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Supreme Court today, in furtherance of its decision of February 12, 2021, wherein it allowed winding up of six Franklin Templeton Schemes, delivered verdict on Constitutional Validity Regulations 39 to 42, SEBI Mutual Funds Regulation, 1996 and their interrelation with Regulation 18(15)(c).

A Division Bench of Justice S. Abdul Nazeer and Justice Sanjiv Khanna, while clarifying that they are not inclined to dispose of the appeals considering interest of unit holders, noted,

“It cannot be accepted that the trustees under clause (a) to Regulation 39(2) have been given absolute and unbridled power to wind up a scheme.

Language of clause (a) to Regulation 39(2) states that the trustees must form an opinion on the happening of any event which requires the scheme to be wound up.

Further, as per Regulation 39(3), the trustees are bound to give notice disclosing the circumstances leading to the winding up of the scheme.

These notices along with the reasons have to be communicated to SEBI and made known to the unitholders by publication in two daily newspapers having circulation all over India and a vernacular newspaper having circulation at the place where the mutual fund is formed.

The trustees are, therefore, required to come to a conclusion that due to specific circumstances articulated in writing, the scheme is required to be wound up.”

The bench added that the words used in the statute including delegated legislation are to be understood in light of the statute and not in isolation.

Court also placed reliance on Nisha Priya Bhatia v. Union of India, where it was held that a duly enacted law cannot be struck down on the mere ground of vagueness unless such vagueness transcends into the realm of arbitrariness.

With respect to Regulation 41(2)(b), the Top Court observed that comparing unit holders with creditors or home buyers is a “far-fetched” idea.

“The Regulations, in our opinion, rightly draw the distinction between creditors and the unit holders…

The waterfall mechanism under the Companies Act, or the Indian Bankruptcy Code, gives primacy to the dues of the creditors over the shareholders. Identical is the position of the unit holders.”

Challenge was inter-alia placed to the following Regulations;

• Regulation 39(2)(a): Expression ‘happening of any event’ suffers from vice of excessive delegation as it lacks to indicate as to which type of events would be relevant for winding up of a scheme. It thus gives unbridled power to the trustees to wind up a scheme which, in the opinion of the trustees, should be wound up.
• Regulation 41(2)(b): Provision is manifestly arbitrary as it states that the sale proceeds under clause (a) shall be first discharged for such liabilities as are due and payable under the scheme and only the balance amount shall be paid to the unit holders in proportion to their respective interests in the assets of the scheme as on the date of the decision for winding up was taken. Regulation 41 does not prescribe any mechanism under which the authorised person or the Asset Management Companies can ascertain the liabilities which are due and payable under the scheme.
• Regulation 42 is also manifestly arbitrary as SEBI is to perform only ministerial functions, much less than the functions of a regulator. Conspicuously, during the winding up process, SEBI has been given a minimalistic role which is contrary to the paramount object of the Act.

Also Read: [Franklin Templeton] Consent of Unitholders Amounts To Consent By Majority Who Participated In Poll: Supreme Court [Read Judgment]

Case Title: Franklin Templeton Trustees Services v. Amruta Garg | CIVIL APPEAL NO. 498-501 of 2021