Unitholders’ Consent Required For Winding Up Mutual Fund Schemes, Says Supreme Court

The Supreme Court has ruled that the consent of unitholders will be required for winding up mutual fund schemes.

In exceptional cases, when trustees seek to wrongfully wind up a scheme, market regulator SEBI can intervene, the apex court said on Wednesday in the Franklin Templeton Asset Management Co. case.

The Supreme Court was hearing an appeal filed by Franklin Templeton against the Karnataka High Court order, which had stopped the fund house from winding up six of its debt schemes without the prior consent of the investors.

In December last year, the apex court had directed Franklin Templeton to call a meeting of the unitholders to seek their consent to wind up the schemes. SEBI was asked to appoint an observer to oversee the e-voting process.

The top court stated that it has not dealt with the specific facts of the Franklin Templeton case in the judgment but only clarified the legal position on the requirement of unitholders’ consent when the trustees seek winding up under Regulation 39(2)(a) of SEBI's mutual fund rules.

This provision, Regulation 39(2), gives power to the trustees, SEBI or a group of 75% of the total unitholders to decide on winding up a scheme.

The apex court rejected the argument that unitholders do not come into picture when the trustees decide to wind up a scheme under Regulation 39. The court also did not agree with the argument that seeking unitholders' consent will result in delays in freezing a scheme, and that it would allow for redemptions from unitholders.

The top court held that Regulation 18(15)(c), which lays down obligations of the trustees, and Regulation 39, which provides for winding up, need to be read harmoniously.

Under Regulation 18, trustees are required to obtain prior approval from unitholders in the event of winding up. While the requirement is not explicit in the winding up provision, Regulation 39, the apex court said the principle of harmonious construction should be applied here.

It held that a harmonious construction of the two regulations can be done and held that consent requirement under Regulation 18 will apply for winding up.

The consent should be sought only after the public notice of the decision of the trustees for winding up is publishe, in line with Regulation 39(3) and fresh investments and redemptions will continue to be frozen after the notice is published, the apex court said.

In April last year, Franklin Templeton closed the six debt schemes citing redemption pressure and lack of liquidity in the bond market. Some unitholders challenged the move in the Karnataka High Court, which held that the schemes could not be wound up without the majority consent of unitholders.

The case then landed in the Supreme Court in an appeal by Franklin Templeton.

In February, the top court passed an order that Rs 9,122 crore should be disbursed among the unitholders of the six debt schemes. The bench had said the disbursal would be done in proportion to the unitholders’ interest in the assets. State Bank of India Mutual Fund was tasked with disbursing the money to the unitholders.

Wednesday's judgment was pronounced by a bench of Justice S Abdul Nazeer and Justice Sanjeev Khanna.