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A Division Bench of Justice S. Abdul Nazeer and Justice Sanjiv Khanna dismissed all objections to the winding up of six mutual fund schemes floated by Franklin Templeton and upheld the results of e-voting.  The bench, precisely said, “We hold that for the purpose of clause (c) to Regulation 18(15), consent of the unitholders would mean consent by majority of the unitholders who have participated in the poll, and not consent of majority of all the unitholders of the scheme… we reject the objections to poll results and hold that the unitholders of the six schemes have given their consent by majority to windup the six schemes”.

With respect to the construction adopted by the bench, it was said, “Keeping in view the object and purpose of the Regulation with the language used therein, we would not accept a ‘construction’ which would lead to commercial chaos and deadlock. Therefore, silence on the part of absentee unitholders can neither be taken as an acceptance nor rejection of the proposal. Regulation 18(15)(c), upon application in ground reality, must not be interpreted in a manner to frustrate the very law and objective/purpose for which it was enacted. We would rather accept a reasonable and pragmatic ‘construction’ which furthers the legislative purpose and objective.”

Further, it was directed that the winding up and disbursements would effectuate in terms of the directions issued by earlier order, dated 2nd February, 2021 and 9th February, 2021

Winding up of Six Schemes floated by Franklin Templeton was under challenge. Namely;

(i) Franklin India Low Duration Fund (Number of Segregated portfolios – 2)

(ii) Franklin India Ultra Short Bond Fund (Number of Segregated portfolios – 1)

(iii) Franklin India Short Term Income Plan (Number of Segregated portfolios – 3)

(iv) Franklin India Credit Risk Fund (Number of Segregated portfolios – 3)

(v) Franklin India Dynamic Accrual Fund (Number of Segregated portfolios – 3)

(vi) Franklin India Income Opportunities Fund (Number of Segregated portfolios – 2).

Judgment under challenge inter seeks to interpret SEBI Regulations, 1996 (‘Mutual Fund Regulations/ Regulations’) framed by the Securities and Exchange Board of India to hold that clause (c) to sub-regulation (15) of Regulation 181 mandates consent of the unitholders for winding up of mutual fund schemes even when the trustees form an opinion that the scheme is required to be wound up in terms of clause (a) to sub-regulation (2) of Regulation 392 of the Mutual Fund Regulations.

Major grievance of the objecting unitholders relates to allegations of gross mismanagement, failure and dereliction of duty by the Asset Management Company and Franklin Templeton Trustee Services Private Limited (‘trustees’ or ‘board of trustees’), violation of the Securities and Exchange Board of India Act, 1992 and Mutual Fund Regulations. It is alleged that over Rupees fifteen thousand crores were withdrawn from the six schemes two weeks prior to the decision for winding up, suggesting arbitrary decision making and implementation by the company.

The limited issue that fell for Court’s consideration was unitholders consent to winding up, on an assumption that regulation 18(15)(c) would apply even where the trustees form an opinion that a scheme should be wound up under Regulation 39(2)(c).

Interpretation of ‘the consent of the unitholders’ for the purpose of clause (c) to sub regulations (15) of Regulation 18

The bench observed, “The word ‘consent’, in the context of the clause, clearly refers to ‘consent of the majority of the unitholders’, and not consent given by individual unitholders who alone would be bound by their consent, that is, it excludes unitholders who are not agreeable… The word/expression ‘consent’ in sub-regulation (15) to Regulation 18 refers to affirmative consent to winding up by ‘the majority of the unitholders’. Conversely, consent is denied when ‘majority of the unitholders’ do not approve the proposal to wind up the scheme.”

Reference was drawn to Ishwar Chandra v. Satyanarain Sinha, (1972) 3 SCC 383 and Halsbury Law of England. Court further referred, Justice Seshagiri Ayyar of the Madras HC in his concurring judgement in Syed Hasan Raza Sahib Shamsul Ulama v. Mir Hasan Ali Sahib, AIR 1918 Mad 1131 carving a difference between definite and indefinite numbers.

Court further cited Black’s Law Dictionary (10th Edition) which defines consent as, “A voluntary yielding to what another proposes or desires; agreement, approval, or permission regarding some act or purpose, esp. given voluntarily by a competent person; legally effective assent.” The dictionary also defines ‘general consent’ to mean “adoption without objection, regardless of whether every voter affirmatively approves.

Shackleton on the Law and Practice of Meetings, 14th Edn., while defining majority, and the binding effect of majority was also considered.

After producing the chronology of events, Court conclusively said “…the unitholders were given a chance and option to vote and about 38% of the unitholders in numerical terms and 54% in value terms had exercised their right to give or reject consent to the proposal for winding up. In the absence or need for minimum quorum, which is not provided or stipulated in the Regulations nor mandated under law, the e-voting result cannot be rejected on the ground that 38% of the unitholders in numerical terms and 54% in value terms, even if we do not account for the rejected votes, had participated. This cannot be a ground to reject and ignore the affirmative result consenting to the proposal for winding up of the six mutual fund schemes.”

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

Access Copy of Judgment Here