Security and Exchange Board of India (Mutual Funds) Regulations, 1996 – Regulation 52 – Applicability – Regulation 52, which relates to and permits deduction of expenses including commission payable to the distributor, is applicable when the scheme is in operation, and not post the decision of the trustees in terms of Regulation 39(2)(a) read with Regulation 39(3), when, upon publication of notices, the ceasure mandate of Regulation 40 is triggered.
Security and Exchange Board of India (Mutual Funds) Regulations, 1996 – Regulations 40 and 52 – Held: Regulations 40 and 52 need to be read harmoniously – When read together, Regulation 52, authorising and specifying the limit of the fees and expenses payable to the asset management company, would apply only when the scheme is in operation, and not after publication of the notice under Clause (b) to sub-regulation 3 to Regulation 39 resulting in ceasure of any business activities in respect of the scheme to be wound up.
Security and Exchange Board of India (Mutual Funds) Regulations, 1996 – Regulation 41 – Applicability – Regulation 41, which deals with the procedure and manner of winding up, applies once the notice under Regulation 39(3)(b) is published and the unitholders’ approval under Regulation 18(15)(c) of the Regulations is received.
Security and Exchange Board of India (Mutual Funds) Regulations, 1996 – Regulation 41 – Claim for entitlement to payment of commission under clause (b) to sub-regulation 2 to Regulation 41 – Held: In a given case, some of the recurring expenses mentioned in clause (b) to Regulation 52(4) like audit fee, insurance premium, cost of statutory advertisements, etc., would be covered and would satisfy the requirement of clause (b) to Regulation 41(2) – However, if and only when they fall under and meet the requirement of the expenses connected with the winding up can they be allowed under Regulation 41(2)(b) – Commission payable to the mutual fund distributers is certainly not an expense connected with the winding up of the scheme.
Security and Exchange Board of India (Mutual Funds) Regulations, 1996 – Regulation 39(2)(b) and 52(4) (b) – Claim for commission payment by mutual fund distributors as an amount ‘due and payable under the scheme’ , on ground that it was an amount or payment that had accrued before the publication of notices under Regulation 39(2)(b), but was not paid as it was payable in future – Held: Not tenable – The expression ‘due and payable’ has to be interpreted with reference to the context in which the words appear – In the context of the Regulations in question, the expression refers to the present liabilities which may be payable in praesenti or in future – There must be an existing obligation to pay though the appointed date of payment may not have arrived – Clause (b) to Regulation 52(4) refers to recurring expenses, that is, expenses which will recur from time to time – It does not refer to one-time payment which is deferred – The recurring liability is not a present liability, but an obligation which, on satisfaction of certain conditions, may accrue in future – The right to claim commission may not accrue and become due and payable – On and after publication of the winding up notice in terms of Regulation 39(3)(b), the trustees and the asset management company cannot claim any payment on account of recurring expenses under clause (b) to sub- regulation (4) to Regulation 52 – Words and Phrases – Expression ‘due and payable’. Security and Exchange Board of India (Mutual Funds) Regulations, 1996 – Regulation 39(3)(b) and 41 – On publication of notices in terms of Regulation 39(3)(b), the business of the mutual fund comes to a stop and therefore, on and from that date the trail commission is not payable, as the scheme is to be wound up and the money is to be collected and paid to the unitholders, in terms of and as per the mandate of Regulation 41 – Even if a distributor renders some services to the unitholders after publication of the notice under Regulation 39(3)(b), it would not entitle him to claim an amount from the asset management company.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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