12 August 2021
The Supreme Court of India has passed a judgment in the matter of Franklin Templeton Trustee Services Private Limited and another vs. Amruta Garg and others on 14 July 2021, in which the Supreme Court has upheld the constitutional validity of the SEBI (Mutual Fund) Regulations, 1996 (“Mutual Fund Regulations”) and laid down certain additional guidelines in relation to winding up of mutual fund schemes.
While considering the constitutional validity of the Mutual Fund Regulations, the Supreme Court looked into whether Regulation 39 (2) (a) and Regulation 39 (3) of the Mutual Fund Regulations suffered from the vice of excessive delegation and whether the regulations gave unbridled power to the trustees of a mutual fund scheme to wind up any scheme. The Supreme Court looked into the powers of SEBI under the SEBI Act, 1992 and held that SEBI had the powers to issue directions under Section 11B of the SEBI Act, if any of the actions of the trustees under Regulation 39 (2) or 39(3) were not in compliance with applicable laws. The Supreme Court held that the trustees did not have absolute and unbridled power in relation to the winding of a scheme, and accordingly, upheld the constitutional validity of the specific provisions of the Mutual Fund Regulations.
The Supreme Court also considered the interplay between Regulations 39 to 42 and Regulation 18 (15) (c) of the Mutual Fund Regulations. The Supreme Court upheld the decision of the Karnataka High Court where the court had held that a mutual fund scheme could only be wound up by the trustees once the consent of a majority of the unitholders had been obtained as per Regulation 18 (15) (c). The Supreme Court while applying the principal of harmonious construction held that, while the opinion of the trustees was relevant, the consent of the unitholders is a pre-requisite for winding up of a scheme. Further, the Supreme Court laid down an additional guideline that the consent of the unitholders is not required to be obtained before publication of the public notices, and that the consent may be obtained after the publication of the notice and once the reasons for winding up have been disclosed to the public.
Please click here to read the Supreme Court judgment. (Pdf 77 Pages)
