Closing mutual funds needs consent of a majority of unit-holders: SC

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New Delhi: The Supreme Court ruled that the trust needed the consent of the majority of unit-holders for closing mutual fund schemes after publishing notices disclosing reasons for their decision to wind up debt schemes.

The Supreme Court was addressing an appeal filed by Franklin Templeton against the Karnataka High Court order. The HC had restrained the company from winding up its six mutual fund schemes without obtaining the consent of its investors by a simple majority.

The court looked into several provisions of the Securities and Exchange Board of India (SEBI) on closing mutual funds. It dictated that the markets regulator has the power to intervene if trustees violate the regulations, reported The News Minute.

A bench of justices S Abdul Nazeer and Sanjiv Khanna looked into the interpretation of the rules, not the facts related to the case.

The court clarified that the observation made in this Order and the earlier Order should not be read as binding factual findings or conclusions on any disputed facts, which could be a subject matter of a show-cause notice and consequent decision.

The High Court had ruled that SEBI can exercise the power to issue directions when it finds that Trustees are not abiding by specific provisions of the Mutual Funds Regulations. But the court had refused to accept the contention that SEBI had the power to adjudicate upon the correctness of the decision.

The bench also noted that SEBI can proceed in accordance with the law in case of a violation of the regulations. The market regulator is entitled to conduct an inquiry and investigation. It added that the court has reservations on the said observations (of Karnataka HC).

The 77-page judgment mentioned that the bench has interpreted Regulations 39 to 42, and hold that the consent of the unit-holders, as envisaged under clause (c) to Regulation 18(15), is not required before publication of the notices under Regulation 39(3). Consent of the unit-holders should be sought post-publication of the notice and disclosure of the reasons for winding up under Regulation 39(3), reported The News Minute.

The verdict said that it will be incorrect to state that the decision of the trustees under clause (need) to Regulation 39(2) cannot be made subject matter of inquiry or investigation. No directions or orders under Section 11 or 11B of the (SEBI) Act can be passed.

The six schemes that were closed on April 23, 2020, citing redemption pressure and lack of liquidity in the bond market are Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund, and Franklin India Income Opportunities Fund.