerning investors who are perceptiveand prudent. The trustees are therefore commanded to inform and betransparent. Summary reports, periodic and continual statements, annualEreports, audit reports, etc., mentioned in paragraph 11 above are intendedto reveal the current status of the investments, future prospects, risksand factors that may have bearing on the returns to enable the unitholdersto take deliberative decisions, be it purchase, redemption or exercise ofthe right to vote. The unitholders, when in doubt, as prudent investors Fmay be advised to abstain, but they are not placid onlookers, impuissantand helpless when the trustees decide to wind up the scheme in whichthey have invested. The stature and rights of the unitholders can co-exist with the expertise of the trustees and should not be diluted becausethe trustees owe a fiduciary duty to them. Thus, the contention that the trustees being specialists and experts in the field, their decision shouldGbe treated as binding and fait accompli has to be rejected not only inview of the specific language of Regulation 18(15)(c), but to be inconcinnity with the objective and purpose of the Regulations.

36. A hypothetical submission that the unitholders may reject avalid and well-considered opinion of the trustees for winding up, andH

therefore Regulation 18(15)(c) is directory, should be rejected.Assumptions cannot be a ground to wrongly interpret Regulation18(15)(c). Situations could arise when the trustees may err in their opinion,in which event the unitholders may correct them. Money and investmentof the unitholders being at stake, a wrong decision would obviously haveinimical impact on the unitholders themselves. We would brace theargument that a good and intelligible decision of winding up wouldinvariably be accepted by the unitholders.

37. ‘Consent’ for the purpose of Regulation 18(15)(c) refers tothe consent of the majority of the unitholders present and voting, and incase of a poll, the computation would be with reference to the numberof units held by the unitholder. In fact, in the course of hearing, it wasconceded that majority of the unitholders belong to provident fund trustsor pension funds. The voting pattern referred to in our earlier orderreflects that voting under Regulation 18(15)(c) is possible and can worksmoothly without much difficulty. The apprehensions expressed, therefore,do not carry much weight. It is obvious that where the unitholders voteagainst winding up, consequences would follow and accordingly thescheme would not be wound up. This is a natural and normal consequencewhich will have to be given effect to. It would, as stated above, happenrarely and that too would not happen without any genuine and goodreason.

38. SEBI is a Member of International Organisation of SecuritiesCommissions (IOSCO). IOSCO in a consultation report published inAugust, 2016 on good practices for the termination of investment funds,states that the termination plan should identify rationale for terminatingthe investment fund. Key steps to be taken as part of the terminationprocess should be identified. Clauses (28), (29) and (30) of the goodpractices under the heading ‘Decision to terminate’ read as follows:

“28. In the majority of cases, the decision to terminate is that ofthe responsible entity. However, in some jurisdictions national lawor regulatory requirements will mandate that the decision of theresponsible entity is approved by investors, or the custodian insome cases. The first step in preparing for the voluntary terminationof an investment fund is to determine whether investor approvalis required. This may depend on the legal structure of theinvestment fund and whether voting rights are attributed to shares/ units.

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A29. Investment in an investment fund usually carries with it theright to vote on certain matters and the voting requirements forthe approval of investors on, inter alia, liquidations and terminationsare generally prescribed in the constitutional documents and theprospectus / offering document of the investment fund, or legalBand regulatory regime of the national regulator, or both. Thetermination plan should set out the process for obtaining investorapproval, where required.

30. Where investor approval is required and investors are askedto vote on the decision to terminate with the outcome achievingCthe minimum voting requirements for approval, the decision isbinding on all, including those who do not vote. Where investorapproval is required, the rights of investors should be clear fromthe termination plan. In particular, the termination plan shoulddocument how the interests of dissenting investors will be treated.”

DGood practices, as recommended by IOSCO, commend theunitholders’ right to vote/approve on matters of termination and liquidation.

39. On and from the date of publication of notices under Regulation39(3), the cease and freeze effect of Regulation 40 applies. The wordsused in sub-regulation (3) to Regulation 39 are ‘where a scheme is to beEwound up in sub-regulation (2)’, that is, a scheme is to be wound up interms of clauses (a), (b) or (c) to Regulation 39(2). Sub-regulation (3) toRegulation 39 also mandates the trustees to disclose in the public noticethe circumstances leading to winding up of the scheme. This obviouslymeans that where the trustees form an opinion to wind up a scheme,they must disclose the reasons, and thereupon, the unitholders exerciseFtheir right to vote and give or deny consent. This is the true legal effecton harmonious reading of Regulation 18(15)(c) and Regulation 39(2)(a).

40. The language of clauses (a) and (c) to sub-regulation (2), andsub-regulation (3) to Regulation 39 does not envisage involvement of theunitholders till the publication of notices in case of clauses (b) and (c) toGsub-regulation (2) to Regulation 39. Therefore, when clauses (a) or (c)of Regulation 39(2) apply, the unitholders are to be informed about thewinding up by the trustees or SEBI by way of public notice. Publicationin terms of Regulation 39(3) is even required when the unitholders votefor winding up of a scheme under clause (b) of Regulation 39(2).H

41. It is manifest that publication of notices under Regulation 39(3)should be instantaneous without any interstice between the decision ofwinding up by the trustees under clause (a), by the unitholders underclause (b) or by SEBI under clause (c). Delay would hold up the cease-and-freeze effect of Regulation 40 and consequently nullify the salutarypurpose and object behind it.

42. In view of the above discussion and harmoniously interpretingRegulations 39 to 42, we hold that the consent of the unitholders, asenvisaged under clause (c) to Regulation 18(15), is not required beforepublication of the notices under Regulation 39(3). Consent of theunitholders should be sought post publication of the notice and disclosureof the reasons for winding up under Regulation 39(3).

43. Read in this manner, we can interpret clause (c) to Regulation18(15) and Regulations 39 to 42 without the disarray as suggested, whilenot displacing the legal effect of either Regulation 40 or Regulation18(15)(c). This interpretation takes care of the apprehension expressedby SEBI, the trustees and AMC that delay or time gap between a decisionof the trustees under clause (a) to sub-regulation (2) to Regulation 39and publication of notice under sub-regulation (3) to Regulation 39 wouldpostpone the cease-and-freeze effect of Regulation 40.

44. We have referred to Regulation 41(1) and that it requirescalling of a meeting of the unitholders for authorising the trustees or anyother person to take steps for winding up of the scheme. In case wherethe scheme is being wound up under Regulation 39(2)(a), it is possible tohold a meeting of the unitholders under the said provision where if theresolution for winding up is passed, the unitholders can also decide bysimple majority of the unitholders present and voting whether the trusteesor any other person should take steps for winding up of the said scheme.One meeting in many a cases would suffice.

45. To complete interpretation of Regulation 18(15), we have torecord that clause (a) applies and requires the trustees to obtain consentof the unitholders whenever required by SEBI in the interest of theunitholders. Clause (b) states that the trustees would obtain consent ofthe unitholders whenever required to do so on the requisition made bythree-fourths of the unitholders of any scheme. Accordingly, clause (a)would apply whenever SEBI mandates and clause (b) applies wheneverthree-fourths of the unitholders of the scheme make a requisition.

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A46. The impugned judgment, from paragraph 211 onwards,specifically refers to the responsibilities and duties of the trusteesincorporated in the statement of additional information published by themutual fund, which reads:

“(b) The Trustees shall obtain consent of the unit holders of theBScheme(s):

i) When the Trustee is required to do so by SEBI in the interestsof the unit-holders; or

ii) Upon the request of three-fourths of the unit holders of anyScheme(s) under the Mutual Fund; orC

iii) If a majority of the directors of the Trustee company decide towind up the Scheme(s) or prematurely redeem the units.”

Clause (iii) of the aforesaid quotation dealing with responsibilitiesand duties of the trustees, requires the trustees to obtain consent of theDunitholders of the scheme if the majority of the directors of the trusteecompany decide to wind up the scheme or prematurely redeem the units.The language of clause (iii) of the aforesaid quotation is identical toclause (c) of sub-regulation (15) to Regulation 18. The High Court was,therefore, right in observing that the trustees and the AMC haveunderstood and accepted that the consent of unitholders of the schemeEwould be necessary if the majority of the directors of the trustee companydecide to wind up a scheme.

47. The impugned judgment, in paragraph 221, observes that nomaterial was placed on record to show compliance with sub-regulation(3) to Regulation 39. The trustees and AMC have disputed the saidFposition by relying upon notice dated 23[rd] April 2020 enclosed at page1262 and the newspaper publications in both English and vernacularlanguages made on 24[th] April 2020 enclosed at pages 3304-3313. Inview of the aforesaid factual position, which was not seriously disputedby most of the unitholders, we would accept that there was compliancewith clause (b) of sub-regulation (3) to Regulation 39 and accordinglyGthe cease and freeze effect of Regulation 40 had become effective.

48. Our attention was drawn to the Circular dated 31[st] May 2016issued by SEBI as per which the trustees have the option to suspendredemption of units for a period of 10 days in a period of 90 days. Therelevant portion of the said circular reads as under:H

“b. Restriction on redemption may be imposed for a specifiedperiod of time not exceeding 10 working days in any 90 daysperiod”

SEBI has taken the stand that the benefit of this circular shouldnot be taken when the question of winding up is pending considerationbefore the trustees. The position not being ironclad, SEBI may re-examinewhether the trustees/AMC can be permitted to take similar benefitpending the decision on the question of winding up, when they facefrightful redemption pressure.

Challenge to the constitutional validity of the Securitiesand Exchange Board of India (Mutual Funds) Regulations, 1996

49. This challenge has been raised by one of the appellants, namely,Amruta Garg. The contentions forwarded can be summarised as under:

(a) The expression ‘happening of any event’ in Regulation39(2)(a) is unspecified and suffers from the vice ofexcessive delegation as it does not give any indication ofthe type of events which would be relevant for winding upof the scheme. It gives unbridled power to the trustees towind up a scheme which, in the opinion of the trustees,should be wound up.

(b) In comparison, vide clause (c) to Regulation 39(2), SEBIhas been invested with the power to issue directions forwinding up a mutual fund scheme only when it is in theinterest of the unitholders.

(c) Further, SEBI has not prescribed/issued guidelines or policyregarding formation of opinion by the trustees to wind upthe scheme.

(d) The opinion of the trustees is given paramountcy and issupreme. Even SEBI accepts that it has no role and cannotexamine and set aside the decision of the trustees. Thus,SEBI, as per its own contention and submission, being boundby the opinion of the trustees, cannot interfere even whenit is necessary to do so in the interest of unitholders or whenthe trustees have acted in their own vested interest. This iscontrary to the scheme of the SEBI Act whereunder SEBIhas been constituted primarily to act as a watchdog and to A

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Aprotect interests of the investors in the capital market,including the unitholders.

(e) There is no provision for appeal or internal challenge againstthe decision of the trustees who may in a given case forma wrong opinion regarding winding up of the scheme.

B(f)For the above reasons, clause (a) to Regulation 39(2) suffersfrom manifest arbitrariness in the absence of anyprescription regulating the exercise of the power by thetrustees. Reliance is placed upon State of Tamil Nadu andAnother v. T. Krishnamurthy and Others;[10]ShayaraCBano v. Union of India and Others;[11]SeniorSuperintendent of Post Offices, Allahabad and Othersv. Izhar Hussain;[12]Director General, Central ReservePolice Force and Others v. Janardan Singh andOthers.[13]

D(g)Regulation 39(3) equally suffers from the vice of manifestarbitrariness as SEBI merely acts as a drop-box. Thoughthe trustees are required to give notice disclosingcircumstances leading to winding up of the scheme to SEBI,this requirement is meaningless and superficial as SEBIcannot go into the question and circumstances to be satisfiedEas to existence of an event warranting the extreme actionof winding up.

(h) Regulation 41(2)(b) is manifestly arbitrary as it states thatthe sale proceeds under clause (a) shall be first dischargedfor such liabilities as are due and payable under the schemeFand only the balance amount shall be paid to the unitholdersin proportion to their respective interests in the assets ofthe scheme as on the date of the decision for winding upwas taken. Regulation 41 does not prescribe any mechanismor manner in which the authorised person or the AMC canGascertain the liabilities which are due and payable underthe scheme. Secondly, the unitholders have been placedbelow the creditors of the scheme and would therefore 10 (2006) 4 SCC 51711 (2017) 9 SCC 112 (1989) 4 SCC 318H13 (2018) 7 SCC 656

receive only the leftover. This undermines the paramountplace and position of the unitholders. Further, the SEBI hasfailed to protect the interest of the unitholders who are notonly financial creditors but, as explicitly provided inRegulation 18(12), their money is held in the mutual fund intrust and for their benefit. Reliance is placed upon PioneerUrban Land and Infrastructure Limited and Another v.Union of India and Others[14] where the home buyers havebeen held to be financial creditors under the IndianBankruptcy Code. Principle of pari passu should be madeapplicable.

(i) Regulation 42 is also manifestly arbitrary as SEBI is toperform only ministerial functions, much less than thefunctions of a regulator. Conspicuously, during the windingup process, SEBI has been given a minimalistic role whichis contrary to the paramount object of the Act.

50. We would begin by referring to the provisions of the SEBIAct and by elucidating the powers of SEBI. Section 11 of the SEBI Actprescribes the functions of SEBI. Sub-section (1), in general terms, statesthat it will be the duty of SEBI to protect the interests of investors insecurities and to promote the development of, and to regulate, thesecurities market. SEBI is empowered to take measures in this regardas it thinks fit. Sub-section (2), without prejudice to the generality ofsub-section (1), lists out as many as 17 specific clauses and states thatSEBI is entitled to provide for measures relating to those clauses.Thereunder, Clause (e) relates to prohibiting fraudulent and unfair tradepractices relating to securities markets. Clause (g) concerns prohibitionof insider trading in securities. Clauses (b), (i), (ia), (ib) and (la) relate toregistering and working of the trustees or trust deeds, investment advisorsand such other intermediaries who may be associated with the securitiesmarket in any manner and permits SEBI to call for information from,undertaking inspection, conducting inquiries and audits of mutual fundsand other persons associated with the securities market, intermediariesand self-regulatory organisations. They can also ask for records fromany persons, including any bank, any other authority or board orcorporation established or constituted by or under a central or state Actrelevant for investigation or inquiry by SEBI. It is also authorised to call AB

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Afor and require any agency to furnish information as may be considerednecessary by SEBI for discharge of its functions. Clause (m) is a residuaryclause which states that SEBI can perform such other functions as maybe prescribed. Sub-section (2A) to Section 11 is a non-obstante provisionwhich authorises SEBI to take measures to undertake inspection of anybook or register or other document or record of any listed public companyBor a public company, etc. which intends to get its securities listed on arecognised stock exchange. Sub-section (3), again, is a non-obstanteprovision and states that SEBI shall exercise the same powers as arevested in a civil court under the Code of Civil Procedure while trying asuit in respect of discovery and production of books of account andCother documents, summoning and enforcing attendance of persons andexamining them on oath, inspection of any books, registers and documentsof any person referred to in Section 12, inspection of any book, or register,or document, or record of a company, and issuing commissions forexamination of witnesses or documents. Sub-section (4) states thatwithout prejudice to the provisions contained in sub-section (1), (2), (2A)Dand (3) and Section 11B, SEBI may, by an order in writing in the interestof the investors or securities market, take the measures stipulatedthereunder either pending investigation or inquiry or upon completion ofinvestigation or inquiry. These include suspension of trading of any security;restraining any person from accessing security markets; attaching, for aEperiod not exceeding 90 days subject to conditions and for a furtherperiod beyond 90 days subject to confirmation by the special court, bankaccounts and other properties of any intermediary or any personassociated with the securities market in any manner involved in violationof the provisions of the SEBI Act, or Rules or Regulations madethereunder; direct any intermediary associated with securities market inFany manner not to dispose of or alienate any asset forming part of anytransaction under investigation subject to the condition that before orafter passing such orders an opportunity of hearing shall be given tosuch intermediaries or persons concerned. Sub-section (4A) authorisesSEBI to conduct an inquiry in the prescribed manner notwithstandingGthe provisions of sub-sections (1), (2), (2A), (3) and (4), Section 11B andSection 15-I by an order and for reasons to be recorded in writing levypenalty under Sections 15A, 15B, etc. Under sub-section (5), the amountdisgorged pursuant to the directions issued under Section 11B of the Actor 12A of the Securities Contracts (Regulation) Act, 1956 etc. is to becredited to the Investor Protection and Education Fund established byH

SEBI and to be utilised in accordance with the regulations framed underthe Act.

51. Section 11B of the Act reads as under:

“Power to issue directions and levy penalty.– (1) Save asotherwise provided in section 11, if after making or causing to bemade an enquiry, the Board is satisfied that it is necessary–

(i) In the interest of investors, or orderly development of securitiesmarket; or

(ii) to prevent the affairs of any intermediary or other personsreferred to in section 12 being conducted in a manner detrimentalto the interests of investors or securities market; or

(iii) to secure the proper management of any such intermediaryor 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 section11 A, as may be appropriate in the interests of investors in securitiesand the securities market.

(2) Without prejudice to the provisions contained in sub-section(1), subsection (4A) of section 11 and section 15-I, the Boardmay, by an order, for reasons to be recorded in writing, levy penaltyunder sections 15A, 15B, 15C, 15D, 15E, 15EA, 15F, 15G, 15H,15HA and 15HB after holding an inquiry in the prescribed manner.

Explanation.– For the removal of doubts, it is hereby declaredthat the power to issue directions under this section shall includeand always be deemed to have been included the power to directany person, who made profit or averted loss by indulging in anytransaction or activity in contravention of the provisions of thisAct or regulations made thereunder, to disgorge an amountequivalent to the wrongful gain made or loss averted by suchcontravention.”

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A52. As the heading of Section 11B states, the provision empowersSEBI to issue directions and levy penalty. It stipulates that such powerscan be exercised if and after making or causing any inquiry SEBI issatisfied that it is necessary – (i) in the interest of the investors or orderlydevelopment of the securities market, (ii) to prevent affairs of anyintermediary or other persons referred to in Section 12 being conductedBin a manner detrimental to the interest of the investors or securitiesmarket; or (iii) to secure proper management of such intermediary orperson. SEBI may issue directions to – (a) any person or class of personsreferred to in Section 12 or associated with the securities market, or (b)to a company in respect of the matters specified in Section 11A as mayCbe appropriate, in the interest of the investors in securities and in thesecurities market. The explanation to the Section is important for itclarifies, by way of removal of doubt, that the directions under this Sectionshall include and shall always deem to include power to direct any person,who has made profit or averted loss by indulging in any transaction oractivity in contravention of the provisions of the Act, or regulations madeDthereunder, to disgorge an amount equivalent to the wrongful gain madeor loss averted by such contravention. The provisions of Section 11Bhave been held to be procedural in nature and include not only an individualbut also a company. Therefore, any person associated with the securitiesmarket who commits breach of the SEBI Act, Rules and Regulations,Ecan be subjected to such directions and measures as may be imposedand issued by SEBI. Sub-section (2) to Section 11B states that SEBImay after holding an inquiry pass an order in writing, and, without prejudiceto the provisions of Section (11), levy penalty under Sections 15A, 15B,etc.F53. Referring to the provisions, the Division Bench of the HighCourt in the impugned judgement has held as under:

“291. Another question is about the powers of SEBI under Section11B of the SEBI Act. We have already held that the power toissue directions under Section 11B(1) can be exercised to issueGdirections to AMC and the Trustees. The said direction can beissued when SEBI, after making or causing to be made an enquiry,is satisfied that (a) it is necessary to issue directions in the interestof investors or orderly development of securities market; (b) toprevent the affairs of any intermediary or other persons referredto in Section 12 being conducted in a manner detrimental to theH

interests of investors of securities market; or (c) to secure theproper management of any such intermediary or person. The firstquestion is whether SEBI has power to interfere with the decisiontaken by the Trustees under Regulation 39(2)(a). If SEBI is totest the correctness or validity of such decision of the Trustees,an adjudication is required. The Trustees and AMG will have tobe heard in the adjudication process. Section 11B does notcontemplate any such adjudication. If an entity to whom a directionunder Section 11B has been issued commits any breach thereofor disobeys the same, it will attract penalty under Section 15HB.Before imposing penalty, adjudication as contemplated by Section15-I is required to be made. There is no provision made in SEBIAct for issuing a notice of the proposed direction under Section11B and hearing the Trustees or AMC before issuing the direction.No adjudication is contemplated before issuing the directions.Therefore, it is not possible for this Court to accept the contentionof the petitioners, AMC as well as the Trustees that by exercisingpower under Section 11B, SEBI has power to adjudicate upon thecorrectness of the decision taken by the Trustees to wind up aScheme. However, when SEBI finds that the Trustees or AMCare not abiding by the specific provisions of the Mutual FundsRegulations, the power to issue directions can be exercised bySEBI. By way of illustration, we refer to hypothetical cases. Afterinvoking the provisions of Regulation 39(2)(a), if the Trustees stopredemption the units by taking recourse to Regulation 40 withoutcomplying with the mandatory requirements of sub-clause (a) and(b) of clause (3) of Regulation 39, SEBI can always issue adirection under Section 11B not to stop redemptions, unlesscompliance is made with clause (3) of Regulation 39. If it is foundthat the Trustees continue to carry on business activities of theSchemes even after action under clause (3) of Regulation 39 istaken, a direction under Section 11-B can be issued by SEBI tostop all business activities.”

54. We have reservations on the said observations for the simplereason that if there is a violation of the regulations, i.e. clause (a) toRegulation 39(2), 39(3), 40, 41 or 42 by the trustees or the AMC, it isopen to SEBI to proceed in accordance with law and in terms of Section11 and 11B of the Act. It would be, therefore, incorrect to state that thedecision of the trustees under clause (a) to Regulation 39(2) cannot be ABC

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Amade subject matter of inquiry or investigation and therefore no directionsor orders under Section 11 or 11B of the Act can be passed. No doubt,clause (a) to Regulation 39(2) gives primacy to the opinion of the trusteesand does not require prior approval of SEBI, yet SEBI is entitled toconduct an inquiry and investigation when justified and necessary toascertain whether the trustees have acted in accordance with theirBfiduciary duty and also for reasons which would fall within the fourcorners of clause (a) to Regulation 39(2). If the trustees have acted forextraneous and irrelevant reasons and considerations, the action wouldbe in violation of clause (a) to Regulation 39(2) and therefore amenableto action under the SEBI Act, including directions under Section 11B.

C55. The view we have taken is in consonance with the earlierdecision of the Gujarat High Court in Alka Synthetics and Trading v.SEBI,[15] wherein it was observed that power under Section 11B is in thenature of issuing a command to persons referred to in the provision to doa certain act or to forbear from doing a certain act, if as a result of anDenquiry, SEBI is satisfied about the necessity of issuing such directionfor the purposes mentioned in clauses (a), (b) and (c). The Gujarat HighCourt, in our opinion, rightly observed that while Section 11 operates inthe field of laying down general regulatory measures as a matter ofpolicy, Section 11B operates in the field of prescribing a specified codeof conduct in relation to specified persons or classes of persons. On theEissue of application of principles of natural justice, it was noted thatSection 11B empowers SEBI to issue directions only after it is satisfiedabout the conditions referred to in the provision, as a result of making orcausing to be made an enquiry – which necessarily implies a pre-decisional hearing. Similar view was subsequently expressed in Nikhil FT. Parikh v. Union of India[16], wherein the same High Court was of theview that Section 11B, being an enabling provision, must be so construedas to subserve the purpose for which it has been enacted. As the term‘measure’ is not defined in the SEBI Act, the High Court gave it a meaningprescribed in general parlance, as incorporating anything desired or done with a view to the accomplishment of a purpose, a plan or course ofGaction intended to obtain some object, any course of action proposed oradopted by a Government. The Securities Appellate Tribunal in SterliteIndustries (India) Ltd. v. SEBI,[17] has given an expansive interpretation15 (1999) 95 Comp Cas 66316 (2014) 2 GLH 582H17 2001 SCC OnLine SAT 28.

to Section 11 and Section 11B of the SEBI Act, observing that they giveenormous authority to SEBI. As long as the power exercised under Section11B is subject to the provisions of the SEBI Act and well within the legaland constitutional frame work, intended to achieve the purposes of theSEBI Act and subjecting the persons specified in the section, the powerwill sustain. The Appellate Tribunal called it a wholesome provisiondesigned to achieve the objectives of the SEBI Act.

56. The Trustees and the AMC in their written submissions filedbefore the High Court interpreting the SEBI Act and the Regulationshad conceded that SEBI has extensive powers with respect to theregulation of mutual funds including the trustee’s decision to wind up ascheme of the mutual fund. Section 11(1) of the SEBI Act states that itis the duty of SEBI to protect the interest of investors in securities and topromote the development of, and to regulate the securities market, by“such measures as it thinks fit”. Under Section 11B of the SEBI Act,SEBI has broad powers to issue appropriate directions if it is satisfiedafter inquiry that such directions are necessary in the interest of investorsor for orderly development of securities market or to prevent the affairsof any intermediary being conducted in a manner detrimental to theinterest of investors or the securities market or to secure propermanagement of any intermediary or other person. The power of SEBIextends to regulating and monitoring the functioning and decisions takenby mutual funds, the trustees and the AMC. SEBI has the power to passany direction if it deems fit in the interest of unitholders. The trusteesand the AMC have specifically stated:

“It is evident form the aforesaid provisions that the SEBI hasextensive powers to regulate, supervise, issue directions withrespect to and inspect and investigate into the affairs of a mutualfund, including with respect to the decision of the trustee to windup a mutual fund scheme under Regulation 39(2)(a) of the MutualFunds Regulations, including to even stop the winding up of amutual fund scheme, if deemed necessary. The existence of suchpowers of the SEBI is further reinforced by Section 11D of theSEBI Act, which empowers the SEBI to pass an order requiringany person who, ‘has violated, or is likely to violate, anyprovisions of this Act, or any rules or regulations madethereunder” to ‘cease and desist’ from committing such violation.It is submitted that whether SEBI would choose to exercise this A

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Apower is a matter, which may be determined by SEBI in its wisdomand there may be numerous reasons why SEBI may not wish tointerfere in a winding up decision by a trustee under Regulation39(2)(a) including the reasons submitted by SEBI in its affidavitsuch as the fact that reversal of a decision to wind up a mutualfund scheme would likely cause a run on the scheme as well asBsevere market contagion (Reference is made to Paras 18,19 atPg. 6 and 7 of the Delhi Reply; Paras 34 and 35 at Pg. 11and 12 of the Gujrat Reply; and Paras 11 and 12 at Pgs. 5and 6 of the Madras Reply); however, on a reading of the schemeof the SEBI Act and regulations as a whole, it is submitted that itCis clear that such a power does exist.”

57. However, we agree with the High Court that the Regulationshave been framed in exercise of power conferred by Section 30 of theSEBI Act which authorises them to make regulations consistent withthe provisions of the SEBI Act to carry out the purpose of the SEBI Act.DThe very object of the SEBI Act is to preserve confidence of the investorsand to regulate the capital market, including mutual funds. In the firstportion of this order, we have elaborately referred to the Regulationswhich thereby create a three-tier system of the sponsor, the AMC andthe trustees. There are stipulations regulating the activities of the trusteesand the AMC whose powers, obligations and rights have been expresslyElaid down. The power to regulate mutual funds, once accepted, wouldinclude the power to make regulations for winding up of a scheme of themutual fund. Not framing any regulation in this regard would haveamounted to dereliction of duty on the part of SEBI and subjected it toadverse comments.F

58. It cannot be accepted that the trustees under clause (a) toRegulation 39(2) have been given absolute and unbridled power to windup a scheme. Language of clause (a) to Regulation 39(2) states that thetrustees must form an opinion on the happening of any event whichrequires the scheme to be wound up. Further, as per Regulation 39(3),Gthe trustees are bound to give notice disclosing the circumstances leadingto the winding up of the scheme. These notices along with the reasonshave to be communicated to SEBI and made known to the unitholdersby publication in two daily newspapers having circulation all over Indiaand a vernacular newspaper having circulation at the place where themutual fund is formed. The trustees are, therefore, required to come toH

a conclusion that due to specific circumstances articulated in writing,the scheme is required to be wound up. Two-thirds of the trustees areindependent persons who are not associated with the sponsor,[18] and nodirector, officer or employee of the AMC can be appointed as a trustee.[19]The trustees hold the assets of the scheme in fiduciary capacity on behalfof the investors. They are experts in the field and, therefore, conferredthe power under Regulation 39(2)(a) to decide whether or not a schemeshould be wound up. The words used in the statute including delegatedlegislation are to be understood in the light of that particular statute andnot in isolation. A duly enacted law cannot be struck down on the mereground of vagueness unless such vagueness transcends into the realmof arbitrariness (See Nisha Priya Bhatia v. Union of India andAnother[20]). In the context of the present case, the expression‘occurrence of any event’ is not to be read in isolation but with thewords ‘requires the scheme to be wound up’. The expression ‘any event’is therefore qualified with the said requirement. Read in this manner,there is no vagueness which can be described as transcending into realmof arbitrariness, on the other hand, the pre-requisite statutory mandate isclear. This is not a case of excessive delegation wherein the legislativefunction has been abdicated and passed on to the trustees who can actas per their whims and fancies. The essential legislative function is thedetermination of legislative policy and its formulation as a rule of conduct.In commercial matters varied and different situations can arise whichmay warrant winding up. Complexities in matters of business andcommerce can be bafflingly intricate and riddled with urgencies anddifficulties. Therefore, there is need for flexibility. Otherwise, the trusteeswould be compelled to first take the approval of SEBI, which may haveits own consequences.

59. The Statement of Additional Information dated 30[th] June, 2019issued by Franklin Templeton Mutual Fund, under Heading VI – ‘Durationof the Scheme and Winding Up’, provides a general indication as towhen a scheme can be wound up under the Regulations, the relevantportion of which is extracted below:

“VI. DURATION OF THE SCHEME AND WINDING UP

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18 Regulation 16(5)19 Regulation 16(3)20 (2020) 13 SCC 56

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AHowever, in terms of the SEBI Regulations, the Scheme may bewound up if:

i. There are changes in the capital markets, fiscal laws or legalsystem, or any event or series of events occurs, which, in theopinion of the Trustee, requires the Scheme to be wound up; or B

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60. We have agreed with the High Court that the opinion of thetrustees under clause (a) to Regulation 39(2), therefore, must beCconsented to by the unitholders in terms of the mandate of Regulation18(15)(c). In view of this interpretation, the argument challengingconstitutional validity of the Regulations on the ground that they giveunbridled and absolute power to the trustees loses much of its sting andforce. There are, therefore, sufficient guidance and safeguards in theRegulations itself on the power of the trustees to decide on winding upDof the fund.

61. The Regulations, in our opinion, rightly draw the distinctionbetween creditors and the unitholders. The unit holders are investorswho take the risk and, therefore, entitled to profits and gains. Havingtaken the calculated risk, they must also bear the losses, if any. UnitholdersEare not entitled to fixed return or even protection of the principal amount(See Regulations 38 and 38A).[21 ]Creditors, on the other hand, are entitledto fixed return as per mutually agreed contracts. Their rate of return isin the nature of interest and not profit or loss. Creditors are not risk 21 Guaranteed ReturnsF38. No guaranteed return shall be provided in a scheme, -(a) unless such returns are fully guaranteed by the sponsor or the asset managementcompany;

(b) unless a statement indicating the name of the person who will guarantee the return,is made in the offer document;

(c) the manner in which the guarantee is to be met has been stated in the offer document.Capital Protection oriented schemesG38A. A capital protection oriented scheme may be launched, subject to the following:(a) the units of the scheme are rated by a registered credit rating agency from theviewpoint of the ability of its portfolio structure to attain protection of the capitalinvested therein; (b) the scheme is close ended; and

(c) there is compliance with such other requirements as may be specified by the BoardHin this behalf.

takers as is the case with the unitholders. In this sense, unitholders aresomewhat at par with the shareholders of a company. The waterfallmechanism under the Companies Act, or the Indian Bankruptcy Code,gives primacy to the dues of the creditors over the shareholders. Identicalis the position of the unitholders. In fact, the argument that the unitholdersshould be treated pari passu with the creditors is farfetched. Similarly,the contention that unitholders are identically placed as home buyersunder the Indian Bankruptcy Code is equally frail and a weak argument.Home buyers pay money to the builder and enter into a contract forpurchase of immovable property. Home buyers are not risk or partakersin gains or losses like investors in a mutual fund. Home buyers under theBankruptcy Code are treated as creditors till the ownership rights in theimmovable property are transferred to them, but they do not take therisks and are not entitled to benefit of profits or suffer losses, as aretaken by the unitholders who invest in the mutual funds without anyguarantee of returns and know that the investment, including the principal,are subject to market risks. To equate the unitholders with either thecreditors or the home buyers will be unsound and incongruous.

62. The expression ‘due and payable’ with reference to the liabilitiesis significant. The words ‘due and payable’ have to be interpreted withreference to the context in which the words appear.[22] In the context inquestion they refer to the present liabilities which may be in praesentior in futuro. There must be an existing obligation though the appointeddate of payment may not have arrived. ‘Payable’, in this context, meanscapable of being paid, suitable to be paid and legally enforceable. Itwould exclude labilities that are time barred or those not payable in factsor in law.[23] In case of any dispute a summary but thorough inquiry maybe made to ascertain whether the liability is due and payable.[24] Obviously,the liabilities which are not due and payable would not get preferentialtreatment, thereby reducing the amounts payable to the unitholders.

63. Since the Regulations are in the nature of economic regulations,while exercising the power of judicial review, we would exercise restraintunless clear grounds justify interference. We would not supplant ourviews for that of the experts as this can put the marketplace into seriousjeopardy and cause unintended complications. Policy decisions can only 22 B.K. Educational Services Private Limited v. Parag Gupta and Associates, (2019)

11 SCC 633.

23 Union of India v. Raman Iron Foundry, (1974) 2 SCC 231

24 Regulations do not bar civil remedy.

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Abe faulted on the grounds of mala fides, unreasonableness, arbitrarinessand unfairness, in addition to violation of fundamental rights or exerciseof power beyond the legal limits. The principle of manifest arbitrarinessrequires something to be done in exercise in the form of delegatedlegislation which is capricious, irrational or without adequate determiningprinciple. Delegated legislations that are forbiddingly excessive orBdisproportionate can also be manifestly arbitrary. In view of theinterpretation placed by us and the discussion above, the Regulationsunder challenge do not suffer from the vice of manifest arbitrariness.64. However, we must now refer to a grey area, which we would,at this stage, not like to decide till we have full facts and decision in theCadjudication proceedings. The issue relates to interpretation of Regulation53, which reads:

“53. Every mutual fund and asset management company shall,(a) despatch to the unitholders the dividend warrants within 189[30]days of the declaration of the dividend; D(b) despatch the redemption or repurchase proceeds within 10working days from the date of redemption or repurchase;

(c) in the event of failure to despatch the redemption or repurchaseproceeds within the period specified in sub-clause (b), the assetmanagement company shall be liable to pay interest to theEunitholders at such rate as may be specified by SEBI for theperiod of such delay; (d) notwithstanding payment of such interest to the unit-holdersunder sub-clause (c), the asset management company may beliable for penalty for failure to despatch the redemption orFrepurchase proceeds within the stipulated time.Clause (b) to Regulation 53 requires that the AMC shall despatchthe redemption or repurchase proceeds within 10 working days from thedate of redemption or repurchase. Regulation 40, as noticed above, statesthat on or from the date of publication of notice under Regulation 39(3)(b),the trustees of the AMC, as the case may be, shall cease to cancel orGcreate units of the scheme; cease to issue or redeem units of the scheme;and cease to carry on any business activity in respect of the scheme sowound up.

65. Issue in question would, therefore, arise whether the AMC orthe trustees are bound to honour and pay the redemption or repurchaseHproceeds for requests received before the date of publication of notice in terms of Regulation 39(3). Interpreting the word ‘business’ in clause(a) of Regulation 40, the Division Bench of the High Court has held thatthis expression refers to business activity and, therefore, would includepayment of redemption proceeds to the unitholders, which would includethe request for redemption received prior to the date of publication underRegulation 59(3). The High court has, accordingly, held:

“228. As regards redemption requests received prior to compliancewith clause (3) of Regulation 39, the argument of AMC and theTrustees was that in view of clause (d) of Regulation 53, theredemption or repurchase proceeds are required to be dispatchedwithin ten working days from the date of redemptionnotwithstanding the decision of winding up. As held earlier, thedispatch of redemption proceeds or repayment of redemptionproceeds is also a part of business activity of a Scheme which iscompletely prohibited once the Regulation 40 triggers in. Therefore,the argument that the redemption requests made by the unit-holderson 23[rd] April, 2020 were required to be honoured even afterRegulation 40 had triggered in cannot be accepted. Once there isa compliance with clause (3) of Regulation 39, the mandatoryprovisions of Regulation 40 forthwith operate. There is noexception carved out to any of the clauses in Regulation 40. It isobvious that such a failure to dispatch the redemption orrepurchase proceeds due to applicability of provision of Regulation40 cannot be termed as a failure within the meaning of sub-clause(c) of Regulation 53. Therefore, the consequences such aspayment of interests and penalty as provided in clause (c) ofRegulation 53 may not follow.”

66. On the aspect of borrowings etc. by the AMC to make paymenttowards redemption, the High Court has held:

“225. But, in the context of the Scheme of the Mutual FundsRegulations, this Court will have to consider the meaning of‘business activities’. As stated in the earlier part of our discussion,a Scheme is launched by AMC with the approval of the Trustees.There are different categories of Schemes in which the investmentsare made by the members of the public. From plain reading of theprovisions of Regulation 43, it is clear that the money receivedfrom the unit-holders and investors is required to be invested byAMC strictly in accordance with Regulation 43. The investmentsare to be made subject to investment restrictions specified in the A

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Aseventh schedule. As far as borrowings are concerned, clause(2) of Regulation 44 provides that the Mutual Fund shall not borrowexcept to meet temporary liquidity needs of the Mutual Fund forthe purpose of repurchase, redemption of units or payment ofinterest or dividend to the unit-holders. The proviso to clause (2)of Regulation 44 clearly provides that a Mutual Fund shall notBborrow more than twenty percent (20%) of the net assets of theScheme and the duration of such borrowing shall not exceed aperiod of six months. Thus, in short, the business of a MutualFund consists of (i) launching Schemes, (ii) receiving theinvestments from the unit-holders/investors, (iii) investing theCmoney so collected from the unit-holders/investors in accordancewith Regulation 43 and other relevant Regulations and (iv) payingthe returns in various modes to the unit-holders/investors. Thereturns can be in the form of repurchase of the units, redemptionof units, payment of interest or dividend to the unit-holders, as thecase may be, depending upon the nature of the Scheme. MakingDsuch returns is certainly a business activity of a Scheme. Theincome so generated by investments made in accordance withRegulation 43, can also be invested by AMC. Clause (3) Regulation44 provides that save as otherwise expressly provided, a MutualFund shall not advance any loans for any purposes. However,Eclause (4) of Regulation 44 provides that a Mutual Fund may lendand borrow securities in accordance with the framework relatingto short selling and securities lending and borrowing specified bySEBI. The provisions of Mutual Funds Regulations are intendedto regulate activities of Mutual Funds for promoting its healthygrowth and for protecting interest of unit-holders. In a caseFof Taxation law, the rules of interpretation applicable provide thatif there are two interpretations possible, the one in favour ofassessee will have to be preferred. In case of Mutual FundsRegulations, a construction needs to be adopted which willsubserve the object of SEBI Act.

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226. It is pertinent to note here that clause (a) of Regulation 40uses the words “business activities in respect of the Scheme” andnot merely business of the Scheme. As siated earlier, the activitiesof repurchase of units, redemption of units or payment of interestor dividend are also a part of business of a Scheme. In view ofclause (2) of Regulation 44, a Mutual Fund can borrow only for H

the purposes of meeting temporary liquidity needs for the purposeof repurchase, redemption of units, payment of interests or dividendto the unit-holders. For example, if there are large number ofrequests for redemption of units by the unit-holders in respect of‘open ended Scheme’, a Mutual Fund may face temporary liquiditycrunch. In such a situation, it is permissible for a Mutual Fund tomake borrowings only for payment of redemption amount.Therefore, borrowings made as specified in clause (2) ofRegulation 44 will certainly amount to ‘business activities’ of aMutual Fund or a Scheme, inasmuch as, such borrowings aremade for the purpose of meeting demand for redemption which isa part of business of the Scheme.

227. Regulation 40 is interlinked with Regulation 41. In view ofRegulation 40, the moment compliance is made with clause (3) ofRegulation 39, the ‘business activities’ of the Scheme of a MutualFund must stop. The creation or cancellation of units and issue orredemption of the units of the said Scheme must also cease. Thereasons is, as required by sub-clause (a) of clause (2) of Regulation41, all the assets of the Scheme under winding up are required tobe disposed of in the best interest of unit-holders and thereafter,as per sub-clause (b) of clause (2) of Regulation 41, the proceedsof the sale are required to be applied firstly towards discharge ofliabilities of the Scheme. Secondly, the expenses in connectionwith the winding up are required to be set apart and thirdly, thebalance amount remaining after clearing the liabilities has to bedistributed to the unit-holders in proportion to their respectiveinterest in the assets of the Scheme. The object of Regulation 40of the Mutual Funds Regulation is to ensure that the momentcompliance is made with clause (3) of Regulation 39, the assetsavailable at that point of time should be made available for sale.The assets cannot be allowed to be depleied by creating moreliability. That is the reason why the redemption must immediatelycease. Therefore, it must be held that the borrowings made byAMC, in terms of clause (2) of Regulation 44, are businessactivities’ of a Scheme within the meaning of clause (a) ofRegulation 40. If borrowings are made in accordance with clause(2) of Regulation 44, the act of replacement of the borrower, asdone by the AMC and the Trustees in the present case, will haveto be also held to be a part of business activities in respect of theScheme.”

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A67. The case set up by some parties is at variance with the dictumpronounced by the High Court. They have submitted that the mutualfund must honour the request for redemptions received on or before thedate of publication of notice under Regulation 39(3). In other words,Regulation 53(b) must be honoured and complied with even if the timeof payment of redemption, the 10 days period stipulated therein, wouldBfall after the date of publication of the notice under Regulation 39(3).They are of the opinion that it would be illegal not to honour the validredemption requests. They are also of the opinion that the AMC shouldbe allowed and permitted to borrow money within the prescribed limitsto honour such valid redemption requests as long as the valid redemptionrequests are received prior to the cut-off date for winding up.C68. Before we answer this aspect, we would like to have greaterclarity on the factual matrix, which would be possible once theproceedings in pursuance of show-cause notices etc. are concluded.Notably, many of the appellants have not addressed us on this aspect,their grievance being that the Forensic Audit Report has not been madeDavailable to them. At the same time, they did refer to news reports orarticles to suggest irregularities and illegalities of different kinds, includingpreferential payments, breach of trust and mis-management indeployment of funds of the scheme, violation of investment objectivesstated in the offer document or scheme information document and breachof trust by withholding price sensitive information etc. Once the factsEare clear and ascertained, we would be able to appreciate and understandthe practical impact of the respective interpretations, i.e. the interpretationplaced by the High Court and the interpretation sought to be placed andpreferred by SEBI, the appellants, the trustees and the AMC. This isalso the reason why we have refrained from referring and commentingon facts and left the several issues open at this stage. Nevertheless, weFclarify that our observations in this Order and the earlier Order shouldnot be read as binding factual findings or conclusions on any disputedfacts, which could be a subject matter of a show-cause notice andconsequent decision. Of course, the legal interpretation of Regulation18(15)(c) and Regulations 39 to 42 to the extent indicated above areGconclusive and binding. For clarity, we would also observe that any findinggiven by the High Court on facts or even on legal issues not subjectmatter of this Order or our earlier Order dated 12[th] February, 2021 wouldnot be treated as conclusive and binding as the findings are sub-judiceand pending before this Court on interpretation as well as merits.HNidhi JainDirections issued.