FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANOTHER versus AMRUTA GARG AND OTHERS ETC on 12 February 2021

FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATELIMITED AND ANOTHER

v.

AMRUTA GARG AND OTHERS ETC.

(Civil Appeal Nos. 498-501 of 2021)

FEBRUARY 12, 2021

[S. ABDUL NAZEER AND SANJIV KHANNA, JJ.]

Securities and Exchange Board of India (Mutual Funds)Regulations, 1996 – Regulation 18(15)(c), 39(2)(a) – Winding upof Mutual Fund Schemes – Consent of unitholders – Held: For thepurpose of clause (c) to Regulation 18(15), consent of theunitholders would mean consent by majority of the unitholders whohave participated in the poll, and not consent of majority of all theunitholders of the scheme – In the present case, the objections topoll results rejected – Unitholders of the six schemes have giventheir consent by majority to wind up the six schemes – With theconsent of the parties, M/s. SBI Funds Management Private Limitedappointed to undertake the exercise of winding up, which wouldinclude liquidation of the holdings/assets/portfolio and distribution/payment to the unitholders – Winding up and disbursements to bein terms of the directions in earlier orders dtd. 2nd February, 2021and 9th February, 2021 and paragraph 41 herein – Other aspectsand issues including the questions whether Regulation 18(15)(c)would apply when the trustee’s form an opinion that the schemeshould be wound up in accordance with Regulation 39(2)(a) andthe contention of the objecting unitholders regarding misfeasance,malfeasances, fraud and the effect thereof, not examined.

Securities and Exchange Board of India (Mutual Funds)Regulations, 1996 – Regulation 18(15) (c) – Mutual Fund Schemes– Winding up of – Consent of unitholders – Plea of the objectingunitholders that consent would be binding only on those who haveconsented to winding up of the mutual fund schemes and cannot beimposed on others – Held: Rejected – ‘consent’, in the context ofthe clause, clearly refers to ‘consent of the majority of theunitholders’, and not consent given by individual unitholders who

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Aalone would be bound by their consent, that is, it excludes unitholderswho are not agreeable.

Interpretation of Statutes – Principles of interpretation – Held:When there is choice between two interpretations, the Court wouldavoid a ‘construction’ which would reduce the legislation to futility,Band should rather accept the ‘construction’ based on the view thatdraftsmen would legislate only for the purpose of bringing aboutan effective result.

Securities and Exchange Board of India (Mutual Funds)Regulations, 1996 – Regulation 18(15) (c) – Winding up of MutualCFund Schemes – Consent of unitholders – Held: Regulation18(15)(c) mandates and requires consent of the unitholders forwinding up, but does not prescribe any mode or manner for takingconsent – Therefore, by implication, the Regulation gives option ofholding a physical meeting, postal poll or e-poll.

DWords & Phrases – “consent” – Securities and ExchangeBoard of India (Mutual Funds) Regulations, 1996 – Regulation18(15) (c) – Held: ‘consent’ in sub-regulation (15) to Regulation18 refers to affirmative consent to winding up by ‘the majority ofthe unitholders’– Conversely, consent is denied when ‘majority ofthe unitholders’ do not approve the proposal to wind up the scheme.

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Directing winding up and disbursements, the Court HELD: 1.1 In view of larger public interest, presently thisCourt is only deciding the limited aspect of “unitholders’ consentto winding up” [assuming that Regulation 18(15)(c) would applyFeven where the trustees form an opinion that a scheme shouldbe wound up under Regulation 39(2)(c)], and is persuaded to directwinding up of the six schemes to ensure disbursement of fundsand liquidation of assets/securities. [Para 4][583-B-C]

Conclusion

1.2 The argument raised by some of the objectingunitholders that consent would be binding only on those who haveGconsented to winding up of the mutual fund schemes and cannotbe imposed on others is rejected. The word ‘consent’, in thecontext of the clause, clearly refers to ‘consent of the majority ofthe unitholders’, and not consent given by individual unitholderswho alone would be bound by their consent, that is, it excludes H

FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED

v. AMRUTA GARG

unitholders who are not agreeable. To accept the second or contraview, as pleaded by some of the objecting unitholders, would beto negate the very object and purpose of clause (c) to sub-regulation (15) Regulation 18. In fact, the submission, if accepted,will make the Mutual Fund schemes and the winding up provisionsin the Mutual Fund Regulations unworkable as there would betwo different classes of unitholders – one bound by the consent,and others who are not bound by consent. Consequently, thescheme would not wind up. The intent behind the provision is tobind even those who do not consent. The word/expression‘consent’ in sub-regulation (15) to Regulation 18 refers toaffirmative consent to winding up by ‘the majority of theunitholders’. Conversely, consent is denied when ‘majority ofthe unitholders’ do not approve the proposal to wind up thescheme. [Paras 8, 9][585-E-H; 586-F-G]

Black’s Law Dictionary (10th Edition), Shackleton onthe Law and Practice of Meetings, 14th Edn. – referredto.

1.3 When there is choice between two interpretations, theCourt would avoid a ‘construction’ which would reduce thelegislation to futility, and should rather accept the ‘construction’based on the view that draftsmen would legislate only for thepurpose of bringing about an effective result. The Court muststrive as far as possible to give meaningful life to enactment orrule and avoid cadaveric consequences. Reading prescription ofa quorum as majority of the unitholders or ‘consent’ as implying‘consent by the majority of all unitholders’ in Regulation 18(15)(c)of the Mutual Fund Regulations will not only lead to an absurditybut also an impossibility given the fact that mutual funds havethousands or lakhs of unitholders. Many unitholders due to lackof expertise, commercial understanding, relatively small holdingetc. may not like to participate. Consent of majority of allunitholders of the scheme with further prescription that ‘fiftypercent of all unitholders’ shall constitute a quorum is clearly apractical impossibility and therefore would be a futile andforeclosed exercise. In the case of unitholders, the number isfluctuating and ever changing and, therefore, indefinite. Numbersof unitholders can increase, decrease and change with purchase A

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Aor redemption. Therefore, in the context of clause (c) ofRegulation 18(15), this Court would not, in the absence of anyexpress stipulation, prescribe a minimum quorum and read therequirement of ‘consent by the majority of the unitholders’ asconsent by majority of all the unitholders. On the other hand, itwould mean majority of unitholders who exercise their right andBvote in support or to reject the proposal to wind up the mutualfund scheme. The unitholders who did not exercise their choice/option cannot be counted as either negative or positive votes aseither denying or giving consent to the proposal for winding up.Keeping in view the object and purpose of the Regulation withCthe language used therein, a ‘construction’ which would lead tocommercial chaos and deadlock cannot be accepted. Therefore,silence on the part of absentee unitholders can neither be takenas an acceptance nor rejection of the proposal. Regulation18(15)(c), upon application in ground reality, must not beinterpreted in a manner to frustrate the very law and objective/Dpurpose for which it was enacted. The underlying thrust behindRegulation 18(15)(c) is to inform the unitholders of the reasonand cause for the winding up of the scheme and to give them anopportunity to accept and give their consent or reject the proposal.It is not to frustrate and make winding up an impossibility. [ParasE14-18][589-E-G; 590-A-C; 591-C, G-H; 592-A-B]

Principles of Statutory Interpretation by Justice G.P.Singh, 14th Edition, at 50; Bennion on StatutoryInterpretation, 5th Edition; Halsbury’s Laws of England1st Edition; Sutherland in Statutes and StatutoryFConstruction, Volume 2, Third Edition at page no. 523,in Note 5109 – referred to.

1.4 The Court would not read into Regulation 18(15)(c) aneed to have affirmative consent of majority of all or entire poolof unitholders. The words ‘all’ or ‘entire’ are not incorporatedGand found in the said Regulation. Thus, consent of the unitholdersfor the purpose of clause (c) to sub-regulation (15) of Regulation18 would mean simple majority of the unitholders present andvoting. Regulation 18(15)(c) mandates and requires consent ofthe unitholders for winding up, but does not prescribe any modeor manner for taking consent. Therefore, by implication, theH

FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED

v. AMRUTA GARG

FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED

v. AMRUTA GARG

Regulation gives option of holding a physical meeting, postal pollor e-poll. In physical meetings, voting may be by show of handsor by holding a poll. Show of hands is quick and an easy way toadminister option but would not reflect and take into account therelative number of units held by the unitholders. Unitholders withfewer units have the same say as those with a greater number ofunits. It is not a good option when the proposal is contested.Poll, whether in a physical meeting, by way of a postal ballot ore-poll, has an advantage as each unitholder has one vote for everyunit/share held. Therefore, in cases where there is huge disparitybetween the units held, or possibility of contest/dispute, poll isthe preferred method for ascertaining preference of theunitholders. The value of poll lies in the fact that the weightedvoting strength based upon the number of units gives moreaccurate and precise results. Majority consent of the investors/unitholders should depend upon the number of units held by them.Polls are akin to election. Poll results like the election resultsare not to be lightly interfered with. More so, when it is fault of athird party and not of the proposer/successful candidate. Pollresults like election results are not to be regarded as vitiated bybreach of rules or mistake, until and unless the breach or mistake,it is proved has materially affected the result of the poll. Thisgeneral principle may be deviated from only when poll/electionis conducted so badly that it is not substantially in accordancewith law as to elections, in which case it would not matter whetherthe result was affected or not. When the poll or voting is on issuesor choices of commercial nature, normally it is not a part of thejudicial process for the court to ferret out flaws by examiningmerits or wisdom of the unitholders who have voted. The courtis not equipped and should refrain from entering into suchoversights as doctrine of internal management, institutionalsovereignty and right to opt and decide come into play. Theunitholders are the best judge and are more conversant with theirown interests. All that is to be seen is that broad parameters offairness in the administration, bona fide poll/election, and thatfundamental rules of reasonable management of public businesshave not been breached. [Paras 19, 28][592-F; 595-F-H; 596-A-F]

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A1.5 The unitholders were given a chance and option to voteand about 38% of the unitholders in numerical terms and 54% invalue terms had exercised their right to give or reject consent tothe proposal for winding up. In the absence or need for minimumquorum, which is not provided or stipulated in the Regulationsnor mandated under law, the e-voting result cannot be rejectedBon the ground that 38% of the unitholders in numerical termsand 54% in value terms, even if the rejected votes are notaccounted for, had participated. This cannot be a ground to rejectand ignore the affirmative result consenting to the proposal forwinding up of the six mutual fund schemes. [Para 31][597-E-F]

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2. KFin Technologies has been providing e-voting platformservices to listed public limited companies ever since the Ministryof Corporate Affairs mandated them to secure approval of theresolutions by the shareholders through electronic voting. Thee-voting platform of KFin Technologies is certified by the MinistryDof Corporate Affairs approved certification agency, viz. STQCWebsite Quality Certification Services. KFin Technologies hasconducted more than 4,500 e-voting events since 2013. To rejectthe voting results on this rather specious submission would castdoubts with serious repercussions on e-voting results of severalreputed companies. The objectors are unable to point out even aEsingle instance where KFin Technologies has been indicted. Inthe present case, the e-voting exercise was also supervised by ateam of technical experts, including Assistant Directors, CFSL,Hyderabad. The Court is satisfied with the explanation given bythe trustees/AMC and KFin Technologies with reference to theFobservations in the report of the forensic experts from CFSL.[Paras 33, 35][598-B-D; 602-C]

3. The notice for e-voting and meeting of the unitholdershas to be read in entirety. In the facts of the present case, thenotice for e-voting and the contents would not justify annullingGthe consent given by the unitholders for the winding up of the sixschemes. [Para 37][603-B]

4. In the present case, the procedure prescribed byRegulation 41 is not required to be followed as the trustees FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED

v. AMRUTA GARG

themselves have stated that the process of winding up, whichwould include liquidation of the securities and distribution/payment to the unitholders, should be undertaken by a third party.The objectors had also made similar submissions. Accordingly,with the consent of the parties, M/s. SBI Funds ManagementPrivate Limited is appointed to undertake the exercise of windingup, which would include liquidation of the holdings/assets/portfolioand distribution/payment to the unitholders. [Para 40][609-B-C]

5. For the purpose of clause (c) to Regulation 18(15),consent of the unitholders would mean consent by majority ofthe unitholders who have participated in the poll, and not consentof majority of all the unitholders of the scheme. In view of thefindings and reasons stated, the objections to poll results isrejected and it is held that the unitholders of the six schemeshave given their consent by majority to windup the six schemes.Winding up and disbursements would be in terms of directions inearlier orders dated 2nd February, 2021 and 9th February, 2021and paragraph 41 herein. However, this order does not examineand decide other aspects and issues including the questionswhether Regulation 18(15)(c) would apply when the trustee’s forman opinion that the scheme should be wound up in accordancewith Regulation 39(2)(a) and the contention of the objectingunitholders regarding misfeasance, malfeasances, fraud and theeffect thereof. [Para 42][610-C-E]

State of Madhya Pradesh and Another v. MahendraGupta and Others, (2018) 3 SCC 635 : [2018] 1SCR 443; Shri Ishwar Chandra v. Shri SatyanarainSinha and Others (1972) 3 SCC 383 : [1972] 3SCR 796; Fertilizer Corpn. Kamgar Union (Regd.) v.Union of India (1981) 1 SCC 568 : [1981] 2 SCR 52;Syed Hasan Raza Sahib Shamsul Ulama and two othersv. Mir Hasan Ali Sahib and two others AIR 1918 Mad1131 – referred to.

Morgan v. Simpson [1975] QB 151 – referred to.

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ACase Law Reference

BCIVIL APPELLATE JURISDICTION: Civil Appeal No. 498-501 of 2021.

From the Judgment and Order dated 24.10.2020 of the High Courtof Karnataka at Bangaluru in WP Nos. 8644, 8748, 8545 of 2020 andWA No. 399 of 2020.

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C.A. Nos. 502, 503, 508, 504-507, 509 of 2021

Tushar Mehta, SG, Harish Salve, Dr. Abhishek Manu Singhvi,Ms. Meenakshi Arora, Ravindra Shrivastava, Arvind P. Datar, Sr. Advs.,DAshish Bhan, Mohit Rohatgi, Jasmeet Singh, Ashim Sood, RajendraDangwal, Ms. Madhavi Khanna, Saif Ali, Nithyaesh Natraj, Vaibhav R.Venkatesh, Gopal Singh, Arjun Garg, Abhinav Shrivastava, Karan Kohli,Puneet Jain, Harshit Khanduja, Harsh Jain, Akshat Maheshwari,Harshvardhan Sharma, Neeraj Sharma, Ms. Christi Jain, PratapVenugopal, Ms. Surekha Raman, Akhil Abraham Roy, Vijay Valsan, forEM/s. K J John and Co, Shivam Singh, Sahil Raveen, Jaideep Khanna,Manish Kumar, Rajat Nair, Ms. Garima Prasad, Ms. Priyanka Das, ArvindKumar Sharma, Anirudh Sriram, Ms. Supriya Juneja, Dheeraj Nair, KumarKislay, Angad Baxi, Ms. Madhumita Bhattacharjee, Ms. Arti Jain,Ms. Srija Choudhury, Sanjay Kapur, Ms. Megha Karnwal, V.M.Kannan,FSambit Panja, Arjun Bhatia, Advs. for the appearing parties.

The Judgment of the Court was delivered by

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SANJIV KHANNA, J.

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G1. Leave is granted in the above captioned Special Leave Petitionswhich emanate from the judgment dated 24[th] October, 2020 by a DivisionBench of the Karnataka High Court, deciding three writ petitions and awrit appeal, wherein the challenge in substance was to the winding up,as well as the procedure for winding up, of six schemes of the FranklinTempleton Mutual Fund, namely:H

FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED581v. AMRUTA GARG [SANJIV KHANNA, J.](i) Franklin India Low Duration Fund (Number of SegregatedAportfolios – 2),

(ii) Franklin India Ultra Short Bond Fund (Number of Segregatedportfolios – 1),

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

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

(v) Franklin India Dynamic Accrual Fund (Number of Segregatedportfolios – 3), and C

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

2. The judgment under challenge inter alia interprets the Securitiesand Exchange Board of India (Mutual Funds) Regulations, 1996 (‘MutualFund Regulations/ Regulations’) framed by the Securities and ExchangeBoard of India (‘SEBI’) to hold that clause (c) to sub-regulation (15) ofRegulation 18[1 ]mandates consent of the unitholders for winding up ofmutual fund schemes even when the trustees form an opinion that thescheme is required to be wound up in terms of clause (a) to sub-regulation(2) of Regulation 39[2] of the Mutual Fund Regulations. To this extent, the D

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1 Regulation 18: Rights and obligations of the trusteesxxxxxx

(15) The trustees shall obtain the consent of the unitholders - (a) whenever required to do so by the Board in the interest of the unitholders; or(b) whenever required to do so on the requisition made by three-fourths of the unit-holders of any scheme; or F

(c) when the majority of the trustees decide to wind up or prematurely redeem theunits.

2 Regulation 39: Winding up

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

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

(d) on the happening of any event which, in the opinion of the trustees, requiresthe scheme to be wound up; or (e) if seventy-five per cent of the unit holders of a scheme pass aresolution that the scheme be wound up; or (f) if the Board so directs in the interest of the unitholders.

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Ajudgment under challenge substantially agrees with the unitholders, albeitSEBI in its appeal before this Court contests this interpretation aserroneous. In other words, SEBI propounds that clause (a) of sub-regulation (2) to Regulation 39 is a standalone provision and theunitholders’ consent is not required when the trustees upon happening ofan event form an opinion that the mutual fund scheme is to be wound up.B

3. The objecting unitholders’[3] (also referred to as objectors)primary grievance relates to allegations of gross mismanagement, failureand dereliction of duty by the Asset Management Company (‘AMC’)and Franklin Templeton Trustee Services Private Limited (‘trustees’ or‘board of trustees’); violation of the Securities and Exchange Board ofCIndia Act, 1992 (‘SEBI Act’); Mutual Fund Regulations; SEBIharmonization norms; investment horizon profiles; manipulation of NetAsset Value (NAV); disgorgement of wrongful payments etc. Inparticular, it is alleged that more than Rs. 15,000 crores were withdrawnfrom the six schemes two weeks prior to the decision for winding up.DObjecting unitholders submit that a finding of fraud, on the part of thetrustees and AMC, would entitle them to restitution etc. Other issuesraised include the question of privilege regarding the forensic audit report.

4. While the objecting unitholders submit that the trustees’ decisionto wind up the six schemes is a smokescreen to conceal misfeasanceEand malfeasance, which issues along with the question of liability of thetrustees/AMC should be decided first or together; we have deliberatelydecided to segregate and examine these issues subsequently. Pertinently,after receipt of the forensic audit report, SEBI has issued show causenotice which is pending adjudication. Common people invest in mutualF(3) Where a scheme is to be wound up under sub-regulation (2), the trustees shall givenotice disclosing the circumstances leading to the winding up of the scheme:—

(g) to the Board; and

(h) in two daily newspapers having circulation all over India, a vernacularnewspaper circulating at the place where the mutual fund is formed.3 The term ‘objecting unitholders’ does not refer to all unitholders but only 15 unitholders,Gnamely, Ms. Amruta Garg, Mr. Areez Khambatta, Mr. Persis Khambatta, KhambattaFamily Trust, Ms. Sanyam Jain, M/s. KAJ Associates, Ms. Sarika Mittal, M/s. UltraWalls & Floors, Ms. Aakansha Maheshwari, Ms. Priya Menghnani, Ms. VarnikaMenghnani, Mr. Sriram Gantasala, Mr. Ratnajit Bhattacharjee, Ms. Aarti Jain and Ms.Kiran Rama, who had filed writ petitions and are present before this Court and will alsoinclude Chennai Financial Markets and Accountability, an association which is not aHunitholder.

funds driven by factors such as simplicity in purchase and redemption ofunits, flexibility of holding and tenure, and liquidity by conversion intomoney. In the light of this, immediate directions are required as embargoprohibiting redemption of the units, effected by Regulation 40[4 ]from thedate of publication of notice under Regulation 39(3)(b) on 23[rd] April2020, for over ten months. Thereby the unitholders have suffered privationand harassment. This, in same manner, also undermines public sentimentsand confidence vital for investments in mutual funds. Hence, in view oflarger public interest, presently we are only deciding the limited aspectof “unitholders’ consent to winding up” [assuming that Regulation18(15)(c) would apply even where the trustees form an opinion that ascheme should be wound up under Regulation 39(2)(c)], and arepersuaded to direct winding up of the six schemes to ensure disbursementof funds and liquidation of assets/securities.

5. We have further taken note of the trustees’ submissions that:(i) as on 15[th] January, 2021, NAV of five of the six schemes was higherthan their respective NAVs on 23[rd] April, 2020 and in one scheme it wasmarginally lower;[5] (ii) five of the six schemes have turned cash positive;(iii) accumulated distributable cash proceeds of Rs.9,122 crores [(as on15[th] January 2021) and (subject only to provision for expenses in ordinarycourse)] is immediately available for disbursement to unitholders; and(iv) Assets Under Management (‘AUM’) of the six schemes hasincreased from Rs.25,648 crores as on 23[rd] April, 2020 to Rs.26,343crores as on 15[th] January, 2021. Lastly and importantly, during the courseof hearing on 2[nd] February, 2021, counsels for the objecting unitholdershave agreed to disbursal of Rs.9,122 crores amongst the unitholders,which, it has been directed would be in proportion to the unitholders’respective interest in the assets of the scheme, as suggested by SEBI. Itis obvious that this disbursal to unitholders is possible only when weaccept that the six schemes should be wound up.

4 Regulation 40: Effect of winding up

On and from the date of the publication of notice under clause (b) of sub-regulation (3) of regulation 39, the trustee or the asset management company as the casemay be, shall —

(a) cease to carry on any business activities in respect of the scheme so wound up; (b) cease to create or cancel units in the scheme;

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

5 The trustees state that NAV valuation of the portfolio securities is being computed byan independent valuation agency as per SEBI guidelines and is being reported daily.

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6. Before we advert to the order passed by this Court for elicitingconsent/approval from the unitholders, we deem it appropriate to firstreproduce sub-regulation (15) to Regulation 18 of the Mutual FundRegulations, which reads as under:

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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 of theunitholders; or C

b) whenever required to do so on the requisition made bythree-fourths of the unit-holders of any scheme; or

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

7. Interpreting the term ‘consent’ with reference to clause (c) ofsub-regulation (15) to Regulation 18, the judgment under challenge holds:

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“221. Obviously, there can be a ‘consent’ of the unit-holders to aproposed of winding up of a Scheme only if the majority of theunit-holders give consent to do so. Sub-clause (c) of clause (15)of Regulation 18 is silent on the nature of majority. Obviously, it isEnot a specific majority like three-fourth majority. Wherever three-fourth majority of the unit-holders was intended, the Mutual FundsRegulations say so. For example, sub-clause (b) of clause (15) ofRegulation 18 and sub-clause (b) of clause (2) of Regulation 39.Therefore, it has to be a simple majority. For this purpose, weFmust make a reference to a decision of a Full Bench of theAllahabad High Court in the case of Wahid UllahKhan v. District Magistrate, Nanital. In paragraph 32, theAllahabad High Court held thus:

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“32. The word “majority” speaks, of greater number out of thetotal number which cannot be a fixed number. In fact, thestarting point of majority is more than half, but any numbermore than half still continues to be majority. Majority cannotbe said only confining to more than half. Majority of three-fourths of the total number, two-thirds of the total number wouldall come within the sphere of the word ‘majority’. A person is G

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said to have won by a majority of fifty thousand votes or thirtythousand votes. All speak about the extent of majority. Amajority may start from a number which is more than half andwould continue till the balance of the number excluding onenumber. In the matter of votes if a resolution is carried eitherin favour or against by all it is said to be unanimous. Majority isused in contradiction to minority. Thus, there must exist aminority vote. So, even where one vote is cast in favour oragainst resolution the balance of the total number of votes castwould all be a number of majority vote.”

222. The meaning assigned by the Allahabad High court to theword majority appears to be most correct meaning. The Black’sLaw Dictionary provides that a majority means a number that ismore than half of a total. Therefore, consent, as contemplated bysub-clause (c) of clause (15) of Regulation 18 will have to be bya simple majority of the unit-holders of a particular Scheme whichis decided to be wound up.”

While we partly agree with the aforesaid observations, we wouldlike to emend the meaning given to the expression ‘the consent of theunitholders’ for the purpose of clause (c) to sub-regulation (15) ofRegulation 18.

8. However, we begin by rejecting the argument raised by someof the objecting unitholders that consent would be binding only on thosewho have consented to winding up of the mutual fund schemes andcannot be imposed on others. The word ‘consent’, in the context of theclause, clearly refers to ‘consent of the majority of the unitholders’, andnot consent given by individual unitholders who alone would be bound bytheir consent, that is, it excludes unitholders who are not agreeable. Toaccept the second or contra view, as pleaded by some of the objectingunitholders, would be to negate the very object and purpose of clause(c) to sub-regulation (15) of Regulation 18. In fact, the submission, ifaccepted, will make the Mutual Fund schemes and the winding upprovisions in the Mutual Fund Regulations unworkable as there wouldbe two different classes of unitholders – one bound by the consent, andothers who are not bound by consent. Consequently, the scheme wouldnot wind up. The intent behind the provision is to bind even those who donot consent.

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A9. Black’s Law Dictionary (10[th] Edition) defines the word‘consent’ as “a voluntary yielding to what another proposes ordesires; agreement, approval, or permission regarding some act orpurpose, esp. given voluntarily by a competent person; legallyeffective assent.” The dictionary also defines ‘general consent’ to mean“adoption without objection, regardless of whether every voterBaffirmatively approves.” Shackleton on the Law and Practice ofMeetings, 14[th ]Edn., while defining majority, and the binding effect ofmajority, has opined:

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7-30. Majority is a term signifying the greater number. In legislativeand deliberative assemblies, it is usual to decide questions by amajority of those present and voting. This is sometimes expressedas a “simple” majority, which means that a motion is carried byDthe mere fact that more votes are cast for than against, as distinctfrom a “special” majority where the size of the majority is critical.

The principle has long been established that the will of a corporationor body can only be expressed by the whole or a majority of itsmembers, and the act of a majority is regarded as the act of thewhole.

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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 of themajority, upon any question, is binding on the majority and theFcorporation, but the rules must be followed.”[6]

The word/expression ‘consent’ in sub-regulation (15) to Regulation18 refers to affirmative consent to winding up by ‘the majority of theunitholders’. Conversely, consent is denied when ‘majority of theunitholders’ do not approve the proposal to wind up the scheme.

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10. However, the question which still remains to be answered iswhether ‘consent’ would mean majority of the unitholders who exercisetheir right in the poll, or majority of all the unitholders of the scheme.Connected with the question is the concern of quorum, which means the6 See State of Madhya Pradesh and Another v. Mahendra Gupta and Others, (2018) 3HSCC 635.

minimum number of members of the entire body of members required tobe present to legally transact business.

11. Shackleton in the above quotation has referred to distinctionbetween simple and special majority. More appropriate for our discussionis William Paul White’s thesis ‘History and Philosophy of the Quorumas a Device of Parliamentary Procedure’ published in 1967, in whichhe elucidates:

“Much of the controversy that has been historically associatedwith the quorum can be traced to the problem of simply determiningjust what is meant by a quorum. “From the very earliest times ithas been recognised as a general rule that a majority of a group isnecessary to act for the entire group.” In the case of a publicbody, the power or authority which establishes the body may alsodetermine what constitutes a quorum. Sturgis states that commonparliamentary law fixes the quorum as a “majority of themembers”. The constitution of the United States sets the quorumrequirement in the House of Representatives at a majority of themembership. But to state that a quorum is a majority of themembership opens the way to potential conflict; which is preciselywhat has happened on numerous occasions.”

After examining the various definitions of the term quorum, theauthor observes that the definitions by themselves give no key as to howto determine what is minimum number or what constitutes majority. Theexpression ‘majority’ can mean - (i) majority of total membership list;(ii) exclude or include delinquent members; (iii) members present andvoting; or (iv) those present, voting and not voting. Different meanings,he observed, have added to the confusion around the concept of thequorum. Albeit referring to the position in 1967, the author observed:

“As we have emerged into the modern era, it is not surprising thatby now the method, which has been legally agreed upon by thecourts, to determine minimum and majority, is well established.”

12. Clause (c) to sub-regulation (15) of Regulation 18 per se doesnot prescribe any quorum or specify the criterion for computing majorityor ratio of unitholders required for valid consent for winding up. Clause(b) of Regulation 39(2), on the other hand, specifies that seventy-fiveper cent of the unitholders of a scheme can pass a resolution that thescheme be wound up. Similarly, Regulation 41(1) requires the trustees A

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Ato call a meeting to approve, by simple majority of the unitholders presentand voting, a resolution for authorising the trustees or any other personto take steps for winding up of the scheme. Section 48 of the CompaniesAct, 2013 states that where share capital of a company is divided intodifferent classes of shares, the rights attached to the shares of any classmay be varied with the consent in writing of the shareholders of not lessBthan three-fourths of the issued shares of that class. Sub-section (3) toSection 55 of the Companies Act, 2013 in case of failure to redeem orpay dividend refers to consent of holders of three-fourths in value of thepreference shares. Section 103 of the Companies Act, 2013 prescribesminimum quorum for shareholder meetings.C13. In Shri Ishwar Chandra v. Shri Satyanarain Sinha andOthers,[7] this Court on the question of quorum has held:

“If for one reason or the other one of them could not attend, thatdoes not make the meeting of others illegal. In such circumstances,where there is no rule or regulation or any other provision forDfixing the quorum, the presence of the majority of the memberswould constitute it a valid meeting and matters considered thereat 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, pageE48, 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 of thecorporators, corporately assembled. In other words, in the absenceof special custom or of special provision of the constitution, theFmajor part must be present at the meeting, and of that major partthere must be a majority in favour of the act or resolutioncontemplated. Where, therefore, a corporation consists of thirteenmembers, there ought to be at least seven present to form a validmeeting, and the act of the majority of these seven or greaterGnumber will bind the corporation. In considering whether therequisite number is present, only those members must be includedwho are competent to take part in the particular business beforethe meeting. The power of doing a corporate act may, however,be specially delegated to a particular number of members, in which H7 (1972) 3 SCC 383

case, in the absence of any other provision, the method of procedureapplicable to the body at large will be applied to the select body.

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

Where a corporation is composed of several select bodies,the general rule is that a majority of each select body must bepresent at a corporate meeting; but this rule will not be applied inthe absence of express direction in the constitution, if its applicationwould 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 productive of adisproportionate counter mischief[8]. Logic referred to herein is not formalor syllogistic logic, but acceptance that enacted law would not set astandard which is palpably unjust, unfair, unreasonable or does not makeany sense.[9] When an interpretation is beset with practical difficulties,the courts have not shied from turning sides to accept an interpretationthat offers a pragmatic solution that will serve the needs of society[10].Therefore, when there is choice between two interpretations, we wouldavoid a ‘construction’ which would reduce the legislation to futility, andshould rather accept the ‘construction’ based on the view that draftsmenwould legislate only for the purpose of bringing about an effective result.We must strive as far as possible to give meaningful life to enactment orrule and avoid cadaveric consequences[11].

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 avoid inconvenience, frictionand confusion, which may, in addition, have adverse economicconsequences[12]. The legislator in the present case must, therefore, reflectand take remedial steps to bring about clarity and certainty in the MutualFund Regulations.

8 See Bennion on Statutory Interpretation, 5th Edition, at 969.

9 Ibid at 986.

10 Ibid at 971, quoting Griffiths LJ.

11 See Principles of Statutory Interpretation by Justice G.P. Singh, 14th Edition, at 50.

12 See Bennion on Statutory Interpretation, 5th Edition, at 980.

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A16. Reading prescription of a quorum as majority of the unitholdersor ‘consent’ as implying ‘consent by the majority of all unitholders’ inRegulation 18(15)(c) of the Mutual Fund Regulations will not only leadto an absurdity but also an impossibility given the fact that mutual fundshave thousands or lakhs of unitholders. Many unitholders due to lack ofexpertise, commercial understanding, relatively small holding etc. mayBnot like to participate. Consent of majority of all unitholders of the schemewith further prescription that ‘fifty percent of all unitholders’ shallconstitute a quorum is clearly a practical impossibility and therefore wouldbe a futile and foreclosed exercise.

17. Conscious of the problem of quorum and majority in indefiniteCelectorate, 1[st] Edition of Halsbury’s Laws of England on the question ofquorum and meetings, had referred to the following principles:

“791. Where a corporation consists of a definite number ofcorporate electors, a majority of that number must be present inorder to constitute a valid election. But where a corporationDconsists 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, orthe electoral assembly is to consist of a definite and an indefinitebody, the majority of the definite body must, as a general rule, beEpresent in order to render the election legal. It is not necessarythat a majority of the indefinite body should be present so long asthere is majority of the definite body. If a constituent part of acorporation refuses to be present at an election, it cannot be held,and an election by the remaining parts will be void. But electorsFpresent at an election and abstaining from voting are deemed toacquiesce in the election made by those who vote.”

The aforesaid exposition, for the purpose of majority and quorum,draws distinction between an electorate consisting of definite numberand an electorate composed of indefinite number. Justice Seshagiri AyyarGof the Madras High Court in his concurring judgment in Syed HasanRaza Sahib Shamsul Ulama and two others v. Mir Hasan Ali Sahiband two others[13] had drawn distinction between definite and indefinitenumbers in the following manner:

H13 AIR 1918 Mad 1131

“…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, the numberof electors of a Temple Committee or the number for a Municipalityis liable to fluctuation. Residence for a particular period, or theattaining of age of minors can bring in new electors. Whereas inthe case of a Select Committee, the number is fixed…”

In the case of unitholders, the number is fluctuating and everchanging and, therefore, indefinite. Numbers of unitholders can increase,decrease and change with purchase or redemption. Therefore, in thecontext of clause (c) of Regulation 18(15), we would not, in the absenceof any express stipulation, prescribe a minimum quorum and read therequirement of ‘consent by the majority of the unitholders’ as consentby majority of all the unitholders. On the other hand, it would meanmajority of unitholders who exercise their right and vote in support or toreject the proposal to wind up the mutual fund scheme. The unitholderswho did not exercise their choice/option cannot be counted as eithernegative or positive votes as either denying or giving consent to theproposal for winding up.

18. Investment in share market, though beneficial and attractive,requires expertise in portfolio construction, stock selection and markettiming. In view of attendant risks, diversification of portfolio is preferredbut this consequentially requires a larger investment. Mutual fundsmanaged by professional fund managers with advantages of pooling offunds and operational efficiency are the preferred mode of investmentfor ordinary and common persons. It would be wrong to expect thatmany amongst these unitholders would have definitive opinion requiredand necessary voting in a poll on winding up of a mutual fund scheme.Such unitholders, for varied reasons, like lack of understanding andexpertise, small holding etc., would prefer to abstain, leaving it to othersto decide. Such abstention or refusal to express opinion cannot beconstrued as either accepting or rejecting the proposals. Keeping in viewthe object and purpose of the Regulation with the language used therein,we would not accept a ‘construction’ which would lead to commercialchaos and deadlock. Therefore, silence on the part of absentee unitholderscan neither be taken as an acceptance nor rejection of the proposal.Regulation 18(15)(c), upon application in ground reality, must not beinterpreted in a manner to frustrate the very law and objective/purpose A

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Afor which it was enacted. We would rather accept a reasonable andpragmatic ‘construction’ which furthers the legislative purpose andobjective. The underlying thrust behind Regulation 18(15)(c) is to informthe unitholders of the reason and cause for the winding up of the schemeand to give them an opportunity to accept and give their consent orreject the proposal. It is not to frustrate and make winding up anBimpossibility. Way back in 1943, Sutherland in Statutes and StatutoryConstruction, Volume 2, Third Edition at page no. 523, in Note 5109, hadstated:

“Where a statue has received a contemporaneous and practicalinterpretation and the statute as interpreted is re-enacted, theCpractical interpretation is accorded greater weight than it ordinarilyreceives, and is regarded presumptively the correct interpretationof the law. The rule is based upon the theory that the legislatureis acquainted with the contemporaneous interpretation of a statue,especially, when made by an administrative body or executiveDofficers charged with the duty of administering or enforcing thelaw, and therefore impliedly adopts the interpretation upon re-enactment.”

With some modifications, the principle can be applied in the presentcase. Practical interpretation should be accorded greater weight than itEordinarily receives, and can be regarded as presumptively correctinterpretation as the draftsmen legislate to bring about a functional andworking result.

19. We would not read into Regulation 18(15)(c) a need to haveaffirmative consent of majority of all or entire pool of unitholders. TheFwords ‘all’ or ‘entire’ are not incorporated and found in the saidRegulation. Thus, consent of the unitholders for the purpose of clause(c) to sub-regulation (15) of Regulation 18 would mean simple majorityof the unitholders present and voting.

20. In the first hearing before this Court on 3[rd] December, 2020,Gwe had, without prejudice to the rights and contentions of the parties,permitted the trustees to call a meeting of the unitholders to seek theirapproval/consent for winding up. Steps in this regard were to be takenwithin a period of one week from the date of the order. Pursuant to theorder, the trustees in their meeting held on 5[th] December, 2020 hadapproved the notices to be sent to the unitholders of the six schemes. ItHwas decided that the unitholders were to be provided e-voting facility from 09:00 a.m. on 26[th] December, 2020 till 06:00 p.m. on 28[th] December,2020. Meeting by way of video conferencing would be held on 29[th]December, 2020 to seek approval of the unitholders, for or against thewinding up of the six schemes. The unitholders participating in the meetingcould opt to vote on 29[th] December, 2020, in the duration starting withthe commencement of the meeting till the conclusion of fifteen minutesafter the closure of the meeting.

21. By order dated 9[th] December, 2020, this Court had directedSEBI to appoint an Observer for the e-voting by the unitholders scheduledbetween 26[th ]and 29[th] December, 2020. However, it was clarified thatthe trustees were undertaking the exercise of e-voting and that SEBIwould appoint an Observer in terms of our directions. The results of thee-voting, it was directed, would not be declared and would be producedbefore this Court in a sealed cover along with the report of the Observerappointed by SEBI.

22. SEBI, vide its letter dated 18[th] December, 2020, had appointedMr. T.S. Krishnamurthy, former Chief Election Commissioner of India,to act as the Observer ‘regarding e-voting of the unitholders’ of the sixschemes. A Technical Assistance Team was also constituted by SEBIto assist Mr. T.S. Krishnamurthy. The Technical Assistance Teamcomprised the following persons:

(i) Mr. B.N. Sahoo, Chief General Manager, SEBI, Mumbai;

(ii) Ms. Nayana Ovalekar, Chief Operating Officer, CentralDepository Services (India) Limited (CDSL), Mumbai;

(iii) Mr. K. Sriram, Practising Company Secretary and Scrutiniser,Chennai;

(iv) Mr. M. Krishna, Assistant Director, Central Forensic ScienceLaboratory (CFSL), Hyderabad; and

(v) Mr. Ch E Sai Prasad, Assistant Director, CFSL, Hyderabad.

23. Order of this Court dated 18[th] January, 2021 records thatMr. T.S. Krishnamurthy had submitted his report, and the e-voting resultsrecorded therein were read out in the Court. The Registry was directedto scan the report and make e-copies of the Observer’s report availableto the counsels for the parties, including Advocates-on-Record who hadfiled applications for intervention/impleadment. Parties were given libertyto file objections to the Observer’s report/e-voting results, with right to A

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Aothers to file response/reply to the objections. It was also directed thatthe Court would first decide the objections, the procedure to be followedand the question whether the procedure under Regulation 41(1) in thefacts of the present case is mandated.

24. Order of this Court dated 25[th] January, 2021, clarified that theBCourt would first examine the objections to the e-voting results and theissue/question whether or not disbursal/payment to the unitholders shouldbe made. Interpretation of Mutual Fund Regulations and other aspectswould be examined and decided thereafter. This order also granted libertyto the objectors to file an application to place on record new facts, whichhad statedly come to their knowledge on 25[th] January, 2021. Option toCfile response/reply to the application disclosing new facts was given tothe opposite parties.

25. The Observer’s report states that the six schemes put togetheras on 3[rd] December, 2020 had 3,15,600 unitholders. The figure wascomputed by consolidating folios on PAN basis. Out of this, 3,09,360Dunitholders, amounting to 98% of the total, had either given their e-mailID or mobile number. In respect of 6,754 unitholders, neither e-mail IDnor mobile numbers were available. On 11[th] December, 2020, noticesvia email were sent to 2,98,704 unitholders. On 17[th] December, 2020,information by way of SMS was sent to 5,872 unitholders on their mobileEnumbers. On 17[th] December, 2020 information through SMS was sentto 10,548 unitholders where no e-mail addresses were available.However, delivery of 1,766 SMSs failed. Accordingly, the report observesthat login IDs and passwords were communicated to 3,09,052 unitholdersamounting to 97.92% of the total number of unitholders.F26. M/s. J. Sagar Associates, a law firm, was appointed as theScrutiniser for the e-voting process, its role being to oversee the conductof e-voting for all the six schemes in a fair and transparent manner. On9[th] January, 2021, the Scrutiniser had submitted its report to the Observersetting out the final results. The Observer in paragraph 36 of his reporthas reproduced the results as set out in the Scrutiniser’s report, in aGtabular form, which is as under:

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27. The aforesaid results have been computed/tabulated onunitholders’ vote on one vote per unitholder basis. The trustees havealso filed computation before us on the basis of one vote per unit held,i.e. proportionate or value basis. If calculated on proportionate/valuebasis, the percentage of votes cast in favour of winding up would increaseas per the table given below:

28. Three other aspects may be noted:

(i) Regulation 18(15)(c) mandates and requires consent of theunitholders for winding up, but does not prescribe any mode ormanner for taking consent. Therefore, by implication, theRegulation gives option of holding a physical meeting, postal pollor e-poll. In physical meetings, voting may be by show of handsor by holding a poll. Show of hands is quick and an easy way toadminister option but would not reflect and take into account therelative number of units held by the unitholders. Unitholders withfewer units have the same say as those with a greater number ofunits. It is not a good option when the proposal is contested. Poll,whether in a physical meeting, by way of a postal ballot or e-poll,has an advantage as each unitholder has one vote for every unit/share held. Therefore, in cases where there is huge disparity A

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Abetween the units held, or possibility of contest/dispute, poll is thepreferred method for ascertaining preference of the unitholders.The value of poll lies in the fact that the weighted voting strengthbased upon the number of units gives more accurate and preciseresults. Majority consent of the investors/unitholders should dependupon the number of units held by them[14].B

(ii) Polls are akin to election. Poll results like the election resultsare not to be lightly interfered with. More so, when it is fault of athird party and not of the proposer/successful candidate. Pollresults like election results are not to be regarded as vitiated bybreach of rules or mistake, until and unless the breach or mistake,Cit is proved has materially affected the result of the poll. Thisgeneral principle may be deviated from only when poll/election isconducted so badly that it is not substantially in accordance withlaw as to elections, in which case it would not matter whether theresult was affected or not.[15]

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(iii) When the poll or voting is on issues or choices of commercialnature, normally it is not a part of the judicial process for the courtto ferret out flaws by examining merits or wisdom of theunitholders who have voted. The court is not equipped and shouldrefrain from entering into such oversights as doctrine of internalEmanagement, institutional sovereignty and right to opt and decidecome into play.[16] The unitholders are the best judge and are moreconversant with their own interests. All that is to be seen is thatbroad parameters of fairness in the administration, bona fide poll/election, and that fundamental rules of reasonable managementof public business have not been breached.F

29. The objectors to the e-voting results are sixteen in numberand, as per details, they hold 20,02,114.041 units in the six schemes ofvalue of Rs. 8,69,28,507.62. In percentage terms, the share of objectorsin the total units is merely 0.024% and their share in the total AUM is0.033%. (Chennai Financial Markets and Accountability, one of the partiesGand an objector, does not hold any unit in the six schemes. Trustees/AMC have questioned the locus and the role of CFMA. We are not 14 Sections 107 to 110 of Companies Act, 2013 are express provisions and will accordinglyapply in case of meeting of shareholders.

15 See Morgan v. Simpson [1975] QB 151.H16 See Fertilizer Corpn. Kamgar Union (Regd.) v. Union of India, (1981) 1 SCC 568.

presently examining the said aspect which is left open to be examinedand decided, if required, later.)

30. Faced with the aforesaid position, the objectors have submittedthat only 38% of the unitholders had voted. On the other hand, the trustees/AMC have submitted that the votes cast represent approximately 54%of the total number of units outstanding, i.e. nearly 54% of the unitholderson proportionate/value basis. Though we have not been provided withscheme-wise break-up of the votes which should have been given, itdoes not matter in view of the overwhelming consent for winding up ofthe schemes. The trustees also state that a large number of corporatevotes were rejected by the Scrutiniser on technical grounds of absenceof corporate formalities for authorisation of the concernedrepresentatives. The rejected votes represent 1,997 unitholders holdingapproximately 68.10 crore units valued at Rs. 2,464 crores. Further, anoverwhelming majority of the rejected votes – Rs. 2,420 crores by value,98.6% by units and 97.5% by number of unitholders – were in favour ofthe scheme. Accordingly, if these rejected votes are taken intoconsideration, the total votes being polled in proportionate terms wouldincrease from approximately 54% to approximately 62%.

31. We do not think we are required to go into the said aspect ingreat detail. As already held above, the unitholders were given a chanceand option to vote and about 38% of the unitholders in numerical termsand 54% in value terms had exercised their right to give or reject consentto the proposal for winding up. In the absence or need for minimumquorum, which is not provided or stipulated in the Regulations normandated under law, the e-voting result cannot be rejected on the groundthat 38% of the unitholders in numerical terms and 54% in value terms,even if we do not account for the rejected votes, had participated. Thiscannot be a ground to reject and ignore the affirmative result consentingto the proposal for winding up of the six mutual fund schemes.

32. Primary objection raised relates to appointment of M/s. KFinTechnologies Pvt. Ltd. (‘KFin Technologies’) for providing e-votingplatform services. The submission being that KFin Technologies is anassociate/sister of M/s. Karvy Stock Broking Limited. This company,M/s. Karvy Stock Broking Limited, indicted by an adverse order dated24[th] November, 2020 under Sections 11(1), 11(4) and 11B of the SEBIAct read with Regulation 35 of SEBI (Intermediary) Regulations, 2008, AB

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Ais barred from accepting new clients on grounds of investor fraud,falsification of records of investors/clients and misuse of client funds.

33. This argument does not impress us and cannot be a ground toreject the results. KFin Technologies, it has been pointed out, has beenproviding e-voting platform services to listed public limited companiesBever since the Ministry of Corporate Affairs mandated them to secureapproval of the resolutions by the shareholders through electronic voting.The e-voting platform of KFin Technologies is certified by the Ministryof Corporate Affairs approved certification agency, viz. STQC WebsiteQuality Certification Services. KFin Technologies has conducted morethan 4,500 e-voting events since 2013. To reject the voting results on thisCrather specious submission would cast doubts with serious repercussionson e-voting results of several reputed companies. The objectors are unableto point out even a single instance where KFin Technologies has beenindicted. In the present case, the e-voting exercise was also supervisedby a team of technical experts, including Mr. M. Krishna and Mr. Ch E.DSai Prasad, Assistant Directors, CFSL, Hyderabad.

34. Faced with the aforesaid situation, learned counsel for theobjectors have drawn our attention to the report of the Assistant Directors,CFSL, Hyderabad which has been enclosed as Annexure-11 to theObserver’s report. The relevant portion of the analysis in the report ofEthe forensic experts is as under:

“C. The Website ‘https://evoting.kfintech.com’ fulfills therequirement of the e-Voting Website Quality Certification SchemeQuality Level II as per the STQC Website Quality CertificationServices, MeitY, Govt. of India, New Delhi. The certificate bearsFthe approval Number CQW/198 and valid up to 4th Feb, 2022.OBSERVATIONS OF THE ANALYSIS

1) The E-Voting took place during the period 26thDecember 2020 to 28th December 2020.

A.Analysis of the E-Votes cast has been performed on the basisGof E-Voting Logs, E-Voting Transaction Logs and the E-Votingrelated data taken from the Master Data Base. The belowtable provides the details of the E-Votes cast against eachScheme.

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B. 0.5% of the above votes have been selected randomly; schemewise and the same have been verified in the Master Database.The screen captures of the same are provided at Annexure I(Page Nos. 01 to 16). On verification the E-Voting Logs matchwith the Master Database.

2) Analysis of the Instapoll Votes during the AGM VCsconducted on 29[th ]December 2020 indicate:

A. On 29[th ]December 2020, AGM through video conferencingfor the SIX Schemes took place at scheduled time intervals.The details are given below.

B. It was informed by KFin Tech. that the customers whohad voted already during the E-Voting on 26[th] December2020 to 28[th ]December 2020 are not allowed to vote againduring the Insta Voting process.

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600SUPREME COURT REPORTS

AC. The below table shows the details of Instapoll Votes Castagainst the each Scheme:

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In particular, our attention was drawn to paragraphs 4 and 5 ofthe report which records that complete database activity monitoring logswere not provided and that, for many votes, the IP address capturedwas the IP address of the Load Balancing Server of KFin Technologies.EIt was submitted by some of the objectors that the report given by KFinTechnologies should be sent to the forensic experts for their comments.Paragraphs 3 to 5 of the analysis report of the forensic experts, reads:

“3) The event logs of the two Web Servers (P1WB1WV-1122and P1WB1WV-1146) and the database servers (P1DBWV-1707)Fhave been provided by the KFin Tech Pvt. Ltd. The analysis ofthese event logs reveals no abnormal events indicating the normalfunctionality of the systems.

4) The analysis of the E-Votes, Instapoll Votes cast on the basisof the IP Addresses indicate that there are instances of castingGmultiple votes from the same IP Address. The details are providedat Annexure I (Page Nos. 17 to 104). The customer details(scheme wise) wherein the same IP address has been logged formultiple E-Votes have been provided at Annexure I (Page Nos.105 to 1988).

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On analysis it is observed that for many of the votes the IPAddress captured is 10.41.3.252, which is the IP Address ofthe Load Balancing Server of KFin Tech. KFin Tech informedthat the capturing of the public IP Addresses of the incomingrequests for E-Votes was effective only after 26[th] December2020 at 1231 Hrs. due to issues in implementing theconfiguration. The details of these E-Votes are provided atAnnexure I (Page Nos. 1989 to 2928).

5) The complete Database Activity Monitoring Logs could not beprovided by the KFin Tech Pvt. Ltd.”

35. The trustees/AMC and KFin Technologies have disputedparagraph 5 of the report stating that database monitoring logs wereprovided to the forensic experts. However, we need not go into the saidaspect, for, in our opinion, paragraph 4 of the report is being misread andmisunderstood by the objectors. It is correct that for some of the votes,the IP address 10.41.3.252 as captured was that of the Load BalancingServer of KFin Technologies. However, the report also records thatKFin Technologies has explained that due to technical or implementationissues it was able to capture public IP address of e-votes after 1231hours on 26[th] December, 2020. Paragraph 4 states that details of thecustomers, scheme-wise, where the same IP address has been loggedfor multiple e-votes, had been provided to the forensic experts. Clearly,the details of each customer /unitholder where one or same IP addresswas used for casting multiple votes was furnished. It is not the case ofthe objectors that any of the unitholders/voters have complained ofimpersonation or misuse of their identity. KFin Technologies has explainedthat in total 1,17,416 votes were registered in the system. The source IPaddress was captured in 88,293 cases. In 29,123 cases, votes with LoadBalancing Server IP was captured in the IIS logs for which end-user IPreport in the firewall between 26[th] December 2020 (09:00 a.m. till 12:31p.m.) was available. They have, by way of data flow diagram, elucidatedand explained the e-voting platform. The e-voting platform on valid loginwould issue a one-time password which would be sent via e-mail orSMS to the unitholder. This one-time password was randomly andautomatically generated without human intervention. The unitholder wasrequired to enter the one-time password and thereupon cast their vote.After the vote was cast, acknowledgement/ confirmation e-mail/SMSwas sent to the registered voter’s ID/mobile number. Further, the data A

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Astored in the database was one-way encrypted. E-voting window wasnot open and the application would not allow the user or the unitholder toenter any details. Importantly, the Observer’s report mentions that beforethe e-voting, a thorough examination of the system was done by theexperts. The report (Annexure-11) records that to check, 0.5% of thevotes were selected randomly and on verification, e-logs were matchedBwith the master database. Further on examination and analysis of theevent logs of the two web servers no abnormal events were witnessed,indicating normal functionality of the system. We are satisfied with theexplanation given by the trustees/AMC and KFin Technologies withreference to the observations in the report of the forensic experts fromCCFSL.

36. The third objection to the e-voting results emanates from thenotice to the unitholders, which, it is inter alia submitted, misguides andeffectively prompts and canvasses the unitholders to give their consentfor winding up. Our attention was specifically drawn to the followingDparagraphs of the notice for e-voting and the meeting of the unitholdersto highlight the aforesaid submission:

“The Trustee has given due consideration to the judgment of theHon’ble High Court and preferred an appeal to the Hon’bleSupreme Court of India on certain aspects of the judgement.EHowever, with a view to proceed with orderly realization of valueform Scheme assets and distribution to Unitholders at the earliest,the Trustee had sought permission of the Hon’ble Supreme Courtto seek the approval of Unitholders for winding up the Schemes,which permission was granted by the Hon’ble Supreme Court onDecember 3, 2020 without prejudice to the rights and contentionsFof all parties.

××××××

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As disclosed in the Scheme Portfolio published on thewebsite (www.franklintempletonindia.com), UnitholdersGmay note that a significant portion of the scheme assets isheld insecurities and the liquidity position of each security,and consequently the value realized may vary dependingon the time available to generate liquidity. An orderlyliquidation would obtain better value for Unitholders.

××××

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H

For all the reasons explained above, the Trustee believesthat it will be beneficial for Unitholders to vote ‘YES’ tothe proposed resolution.”

37. At the first blush there does appear to be merit in the contention,albeit the notice for e-voting and meeting of the unitholders has to beread in entirety. We must also account for the history leading to the e-voting process. It is but obvious that the trustees had already taken adecision to wind up the six schemes. Regulation 39(3) requires the trusteesto disclose the circumstances leading to winding up of the schemes. Thetrustees accordingly, in the notice for e-voting and meeting of theunitholders, had furnished their explanation and reason for winding up ofthe six schemes and had also stated as under:

“The Trustee is providing the following explanation to helpUnitholders assess the pros and cons of the voting options availableto them. There can be no guarantee that the outcomes will beexactly as the Trustee expects. We urge Unitholders to carefullyconsider the following and seek appropriate advice and guidancein making this important decision.

A

B

C

D

E

F

G

H

A

BCD

E

’’

The controversy relating to winding up of the six mutual fundschemes has been in the public domain for a long time. The court wouldalso take judicial notice that the unitholders were aware and consciousFof the litigation against the winding up, including the procedure. At thesame time, many in the general public may not be fully aware of thecommercial considerations and niceties relating to mutual funds and debtsecurities market. This is the precise reason why most people do notmake direct investment in the securities market and prefer mutual funds.Further, the trustees had earlier vide document No. 16 (enclosed at pagesG1253 to 1255 in the appeal arising out of Special Leave Petition (C) No.14288 of 2020) communicated the reasons for their decision to wind upthe six schemes. The relevant portions this notice read as under:

“The unprecedented lockdown of the Indian economy in the wakeof Covid-19 has impacted livelihoods and businesses across theHcountry. Despite several measures by the Reserve Bank of India

(RBI), the liquidity in certain segments of the corporate bondmarkets has fallen-off dramatically and has remained low for anextended period.

In this scenario, mutual funds are facing unprecedented liquiditychallenges due to a variety of factors – rising redemption pressuresdue to heightened risk aversion, mark to market losses followinga spike in yields and lower trading volumes in the bond markets.These factors have together caused a significant and worseningliquidity crunch for open-end mutual fund schemes investing incorporate credits across the credit rating spectrum.

Important Announcement: In this situation, we find that theability to liquidate assets at a reasonable price to fund redemptionsfor the schemes identified below is under severe stress and it isno longer possible for certain schemes of Franklin Templeton togenerate adequate liquidity to fund daily redemptions. Accordingly,we wish to inform you, that the Trustees of Franklin TempletonMutual Fund in India have, after careful analysis and review ofthe recommendations submitted by Franklin Templeton AMC, andin close consultation with the investment team, voluntarilydecided to wind up its suite of six yield-oriented fixedincome funds, post cut-off time from April 23, 2020 (refer toAnnexure I- Notice to Investors) as they are of the consideredopinion that an event has occurred, which requires these schemesto be wound up. This decision has been taken in light of the severemarket dislocation illiquidity caused by the Coid-19 pandemic, andin order to protect value for investors via managed sale of theportfolio. The list of schemes being wound up is as follows:

1. Franklin India Ultra Short Bond Fund (FIUBF)

2. Franklin India Short Term Income Fund (FISTIP)

3. Franklin India Credit Risk Fund (FICRF)

4. Franklin India Low Duration Fund (FILDF)

5. Franklin India Dynamic Accrual Fund (FIDA)

6. Franklin India Income Opportunities Fund (FIIOF)

Factors leading to Winding-Up: The impact schemes ofFranklin Templeton were able to meet their redemption

A

B

CD

E

F

G

H

Aobligationacross all market conditions and even during the initialphase of the Covid-19 pandemic lockdown despite redemptionpressures and increased market illiquidity. However, the extensionof the lockdown has heightened redemption volumes and reducedinflows to unsustainable levels. The schemes even resorted toborrowings within permissible limits in line with market practiceBto fund redemptions during this time but given the situation, wefelt that it would not be prudent to leverage the schemes further.While the respective valuations of these schemes have beenmarked promptly and conservatively thus far, continuousredemption pressures in the backdrop of a severe dislocation inCthe corporate bond markets would place great strain on our abilityto ensure equitable treatment of all investors.

A

Further, given the current unprecedented situation even thecommitted borrowing lines maintained by the funds are inadequateto meet the demand for sustained narrowing across the schemes.

D

We explored the possibility of suspending redemptions until marketconditions stabilize without winding up the schemes. However,conditions for such a suspension under the current regulatoryframework, such as a maximum suspension period of 10 workingdays (in 90 days) and the requirement to honour redemptions upEto INR 2 lakh per day per investor, rendered this approach unviableto meet the severe sustained impact of the current crisis (referAnnexure III-FAQ for options considered besides winding up).

The Trustees were hence left with no option except to initiate thewinding up of the schemes with a view to protect the interests ofFunitholders, Winding up the schemes was determined to be thebest way to ensure a fair and equitable distribution of monies tounitholders while minimizing erosion in value for investors.”

It is also the contention of the trustees that they were required tojustify and explain the reasons for winding up of the six schemes andhence the notice was worded in this manner. The notice had also informedGthe investors that there would be suspension of subscription andredemption post the cut-off time from 23[rd] April, 2020. All SystematicInvestment Plans, Systematic Transfer Plans and Systematic WithdrawalPlans into and from the above-mentioned funds stood cancelled post thecut off time from 23[rd] April, 2020. The notice had also furnishedH

information and clarification regarding distribution of monies from theFund Assets, inter alia stating that following the decision to wind up thesix schemes, the trustees would proceed for orderly realization andliquidation of the underlying assets with the objective of preserving valuefor unitholders. Their endeavour would be to liquidate the portfolio holdingsat the earliest opportunity, to enable an equitable exit for all investors inthe ‘unprecedented circumstances’. We do not think, in the facts of thepresent case, the notice for e-voting and the contents would justifyannulling the consent given by the unitholders for the winding up of thesix schemes.

38. We will now refer to and deal with some of the other objectionsto the consent/e-voting results which, in our opinion, are merely assertions,or at best minor irregularities, which do not have any substance. Thesecontentions are:

(i) Mr. T.S. Krishnamurthy’s appointment as the Observer bySEBI vide its letter dated 18[th] December, 2020 was madepublic belatedly on 26[th] December, 2020;

(ii) Notice for e-meeting dated 6[th] December, 2020 issued underthe name of Mr. Alok Sethi, Director of the Trustees, was notdigitally signed by him. However, Mr. Alok Sethi had digitallysigned the notice subsequently on 28[th] December, 2020;

(iii) M/s. J. Sagar and Associates should not have been appointedas the Scrutiniser to oversee the conduct of the e-voting andthe Observer Mr. T.S. Krishnamurthy should have acted asthe Scrutinser;

(iv) KFin Technologies was appointed for providing electronicplatform for e-voting vide meeting of the Board of Directorsof the trustees dated 29[th]April, 2020 and thereafter theagreement dated 8[th] June, 2020 was entered into, but thisagreement was digitally signed on 30[th] June, 2020. Similarly,M/s. J. Sagar and Associates, the law firm, was appointed asthe Scrutiniser by letter of engagement dated 13[th] May, 2020and the law firm had conveyed its willingness to act as theScrutiniser. However, the resolution by the Board of Directorsof the trustees was approved by circulation on 21[st] May, 2020.Further addendum to their letter of engagement was issuedon 22[nd] December, 2020; and A

B

C

D

E

F

G

H

A(v) Notices for e-voting did not specify with clarity whether e-voting was possible on any technology platform, viz. laptop/desktop or smartphone, etc., though such facility was available.

39. These contentions are mere nitpicks and would hardly justifyrejection of the consent to winding up which has been expressed byBmore than 95% of the unitholders who had voted. Mr. T.S. Krishnamurthywas appointed as the Observer by SEBI in view of the directions givenby this Court to ensure fairness and transparency. He was not to conductthe meeting or the process, but only to oversee and give his report on theentire process. Being an independent observer, his observations andcomments vide the report would help resolve any debate, doubt orCquestions. The observer is the eyes and ears, which the Court couldrely. Mr. T.S. Krishnamurthy in his report has mentioned that many calls,messages and e-mails were received by him expressing difficulty in voting,non-receipt of passwords and difficulty in reaching the helplines. Hehad, therefore, conveyed these messages to the trustees and KFin DTechnologies. Based on the response, the number of helplines wereincreased. Missed calls were returned and answered. The Observer’sreport vide Annexure-10 refers to the complaints/calls made to Mr. T.S.Krishnamurthy and also records that these were redressed. No unitholderhas expressed or stated that they could not vote or their queries werenot answered. Absence or lack of digital signatures on the notice is aEtechnical and not a substantive objection. Moreover, the trustees haveexplained that in view of the objection raised by the Technical AssistanceTeam, Mr. Alok Sethi had digitally signed a copy of the notice for thepurpose of the record. This digitally signed notice was made availableto the Technical Assistance Team. M/s. J. Sagar and Associates and FKFin Technologies had been earlier appointed by the trustees possiblyfor compliance of clause (c) to Regulation 18(15) of the Regulations.Agreements earlier in point of time with KFin Technologies and M/s. J.Sagar and Associates would not, in any manner, be an irregularity. Further,Mr. T.S. Krishnamurthy was not to himself count the votes as this exercise had to be undertaken essentially by the Scrutiniser, M/s. J. Sagar andGAssociates. To conduct the e-voting, for the purpose of consent, thetrustees had engaged services of KFin Technologies and M/s. J. Sagarand Associates. M/s J. Sagar and Associates being a law firm, it isobvious, are not experts in information technology. Necessarily, theywould rely on the data and details made available by KFin Technologies.HWe have already dealt with the question of integrity and authenticity of the e-voting data and that it was checked by two technical experts whoare Assistant Directors at CFSL, Hyderabad. The comments of theforensic experts have been examined and considered in detail.

40. In the present case, we do not think the procedure prescribedby Regulation 41[17] is required to be followed as the trustees themselveshave stated that the process of winding up, which would include liquidationof the securities and distribution/payment to the unitholders, should beundertaken by a third party. The objectors had also made similarsubmissions. Accordingly, with the consent of the parties, we haveappointed M/s. SBI Funds Management Private Limited to undertakethe exercise of winding up, which would include liquidation of the holdings/assets/portfolio and distribution/payment to the unitholders.

41. As per the consolidated affidavit filed by the trustees andAMC, securities equivalent to more than Rs.17,000 crores are yet to berealised. This is a substantial amount. The trustees and SEBI were notat ad idem and have given different time frames within which they feltthe securities can be liquidated. However, both the trustees and SEBI, 17 Regulation 41: Procedure and manner of winding up

(1) The trustee shall call a meeting of the unitholders to approve by simplemajority of the unitholders present and voting at the meeting resolution forauthorising the trustees or any other person to take steps for winding up of thescheme.

Provided that a meeting of the unitholders shall not be necessary if thescheme is wound up at the end of maturity period of the scheme.

(2) (a) The trustee or the person authorised under sub-regulation (1) shall disposeof the assets of the scheme concerned in the best interest of the unitholders of thatscheme.

(b) The proceeds of sale realised under clause (a), shall be first utilised towardsdischarge of such liabilities as are due and payable under the scheme and aftermaking appropriate provision for meeting the expenses connected with such windingup, the balance shall be paid to the unitholders in proportion to their respectiveinterest in the assets of the scheme as on the date when the decision for winding upwas taken.

(3) On the completion of the winding up, the trustee shall forward to the Boardand the unitholders a report on the winding up containing particulars such ascircumstances leading to the winding up, the steps taken for disposal of assets ofthe fund before winding up, expenses of the fund for winding up, net assets availablefor distribution to the unit holders and a certificate from the auditors of the fund.(4)Notwithstanding anything contained in this regulation, the provisions ofthese regulations in respect of disclosures of half-yearly reports and annual reportsshall continue to be applicable until winding up is completed or the scheme ceasesto exist.

AB

C

D

E

F

G

H

Ahave stated in unison that the liquidation/realisation has to be proceededwith caution, as an attempt to offload the securities in haste can result inlosses which would be detrimental and cause reduction in realisable value.We would not like to enter into this debate or give any specific directionsbut would observe that M/s. SBI Funds Management Pvt. Ltd. shallfollow the best effort principle so as to ensure expeditious and timelyBpayment to the unitholders and assure the best possible liquidation valueof the assets/ securities to the unitholders. However, we have nohesitation in directing that distribution/disbursement of funds to theunitholders can be made in tranches without waiting for liquidation of allthe securities/assets.C

42. In view of the aforesaid discussion, we hold that for the purposeof clause (c) to Regulation 18(15), consent of the unitholders wouldmean consent by majority of the unitholders who have participated inthe poll, and not consent of majority of all the unitholders of the scheme.In view of the findings and reasons stated above, we reject the objectionsDto poll results and hold that the unitholders of the six schemes have giventheir consent by majority to windup the six schemes. Winding up anddisbursements would be in terms of our directions in earlier orders dated2[nd] February, 2021 and 9[th ]February, 2021 and paragraph 41 above. We,however, clarify that this order does not examine and decide other aspectsand issues including the questions whether Regulation 18(15)(c) would Eapply when the trustee’s form an opinion that the scheme should bewound up in accordance with Regulation 39(2)(a) and the contention ofthe objecting unitholders regarding misfeasance, malfeasances, fraudand the effect thereof.

F

Divya Pandey

Directions issued.

G

H