[Judgment] “To Equate the Unitholders with Creditors or Home Buyers is unsound & Incongruous”: Supreme Court

The Supreme Court of India in a judgement by which it held that the trustees are required to seek consent of majority unit-holders for closing mutual fund schemes upheld the distinction drawn between the creditors and the unitholders under various provisions of the Securities and Exchange Board of India (SEBI) Regulations (The Regulations).

A Supreme Court Divisional Bench comprising Justices S. Abdul Nazeer and Justice Sanjiv Khanna on Wednesday also held that market regulator SEBI is entitled to conduct an inquiry and investigation when justified and necessary to ascertain whether the trustees have acted in accordance with their fiduciary duty.

In the judgment the Court stated,

“The Regulations, in our opinion, rightly draw the distinction between creditors and the unitholders. The unit holders are investors who take the risk and, therefore, entitled to profits and gains. Having taken the calculated risk, they must also bear the losses, if any……….Creditors are not risk takers as is the case with the unitholders. In this sense, unitholders are somewhat at par with the shareholders of a company.”

It further added that,

“Home buyers under the Bankruptcy Code are treated as creditors till the ownership rights in the immovable property are transferred to them, but they do not take the risks and are not entitled to benefit of profits or suffer losses, as are taken by the unitholders who invest in the mutual funds without any guarantee of returns and know that the investment, including the principal, are subject to market risks. To equate the unitholders with either the creditors or the home buyers will be unsound and incongruous.”

The apex court’s judgement came on pleas, including the appeal filed by Franklin Templeton, against the Karnataka High Court order restraining the company from winding up its six of mutual fund (MF) schemes without obtaining the consent of its investors by a simple majority.

The Bench agreed with the High Court’s opinion that the trustees must be consented to by the unitholders in terms of the mandate of the Regulation 18(15)(c).

The Court also rejected the petitioner’s argument challenging constitutional validity of the Regulations on the ground that they give unbridled and absolute power to the trustees. The court affirmed the provisions of the Regulation stating that ‘there are, therefore, sufficient guidance and safeguards in the Regulations itself on the power of the trustees to decide on winding up of the fund’.

Case Title: FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANOTHER vs AMRUTA GARG AND OTHERS ETC.