‘Consent of unitholders must before winding up MF scheme’
NEW DELHI: The Supreme Court on Wednesday ruled that consent of the unitholders is a prerequisite for winding up any mutual fund scheme as it interpreted the mutual fund regulations in India while examining the Franklin Templeton case.
The apex court also held that the Securities and Exchange Board of India (Sebi) can conduct an inquiry into the decision of the trustees of a mutual fund company to wind up the schemes “to ascertain whether the trustees have acted in accordance with their fiduciary duty”.
The bench of justices SA Nazeer and Sanjiv Khanna was called upon to analyse the interplay between clause (a) to Regulation 39(2) and Regulation 18(15)(c) of the Sebi (Mutual Fund) Regulations, after Franklin Templeton and Sebi argued that there was no requirement for obtaining consent of the unitholders after trustees had decided to wind up the six mutual fund schemes.
It was argued by Sebi that the consent of unitholders is required only when the unit holders propose to wind up a debt scheme and not when trustees or Sebi proceed to do so due to any adverse event. They added that the decision of winding up is final and binding on the unitholders and that their mandate is required only for authorising the trustees or any other person to take steps for winding up of the scheme.
But the bench shot down these contentions, saying not taking consent of the unit holders after the trustees decide to wind up the debt schemes would amount to “debilitates their role and right to participate.”
“Investments by the unit holders constitute the corpus of the scheme...regulations envision the unit holders not as domain experts, albeit as discerning investors who are perceptive and prudent. The trustees are therefore commanded to inform and be transparent,” said the bench as it gave harmonious interpretation to clause (a) to Regulation 39(2) and Regulation 18(15) (c).
It added: “The unit holders, 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 top court clarified that ‘consent’ refers to the consent of the majority of the unitholders present and voting, and in case of a poll, the computation would be with reference to the number of units held by the unitholder.
The bench further held that the consent of the unitholders should be sought post publication of the notice and disclosure of the reasons for winding but and not before that. .