Case Law Details
Franklin Templeton Trustee Services Private Limited and Another Vs Amruta Garg and Others (Supreme Court of India)
Prior-consent from the unitholders if necessary even when the trustees ‘decide to wind up’ a scheme under Regulation 39(2)(a), would inevitably delay the publication of public notices as envisaged by Regulation 39(3). Therefore the cease and freeze legal effect of Regulation 40 would get postponed resulting in chaos and confusion, as business activities such as buying and redemption of units etc., would continue despite the trustees having taken the decision to wind up the scheme. In panic, most unitholders would rush for redemptions, which achingly would be the reason for winding up. The result would be fire-sale of sound assets in a hasty and disorganised manner at discounted valuations in adverse market conditions. The trustees who stand in a fiduciary capacity as domain experts, as mandated by clause (a) to Regulation 39(2), act for and in the interest of the unitholders. The unitholders, a large and disparate body of lay persons without domain expertise, have been erroneously conferred the right to veto and overrule the decision of the domain experts. Given the grave consequences for the sponsor, trustees and AMC, a decision to wind up a scheme is taken after in-depth analysis with great care and caution. Thus, the findings of the High Court to the contrary should be reversed.
Investments by the unitholders constitute the corpus of the scheme. To deny the unitholders a say, when Regulation 18(15)(c) requires their consent, debilitates their role and right to participate. It is an in-contestable position that the unitholders exercise informed choice and discretion when they invest or redeem the units. Regulations envision the unitholders not as domain experts, albeit as discerning investors who are perceptive and prudent. The trustees are therefore commanded to inform and be transparent. Summary reports, periodic and continual statements, annual reports, audit reports, etc., mentioned in paragraph 11 above are intended to reveal the current status of the investments, future prospects, risks and factors that may have bearing on the returns to enable the unitholders to take deliberative decisions, be it purchase, redemption or exercise of the right to vote. The unitholders, when in doubt, as prudent investors may be advised to abstain, but they are not placid onlookers, impuissant and helpless when the trustees decide to wind up the scheme in which they have invested. The stature and rights of the unitholders can co-exist with the expertise of the trustees and should not be diluted because the trustees owe a fiduciary duty to them. Thus, the contention that the trustees being specialists and experts in the field, their decision should be treated as binding and fait accompli has to be rejected not only in view of the specific language of Regulation 18(15)(c), but to be in concinnity with the objective and purpose of the Regulations.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
By the order dated 12th February 2021, interpreting Regulation 18(15)(c) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (hereafter referred to as ‘Regulations’) and accepting the poll results, we have directed winding up of six mutual fund schemes:
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