Consent By Majority Of Unit Holders Who Participated In Poll Is Sufficient For Winding Up Mutual Fund Schemes: Supreme Court

The Supreme Court observed that, for the purpose winding up Mutual fund schemes, the 'consent of the unitholders' stipulated under Regulation 18(5)(C) of the SEBI (Mutual Funds) Regulations, would mean consent by majority of the unit holders who have participated in the poll, and not consent of majority of all the unitholders of the scheme. "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." the bench comprising Justices Abdul Nazeer and Sanjiv Khanna observed thus while upholding the validity of e-voting process for winding up of six mutual fund schemes of Franklin Templeton.The Karnataka High Court had, in this case, held that the clause (c) to sub regulation (15) of Regulation mandates consent of the unit holders 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. The Regulation 18(5)(c) mandates the trustees to obtain the consent of the unitholders c) when the majority of the trustees decide to wind up or prematurely redeem the units.In appeal, the Apex Court dealt with the interpretation of the expression 'the consent of the unit holders' for the purpose of clause (c) to sub regulation (15) of Regulation 18. The issue considered was whether 'consent' would mean majority of the unit holders who exercise their right in the poll, or majority of all the unit holders of the scheme?The bench observed that, reading prescription of a quorum as majority of the unit holders or 'consent' as implying 'consent by the majority of all unit holders' in Regulation 18(15)(c) will not only lead to an absurdity but also an impossibility given the fact that mutual funds have thousands or lakhs of unit holders. "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.", it said. The bench observed:" 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), we 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.", Investment in share market, though beneficial and attractive, requires expertise in portfolio construction, stock selection and market timing. In view of attendant risks, diversification of portfolio is preferred but this consequentially requires a larger investment. Mutual funds managed by professional fund managers with advantages of pooling of funds and operational efficiency are the preferred mode of investment for ordinary and common persons. It would be wrong to expect that many amongst these unitholders would have definitive opinion required and necessary voting in a poll on winding up of a mutual fund scheme. Such unitholders, for varied reasons, like lack of understanding and expertise, small holding etc., would prefer to abstain, leaving it to others to decide. Such abstention or refusal to express opinion cannot be construed as either accepting or rejecting the proposals. 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. 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.Regarding the 'poll', the bench made the ...

Consent By Majority Of Unit Holders Who Participated In Poll Is Sufficient For Winding Up Mutual Fund Schemes: Supreme Court

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Consent By Majority Of Unit Holders Who Participated In Poll Is Sufficient For Winding Up Mutual Fund Schemes: Supreme Court

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