Franklin Templeton Trustee Services Private Limited and Another vs Amruta Garg and Others etc.

Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 – Regulation 18(15) (c) – Winding up of Mutual Fund Schemes – Consent of unitholders – Held: Regulation 18(15)(c) mandates and requires consent of the unitholders for winding up, but does not prescribe any mode or manner for taking consent – Therefore, by implication, the Regulation gives option of holding a physical meeting, postal poll or e-poll. Words & Phrases – “consent” – Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 – Regulation 18(15) (c) – Held: ‘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. Directing winding up and disbursements, the Court HELD: 1.1 In view of larger public interest, presently this Court is only deciding the limited aspect of “unitholders’ consent to winding up” [assuming 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)], and is persuaded to direct winding up of the six schemes to ensure disbursement of funds and liquidation of assets/securities. [Para 4][583-B-C]

1.2 The argument raised by some of the objecting unitholders that consent would be binding only on those who have consented to winding up of the mutual fund schemes and cannot be imposed on others is rejected. 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. To accept the second or contra view, as pleaded by some of the objecting unitholders, would be to negate the very object and purpose of clause (c) to subregulation (15) Regulation 18. In fact, the submission, if accepted, will make the Mutual Fund schemes and the winding up provisions in the Mutual Fund Regulations unworkable as there would be two different classes of unitholders – one bound by the consent, and others who are not bound by consent. Consequently, the scheme would not wind up. The intent behind the provision is to bind even those who do not consent. 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. [Paras 8, 9][585-E-H; 586-F-G]

Black’s Law Dictionary (10th Edition), Shackleton on the Law and Practice of Meetings, 14th Edn. – referred to.

1.3 When there is choice between two interpretations, the Court would avoid a ‘construction’ which would reduce the legislation to futility, and should rather accept the ‘construction’ based on the view that draftsmen would legislate only for the purpose of bringing about an effective result. The Court must strive as far as possible to give meaningful life to enactment or rule and avoid cadaveric consequences. Reading prescription of a quorum as majority of the unitholders or ‘consent’ as implying ‘consent by the majority of all unitholders’ in Regulation 18(15)(c) of the Mutual Fund Regulations will not only lead to an absurdity but also an impossibility given the fact that mutual funds have thousands or lakhs of unitholders. Many unitholders due to lack of expertise, commercial understanding, relatively small holding etc. may not like to participate. Consent of majority of all unitholders of the scheme with further prescription that ‘fifty percent of all unitholders’ shall constitute a quorum is clearly a practical impossibility and therefore would be a futile and foreclosed exercise. In the case of unitholders, the number is fluctuating and ever changing and, therefore, indefinite. Numbers of unitholders can increase, decrease and change with purchase or redemption. Therefore, in the context of clause (c) of Regulation 18(15), this Court would not, in the absence of any express stipulation, prescribe a minimum quorum and read the requirement of ‘consent by the majority of the unitholders’ as consent by majority of all the unitholders. On the other hand, it would mean majority of unitholders who exercise their right and vote in support or to reject the proposal to wind up the mutual fund scheme. The unitholders who did not exercise their choice/option cannot be counted as either negative or positive votes as either denying or giving consent to the proposal for winding up. Keeping in view the object and purpose of the Regulation with the language used therein, a ‘construction’ which would lead to commercial chaos and deadlock cannot be accepted. 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. The underlying thrust behind Regulation 18(15)(c) is to inform the unitholders of the reason and cause for the winding up of the scheme and to give them an opportunity to accept and give their consent or reject the proposal. It is not to frustrate and make winding up an impossibility. [Paras 14-18][589-E-G; 590-A-C; 591-C, G-H; 592-A-B]

Principles of Statutory Interpretation by Justice G.P. Singh, 14th Edition, at 50; Bennion on Statutory Interpretation, 5th Edition; Halsbury’s Laws of England 1st Edition; Sutherland in Statutes and Statutory Construction, Volume 2, Third Edition at page no. 523, in Note 5109 – referred to.

1.4 The Court would not read into Regulation 18(15)(c) a need to have affirmative consent of majority of all or entire pool of unitholders. The words ‘all’ or ‘entire’ are not incorporated and found in the said Regulation. Thus, consent of the unitholders for the purpose of clause (c) to sub-regulation (15) of Regulation

18 would mean simple majority of the unitholders present and voting. Regulation 18(15)(c) mandates and requires consent of the unitholders for winding up, but does not prescribe any mode or manner for taking consent. Therefore, by implication, the Regulation gives option of holding a physical meeting, postal poll or e-poll. In physical meetings, voting may be by show of hands or by holding a poll. Show of hands is quick and an easy way to administer option but would not reflect and take into account the relative number of units held by the unitholders. Unitholders with fewer units have the same say as those with a greater number of units. It is not a good option when the proposal is contested. Poll, whether in a physical meeting, by way of a postal ballot or e-poll, has an advantage as each unitholder has one vote for every unit/share held. Therefore, in cases where there is huge disparity between the units held, or possibility of contest/dispute, poll is the preferred method for ascertaining preference of the unitholders. The value of poll lies in the fact that the weighted voting strength based upon the number of units gives more accurate and precise results. Majority consent of the investors/unitholders should depend upon the number of units held by them. Polls are akin to election. Poll results like the election results are not to be lightly interfered with. More so, when it is fault of a third party and not of the proposer/successful candidate. Poll results like election results are not to be regarded as vitiated by breach of rules or mistake, until and unless the breach or mistake, it is proved has materially affected the result of the poll. This general principle may be deviated from only when poll/election is conducted so badly that it is not substantially in accordance with law as to elections, in which case it would not matter whether the result was affected or not. When the poll or voting is on issues or choices of commercial nature, normally it is not a part of the judicial process for the court to ferret out flaws by examining merits or wisdom of the unitholders who have voted. The court is not equipped and should refrain from entering into such oversights as doctrine of internal management, institutional sovereignty and right to opt and decide come into play. The unitholders are the best judge and are more conversant with their own interests. All that is to be seen is that broad parameters of fairness in the administration, bona fide poll/election, and that fundamental rules of reasonable management of public business have not been breached. [Paras 19, 28][592-F; 595-F-H; 596-AF]

1.5 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 the rejected votes are not accounted for, 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. [Para 31][597-E-F]

2. KFin Technologies has been providing e-voting platform services to listed public limited companies ever since the Ministry of Corporate Affairs mandated them to secure approval of the resolutions by the shareholders through electronic voting. The e-voting platform of KFin Technologies is certified by the Ministry of Corporate Affairs approved certification agency, viz. STQC Website Quality Certification Services. KFin Technologies has conducted more than 4,500 e-voting events since 2013. To reject the voting results on this rather specious submission would cast doubts with serious repercussions on e-voting results of several reputed companies. The objectors are unable to point out even a single instance where KFin Technologies has been indicted. In the present case, the e-voting exercise was also supervised by a team of technical experts, including Assistant Directors, CFSL, Hyderabad. The Court is satisfied with the explanation given by the trustees/AMC and KFin Technologies with reference to the observations in the report of the forensic experts from CFSL. [Paras 33, 35][598-B-D; 602-C]

3. The notice for e-voting and meeting of the unitholders has to be read in entirety. In the facts of the present case, the notice for e-voting and the contents would not justify annulling the consent given by the unitholders for the winding up of the six schemes. [Para 37][603-B]

4. In the present case, the procedure prescribed by Regulation 41 is not required to be followed as the trustees themselves have stated that the process of winding up, which would include liquidation of the securities and distribution/payment to the unitholders, should be undertaken by a third party. The objectors had also made similar submissions. Accordingly, with the consent of the parties, M/s. SBI Funds Management Private Limited is appointed to undertake the exercise of winding up, which would include liquidation of the holdings/assets/portfolio and distribution/payment to the unitholders. [Para 40][609-B-C]

5. 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. In view of the findings and reasons stated, the objections to poll results is rejected and it is held that the unitholders of the six schemes have given their consent by majority to windup the six schemes. Winding up and disbursements would be in terms of directions in earlier orders dated 2nd February, 2021 and 9th February, 2021 and paragraph 41 herein. However, this order does not examine and decide other aspects and issues including the questions whether Regulation 18(15)(c) would apply when the trustee’s form an opinion that the scheme should be wound up in accordance with Regulation 39(2)(a) and the contention of the objecting unitholders regarding misfeasance, malfeasances, fraud and the effect thereof. [Para 42][610-C-E]

State of Madhya Pradesh and Another v. Mahendra Gupta and Others, (2018) 3 SCC 635 : [2018] 1

SCR 443; Shri Ishwar Chandra v. Shri Satyanarain Sinha and Others (1972) 3 SCC 383 : [1972] 3

SCR 796; Fertilizer Corpn. Kamgar Union (Regd.) v. Union of India (1981) 1 SCC 568 : [1981] 2 SCR 52; Syed Hasan Raza Sahib Shamsul Ulama and two others v. Mir Hasan Ali Sahib and two others AIR 1918 Mad 1131 – referred to.

Morgan v. Simpson [1975] QB 151 – referred to.