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The Supreme Court on Wednesday held that trustees of a mutual fund scheme have to take the consent of the unit-holders, who have invested their money, before deciding to wind up the scheme or prematurely redeeming the units.
Trustees cannot give themselves the air of “domain experts” and treat unit-holders as “lay persons” whose consent is not necessary before winding up.
“The argument that the unit-holders are lay persons and not well-versed with the market conditions is to be rejected. Investments by the unit-holders constitute the corpus of the scheme. To deny the unit-holders a say debilitates their role and right to participate,” a Bench of Justices S. Abdul Nazeer and Sanjiv Khanna observed in a judgment.
The Bench was hearing an appeal by Franklin Templeton Trustee Services Private Limited on the winding up of its six mutual fund schemes. The judgment harmoniously interprets Regulation 18(15)(c) with Regulation 39 (2) (a) of the Securities and Exchange Board of India (Mutual Funds) Regulations of 1996.
Regulation 18 mandates that trustees seek the consent of the unit-holders, while Regulation 39 allows a close-ended mutual fund scheme to be wound up if the trustees give that opinion. The latter Regulation is silent about getting unit-holders’ consent.
The Supreme Court opted for a middle path between the two Regulations. “The Principle of Harmonious Construction should be applied in the context of the Regulations in question… This would mean the opinion of the trustees would stand, but the consent of the unit-holders is a pre-requisite for winding up,” Justice Khanna observed.
The court said that unlike the trustees of a mutual fund scheme, unit-holders may not be domain experts. But they are “discerning investors who are perceptive and prudent”.
“...Thus, the contention that the trustees, being specialists and experts in the field, their decision should be treated as binding and fait accompli has to be rejected,” Justice Khanna wrote.
Like shareholders
The court compared unit-holders of a mutual fund scheme with the shareholders of a company. “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... the argument that unit-holders should be treated pari passu with the creditors is far-fetched,” the court noted.
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