[Franklin Templeton debt schemes] Consent of unitholders should be sought for winding up, post publication of notice: Supreme Court

The Supreme Court today held that consent of unitholders under a debt scheme will be required for winding up of the scheme and that such consent will be required after notice of the winding up has been published (Franklin Templeton Trustee Services v. Amruta Garg & Ors)..The Bench of Justices Abdul Nazeer and Sanjiv Khanna ruled the same while hearing a challenge to the Karnataka High Court verdict by which it was ordered that no interference can be made in the decision to wind up six debt schemes of Franklin Templeton..While harmoniously interpreting Regulations 18(15)(c) [trustees shall obtain consent of unitholders before winding up] with Regulations 39 to 42 of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the Court held,"...we hold that the consent of the unitholders, as envisaged under clause (c) to Regulation 18(15), is not required before publication of the notices under Regulation 39(3). Consent of the unitholders should be sought post publication of the notice and disclosure of the reasons for winding up under Regulation 39(3).".The top court also dismissed a challenge to the vires of the Mutual Funds Regulations, stating that in case the trustees seek winding up wrongfully, the Securities and Exchange Board of India (SEBI) can look into the same."...if there is a violation of the regulations, i.e. clause (a) to Regulation 39(2), 39(3), 40, 41 or 42 by the trustees or the AMC, it is open to SEBI to proceed in accordance with law and in terms of Section 11 and 11B of the Act. It would be, therefore, incorrect to state that the decision of the trustees under clause (a) to Regulation 39(2) cannot be made subject matter of inquiry or investigation and therefore no directions or orders under Section 11 or 11B of the Act can be passed...".It was further held, "We have agreed with the High Court that the opinion of the trustees under clause (a) to Regulation 39(2), therefore, must be consented to by the unitholders in terms of the mandate of Regulation 18(15)(c). In view of this interpretation, the argument challenging constitutional validity of the Regulations on the ground that they give unbridled and absolute power to the trustees loses much of its sting and force. 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.".The Court has held that regulations rightly draw a 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. Unitholders are not entitled to fixed return or even protection of the principal amount. Creditors, on the other hand, are entitled to fixed return as per mutually agreed contracts," the order stated..It was further noted that policy decisions can only be faulted on the grounds of mala fides, unreasonableness, arbitrariness and unfairness, in addition to violation of fundamental rights or exercise of power beyond the legal limits.Thus, the Bench stated that since the Regulations are in the nature of economic regulations, while exercising the power of judicial review, it would exercise restraint unless clear grounds justify interference."We would not supplant our views for that of the experts as this can put the marketplace into serious jeopardy and cause unintended complications," reads the judgment..The Court pointed out a grey area with respect to Regulation 53, which deals with despatch of dividend to unitholders of a mutual fund."Issue in question would, therefore, arise whether the AMC or the trustees are bound to honour and pay the redemption or repurchase proceeds for requests received before the date of publication of notice in terms of Regulation 39(3)."It, however, made it clear that it would not adjudicate on the same without the full facts and until a decision has been arrived at in this case."Before we answer this aspect, we would like to have greater clarity on the factual matrix, which would be possible once the proceedings in pursuance of show-cause notices etc. are concluded. Notably, many of the appellants have not addressed us on this aspect, their grievance being that the Forensic Audit Report has not been made available to them..."."We have not dealt with facts, we have only dealt with and clarified the legal position. The facts remain open. We will postpone the hearing since some orders are subject matter of appellate hearing. We will post it in October now. You can move the Court for early hearing," the Bench observed after passing its order..In February this year, the Court passed an order dismissing the objections raised by unitholders of the six Franklin Templeton mutual fund schemes that were wound up last year..The Bench had stated that as per clause (c) of 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. .Prior to that, the Court had directed that a sum of ₹9,122 crore be disbursed to unitholders of the six Franklin Templeton mutual fund schemes in proportion to their respective interest in the assets of the scheme..On October 24, the Karnataka High Court had refused to interfere in the decision of the trustees to wind up the six debt schemes of Franklin Templeton. The Court, however, clarified that the consent of unit holders as per the regulations is to be obtained before going through the winding-up process..[Read order]