Supreme Court of India
FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANOTHER versus AMRUTA GARG AND OTHERS ETC. on 12 August 2022
SUPREME COURT REPORTS
[2022] 6 S.C.R.
AFRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATELIMITED AND ANOTHER
v.
AMRUTA GARG AND OTHERS ETC.
I. A. NO. 53453 of 2022
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(Civil Appeal Nos. 498-501 of 2021)
AUGUST 12, 2022
C[S. ABDUL NAZEER AND SANJIV KHANNA, JJ.]
Security and Exchange Board of India (Mutual Funds)Regulations, 1996 – Regulation 52 – Applicability – Regulation 52,which relates to and permits deduction of expenses includingcommission payable to the distributor, is applicable when the schemeDis in operation, and not post the decision of the trustees in terms ofRegulation 39(2)(a) read with Regulation 39(3), when, uponpublication of notices, the ceasure mandate of Regulation 40 istriggered.
Security and Exchange Board of India (Mutual Funds)ERegulations, 1996 – Regulations 40 and 52 – Held: Regulations 40and 52 need to be read harmoniously – When read together,Regulation 52, authorising and specifying the limit of the fees andexpenses payable to the asset management company, would applyonly when the scheme is in operation, and not after publication ofthe notice under Clause (b) to sub-regulation 3 to Regulation 39Fresulting in ceasure of any business activities in respect of the schemeto be wound up.
Security and Exchange Board of India (Mutual Funds)Regulations, 1996 – Regulation 41 – Applicability – Regulation 41,which deals with the procedure and manner of winding up, appliesGonce the notice under Regulation 39(3)(b) is published and theunitholders’ approval under Regulation 18(15)(c) of the Regulationsis received.
Security and Exchange Board of India (Mutual Funds)Regulations, 1996 – Regulation 41 – Claim for entitlement to H
payment of commission under clause (b) to sub-regulation 2 toRegulation 41 – Held: In a given case, some of the recurring expensesmentioned in clause (b) to Regulation 52(4) like audit fee, insurancepremium, cost of statutory advertisements, etc., would be coveredand would satisfy the requirement of clause (b) to Regulation 41(2)– However, if and only when they fall under and meet therequirement of the expenses connected with the winding up canthey be allowed under Regulation 41(2)(b) – Commission payableto the mutual fund distributers is certainly not an expense connectedwith the winding up of the scheme.
Security and Exchange Board of India (Mutual Funds)Regulations, 1996 – Regulation 39(2)(b) and 52(4) (b) – Claim forcommission payment by mutual fund distributors as an amount ‘dueand payable under the scheme’ , on ground that it was an amountor payment that had accrued before the publication of notices underRegulation 39(2)(b), but was not paid as it was payable in future –Held: Not tenable – The expression ‘due and payable’ has to beinterpreted with reference to the context in which the words appear– In the context of the Regulations in question, the expression refersto the present liabilities which may be payable in praesenti or infuture – There must be an existing obligation to pay though theappointed date of payment may not have arrived – Clause (b) toRegulation 52(4) refers to recurring expenses, that is, expenses whichwill recur from time to time – It does not refer to one-time paymentwhich is deferred – The recurring liability is not a present liability,but an obligation which, on satisfaction of certain conditions, mayaccrue in future – The right to claim commission may not accrueand become due and payable – On and after publication of thewinding up notice in terms of Regulation 39(3)(b), the trustees andthe asset management company cannot claim any payment on accountof recurring expenses under clause (b) to sub- regulation (4) toRegulation 52 – Words and Phrases – Expression ‘due and payable’.
Security and Exchange Board of India (Mutual Funds)Regulations, 1996 – Regulation 39(3)(b) and 41 – On publicationof notices in terms of Regulation 39(3)(b), the business of the mutualfund comes to a stop and therefore, on and from that date the trailcommission is not payable, as the scheme is to be wound up and themoney is to be collected and paid to the unitholders, in terms of and AB
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Aas per the mandate of Regulation 41 – Even if a distributor renderssome services to the unitholders after publication of the notice underRegulation 39(3)(b), it would not entitle him to claim an amountfrom the asset management company.
CIVIL APPELLATE JURISDICTION: I.A. No. 53453 of 2022Bin Civil Appeal Nos. 498-501 of 2021.
From the Judgment and Order dated 24.10.2020 of the High Courtof Karnataka at Bengaluru in WP Nos. 8644, 8545 of 2020 and WA No.399 of 2020.
Dr. Abhishek Manu Singhvi, Neeraj Kishan Kaul, JanakCDwarkadas, Sr. Advs., Ashim Sood, Mohit Rohatgi, Rajendra Dangwal,Jasmeet Singh, Ms. Ira S. Mahajan, Arzoo Aneja, Ramachandra Madan,Ms. Ankita Singhania, Pushpendra Singh Bhadoriya, Advs. for theAppellants.
Tushar Mehta, SG, Ms. Priyanka Das, Rajat Nair, Ms. GarimaDPrasad, Sughosh Subramanyam, Pratap Venugopal, Ms. Surekha Raman,Akhil Abraham Roy, Vijay Valsan, M/s. K J John And Co, NithyaeshNatraj, Vaibhav R. Venkatesh, Gopal Singh, Arjun Garg, AbhinavShrivastava, Ms. Supriya Juneja, Ms. Christi Jain, Sanjay Kapur, Ms.Subhra Kapur, Ms. Megha Karnwal, Arjun Bhatia, Aashish Kumar, Ms.EAkshata Joshi, Dheeraj Nair, Kumar Kislay, Angad Baxi, Shivam Singh,Abhnav Singh, Manish Kumar, Ms. Madhumita Bhattacharjee, Advs.for the Respondents.
The Order of the Court was passed by
SANJIV KHANNA, J.F
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1. This Court, vide order dated 03[rd ]August 2022, dismissed theaforesaid application filed on behalf of the Foundation of IndependentFinancial Advisors,[1] while stating that the reasons for such dismissalwould follow. The order further directed that Rs. 684,00,00,000/- (RupeesSix Hundred and Eighty Four Crores) be distributed to the unitholders.GAs a corollary, the stay granted by us vide order dated 12[th] April 2022,while issuing notice in the application therein, also stood vacated. By thepresent order, we provide the reasons for dismissal of the captionedapplication.
H1 For short, ‘FIFA’
2. FIFA claims that independent financial advisors/mutual funddistributors are entitled to payment of commission agreed between themand Franklin Templeton Asset Management (India) Private Limited,which are in the nature of recurring expenses as per Regulation 52 ofthe Security and Exchange Board of India (Mutual Funds) Regulations,1996[2]. Our attention is drawn to sub-clause (i) of Regulation 52(4)(b),which states that ‘recurring expenses’ encompass marketing and sellingexpenses, including agents’ commission, if any. The circular issued bySecurity and Exchange Board of India[3] dated 22[nd] October 2018, whilereferring to Regulation 52, states that the asset management companies/mutual funds shall adopt a full trail model of commission in all schemes,without payment of any upfront commission or upfronting of any trailcommission, directly or indirectly. Upfronting of trail commission is allowedonly in case of inflows through Systematic Investment Plans.
3. At the outset, we must state that FIFA is claiming commissionfor the period from 23[rd] April 2020 and up to 17[th] March 2021. Thecommission/service charges payable prior to 23[rd] April 2020 are notsubject matter of the present application. 23[rd] April 2020 is relevant as itis the date of publication of notices under Regulation 39(3)(b).Accordingly, on and from the said date, the trustees/asset managementcompany ceased to carry on business in respect of the six schemes sowound up. In our opinion, Regulation 52, which relates to and permitsdeduction of expenses including commission payable to the distributor, isapplicable when the scheme is in operation, and not post the decision ofthe trustees in terms of Regulation 39(2)(a) read with Regulation 39(3),when, upon publication of notices, the ceasure mandate of Regulation40 is triggered. On and from the date of publication of notices underRegulation 39(3)(b), the trustees/asset management company cannotcarry on business activities, create or cancel units and issue or redeemunits of the scheme. It would be a different matter if the unitholders donot approve the winding up of the scheme, which is not a fact in thepresent case, as the unitholders have consented to the winding up of thesix Schemes in accordance with Regulation 18(15)(c).
4. If we are to accept the contention of FIFA, the necessarysequitur is to also acknowledge and accept that the asset managementcompany, even post the publication of notices under Regulation 39(3)(b), 2 For short, “Regulations’’
3 For short, “SEBI”
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Awould be entitled to fees and expenses mentioned and covered byRegulation 52, as per the terms and quantum specified in sub-regulation6 to Regulation 52. Sub-clause (c) to Regulation 52(6) specifies thepercentage of total expenses of the scheme which is allowable, varyingfrom 2.5% to 1.75% of the daily net assets. This, in our opinion, wouldnot be a correct interpretation and lead to anomalies and tribulation withBadverse consequences for the suffering unitholders, and undo the embargodirecting the ceasure of business. Regulations 40 and 52 need to be readharmoniously. When read together, Regulation 52, authorising andspecifying the limit of the fees and expenses payable to the assetmanagement company, would apply only when the scheme is in operation,Cand not after publication of the notice under Clause (b) to sub-regulation3 to Regulation 39 resulting in ceasure of any business activities in respectof the scheme to be wound up.
5. Regulation 41, which deals with the procedure and manner ofwinding up, applies once the notice under Regulation 39(3)(b) is publishedDand the unitholders’ approval under Regulation 18(15)(c) of theRegulations is received. We are not required to interpret sub-regulation1 to Regulation 41, as we have already interpreted it in our earlier orderdated 14[th] July 2021 read with the order dated 12[th] February 2021.However, FIFA claims that they would be entitled to payment ofcommission under clause (b) to sub-regulation 2 to Regulation 41 which,Efor the sake of convenience, is quoted below:
“41. (1) ….
(2) (a) ….
(b) The proceeds of sale realised under clause (a), shall be firstFutilised 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 theGdecision for winding up was taken.
(3) ….
(4) ….”
We would concede that, in the given case, some of the recurringexpenses mentioned in clause (b) to Regulation 52(4) like audit fee,H
insurance premium, cost of statutory advertisements, etc., would becovered and would satisfy the requirement of clause (b) to Regulation41(2). However, if and only when they fall under and meet therequirement of the expenses connected with the winding up can they beallowed under Regulation 41(2)(b). Such expenses are allowed notbecause of clause (b) to Regulation 52(4), but because the expensesincurred would satisfy the requirement of being connected with suchwinding up under Regulation 41(2)(b). Commission payable to the mutualfund distributers is certainly not an expense connected with the windingup of the scheme.
6. In the aforesaid background, FIFA has claimed that thecommission payment due to the mutual fund distributors on and from23[rd] April 2020 is an amount ‘due and payable under the scheme’, as it isan amount or payment that had accrued before the publication of noticesunder Regulation 39(2)(b), but was not paid as it was payable in future.Commission payable to mutual fund distributors is in the nature of trail,and therefore, is payment due for the services rendered to the unitholdersprior to the winding up. This argument is farfetched and fallacious.
7. In our order dated 14[th] July 2021, we have explained that theexpression ‘due and payable’ has to be interpreted with reference to thecontext in which the words appear. In the context of the Regulations inquestion, we have held that the expression refers to the present liabilitieswhich may be payable in praesenti or in futuro. There must be anexisting obligation to pay though the appointed date of payment may nothave arrived. Any liability which is not due and payable, in facts and inlaw, would not be covered by the expression ‘due and payable’.[4] Clause(b) to Regulation 52(4) refers to recurring expenses, that is, expenseswhich will recur from time to time. It does not refer to one-time paymentwhich is deferred. The recurring liability is not a present liability, but anobligation which, on satisfaction of certain conditions, may accrue infuture. The right to claim commission may not accrue and become dueand payable. Distributor commission, as a recurring liability, is not payableif the unitholder(s) redeem the unit. Winding up of the scheme entailssimilar effects and consequences.
8. As noticed above, it is the asset management company whichis entitled to charge fees and expenses in terms of sub-regulations (1)
4 See paragraph 78 in the judgment reported as (2021) 9 SCC 606
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Aand (2) of Regulation 52. The mutual fund distributors are not entitled todirect payment from the unitholders. Payment to the distributors is madeby the asset management company, from the amount that they deductas a recurring expense in terms of Regulation 52(4)(b). On and afterpublication of the winding up notice in terms of Regulation 39(3)(b), thetrustees and the asset management company cannot claim any paymentBon account of recurring expenses under clause (b) to sub- regulation (4)to Regulation 52. That being the position, as held above, the claim ofFIFA has to be rejected. If the amount cannot be due and payable to theprincipal, the claim of the agent or a third party, in view of the Regulations,must also fail.C[[nd]]
9. The claim of FIFA, on the basis of the Circular dated 22[[nd]]October 2018, which has been referred to above, is equally misconceivedand untenable. The Circular dated 22[nd] October 2018 bars the assetmanagement company from making upfront payment or upfronting ofany trail commission, except in case of inflows through SystematicDInvestment Plans. It is also stipulated that, when the SystematicInvestment Plan is discontinued for a period for which commission ispaid, the commission amount has to be recovered on pro rata basisfrom the distributor. As a deduction, it follows that on publication ofnotices in terms of Regulation 39(3)(b), the business of the mutual fundcomes to a stop and therefore, on and from that date the trail commissionEis not payable, as the scheme is to be wound up and the money is to becollected and paid to the unitholders, in terms of and as per the mandateof Regulation 41. Even if a distributor renders some services to theunitholders after publication of the notice under Regulation 39(3)(b), itwould not entitle him to claim an amount from the asset management Fcompany. The Circular dated 22[nd] October 2018 cannot override theRegulations. The Circular does not intend to do so. It has been issued tobring about transparency in expenses, reduce portfolio churning and mis-selling in mutual fund schemes. The intent behind specifying total expenseratio and the performance disclosure for mutual funds is to bring greatertransparency in expenses and to not confer any right on the mutual fundGdistributors to claim expenses under clause (b) to Regulation 41(2), whichpertains to the procedure and manner of winding up.
10. Franklin Templeton Trustee Services Private Limited andFranklin Templeton Asset Management (India) Private Limited havefiled an affidavit before us stating that they have borne liquidation expensesH
amounting to approximately Rs. 40,00,00,000/- (Rupees Forty Crores)towards various services such as liquidator’s fee, disbursement expenses,fees for the e-voting platform and the scrutinizer for voting results, etc.It is stated by them that this amount is not intended to be charged to thesix Schemes in the interest of the unitholders of the Schemes. We havetaken the said statement on record.
11. For the aforesaid reasons, the application IA No. 53453/2022filed by FIFA is dismissed, without any orders as to costs.
Bibhuti Bhushan Bose
Application dismissed.
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