Franklin Templeton Trustee Services Private Limited And Another vs Amruta Garg And Others Etc

,,,,,,,

Sanjiv Khanna, J",,,,,,,

Leave is granted in the above captioned Special Leave Petitions which emanate from the judgment dated 24th October, 2020 by a Division Bench",,,,,,,

of the Karnataka High Court, deciding three writ petitions and a writ appeal, wherein the challenge in substance was to the winding up, as well as the",,,,,,,

procedure for winding up, of six schemes of the Franklin Templeton Mutual Fund, namely:",,,,,,,

(i) Franklin India Low Duration Fund (Number of Segregated portfolios â€" 2),",,,,,,,

(ii) Franklin India Ultra Short Bond Fund (Number of Segregated portfolios â€" 1),",,,,,,,

(iii) Franklin India Short Term Income Plan (Number of Segregated portfolios â€" 3),",,,,,,,

(iv) Franklin India Credit Risk Fund (Number of Segregated portfolios â€" 3),",,,,,,,

(v) Franklin India Dynamic Accrual Fund (Number of Segregated portfolios â€" 3), and",,,,,,,

(vi) Franklin India Income Opportunities Fund (Number of Segregated portfolios â€" 2).,,,,,,,

The judgment under challenge inter alia interprets the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (‘Mutual Fund",,,,,,,

Regulations/ Regulations’) framed by the Securities and Exchange Board of India (‘SEBI’) to hold that clause (c) to sub-regulation (15) of,,,,,,,

Regulation 18 mandates consent of the unitholders 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 39 of the Mutual Fund Regulations. To this extent, the judgment",,,,,,,

under challenge substantially agrees with the unitholders, albeit SEBI in its appeal before this Court contests this interpretation as erroneous. In other",,,,,,,

words, SEBI propounds that clause (a) of sub-regulation (2) to Regulation 39 is a standalone provision and the unitholders’ consent is not required",,,,,,,

when the trustees upon happening of an event form an opinion that the mutual fund scheme is to be wound up.,,,,,,,

Regulation 18: Rights and obligations of the trustees,,,,,,,

(15) The trustees shall obtain the consent of the unitholders -,,,,,,,

(a) whenever required to do so by the Board in the interest of the unitholders; or,,,,,,,

(b) whenever required to do so on the requisition made by three-fourths of the unit-holders of any scheme; or,,,,,,,

(c) when the majority of the trustees decide to wind up or prematurely redeem the units.,,,,,,,

Regulation 39: Winding up,,,,,,,

(1) A close-ended scheme shall be wound up on the expiry of duration fixed in thescheme on the redemption of the units unless it is rolled over for a,,,,,,,

further period under sub-regulation (4) of regulation 33.,,,,,,,

(2) A scheme of a mutual fund may be wound up, after repaying the amount due to the unit holders,â€"",,,,,,,

(d) on the happening of any event which, in the opinion of the trustees, requires the scheme to be wound up; or",,,,,,,

(e) if seventy-five per cent of the unit holders of a scheme pass a resolution that the scheme be wound up; or,,,,,,,

(f) if the Board so directs in the interest of the unitholders.,,,,,,,

(3) Where a scheme is to be wound up under sub-regulation (2), the trustees shall give notice disclosing the circumstances leading to the winding up of",,,,,,,

the scheme:â€",,,,,,,

(g) to the Board; and,,,,,,,

(h) in two daily newspapers having circulation all over India, a vernacular newspaper circulating at the place where the mutual fund is formed.",,,,,,,

The objecting unitholders’ [The term ‘objecting unitholders’ does not refer to all unitholders but only 15 unitholders, namely, Ms. Amruta",,,,,,,

Garg, Mr. Areez Khambatta, Mr. Persis Khambatta, Khambatta Family Trust, Ms. Sanyam Jain, M/s. KAJ Associates, Ms. Sarika Mittal, M/s. Ultra",,,,,,,

Walls & Floors, Ms. Aakansha Maheshwari, Ms. Priya Menghnani, Ms. Varnika Menghnani, Mr. Sriram Gantasala, Mr. Ratnajit Bhattacharjee, Ms.",,,,,,,

Aarti Jain and Ms. Kiran Rama, who had filed writ petitions and are present before this Court and will also include Chennai Financial Markets and",,,,,,,

Accountability, an association which is not a unitholder.] (also referred to as objectors) primary grievance relates to allegations of gross",,,,,,,

mismanagement, failure and dereliction of duty by the Asset Management Company (‘AMC’) and Franklin Templeton Trustee Services Private",,,,,,,

Limited (‘trustees’ or ‘board of trustees’); violation of the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’); Mutual",,,,,,,

Fund Regulations; SEBI harmonization norms; investment horizon profiles; manipulation of Net Asset Value (NAV); disgorgement of wrongful,,,,,,,

payments etc. In particular, it is alleged that more than Rs. 15,000 crores were withdrawn from the six schemes two weeks prior to the decision for",,,,,,,

winding up. Objecting unitholders submit that a finding of fraud, on the part of the trustees and AMC, would entitle them to restitution etc. Other",,,,,,,

issues raised include the question of privilege regarding the forensic audit report.,,,,,,,

While the objecting unitholders submit that the trustees’ decision to wind up the six schemes is a smokescreen to conceal misfeasance and,,,,,,,

malfeasance, which issues along with the question of liability of the trustees/AMC should be decided first or together; we have deliberately decided to",,,,,,,

segregate and examine these issues subsequently. Pertinently, after receipt of the forensic audit report, SEBI has issued show cause notice which is",,,,,,,

pending adjudication. Common people invest in mutual funds driven by factors such as simplicity in purchase and redemption of units, flexibility of",,,,,,,

holding and tenure, and liquidity by conversion into money. In the light of this, immediate directions are required as embargo prohibiting redemption of",,,,,,,

the units, effected by Regulation 40 from the date of publication of notice under Regulation 39(3)(b) on 23rd April 2020, for over ten months. Thereby",,,,,,,

the unitholders have suffered privation and harassment. This, in same manner, also undermines public sentiments and confidence vital for investments",,,,,,,

in mutual funds. Hence, in view of larger public interest, presently we are 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 are persuaded to direct winding up of the six schemes to ensure disbursement of funds and liquidation of assets/securities.",,,,,,,

Regulation 40: Effect of winding up,,,,,,,

On and from the date of the publication of notice under clause (b) of sub-regulation (3) of regulation 39, the trustee or the asset management company",,,,,,,

as the case may be, shall â€"",,,,,,,

(a) cease to carry on any business activities in respect of the scheme so wound up;,,,,,,,

(b) cease to create or cancel units in the scheme;,,,,,,,

(c) cease to issue or redeem units in the scheme.,,,,,,,

We have further taken note of the trustees’ submissions that: (i) as on 15th January, 2021, NAV of five of the six schemes was higher than",,,,,,,

their respective NAVs on 23rd April, 2020 and in one scheme it was marginally lower; [The trustees state that NAV valuation of the portfolio",,,,,,,

securities is being computed by an independent valuation agency as per SEBI guidelines and is being reported daily.] (ii) five of the six schemes have,,,,,,,

turned cash positive; (iii) accumulated distributable cash proceeds of Rs.9,122 crores [(as on 15th January 2021) and (subject only to provision for",,,,,,,

expenses in ordinary course)] is immediately available for disbursement to unitholders; and (iv) Assets Under Management (‘AUM’) of the six,,,,,,,

schemes has increased from Rs.25,648 crores as on 23rd April, 2020 to Rs.26,343 crores as on 15th January, 2021. Lastly and importantly, during the",,,,,,,

course of hearing on 2nd February, 2021, counsels for the objecting unitholders have agreed to disbursal of Rs.9,122 crores amongst the unitholders,",,,,,,,

which, it has been directed would be in proportion to the unitholders’ respective interest in the assets of the scheme, as suggested by SEBI. It is",,,,,,,

obvious that this disbursal to unitholders is possible only when we accept that the six schemes should be wound up.,,,,,,,

Before we advert to the order passed by this Court for eliciting consent/approval from the unitholders, we deem it appropriate to first reproduce",,,,,,,

sub-regulation (15) to Regulation 18 of the Mutual Fund Regulations, which reads as under:",,,,,,,

“Regulation 18: Rights and obligations of the trustees,,,,,,,

xx xx xx,,,,,,,

(15) The trustees shall obtain the consent of the unitholders â€",,,,,,,

a) whenever required to do so by the Board in the interest of the unitholders; or,,,,,,,

b) whenever required to do so on the requisition made by three-fourths of the unit-holders of any scheme; or,,,,,,,

c) when the majority of the trustees decide to wind up or prematurely redeem the units.â€​,,,,,,,

Interpreting the term ‘consent’ with reference to clause (c) of sub-regulation (15) to Regulation 18, the judgment under challenge holds:",,,,,,,

“221. Obviously, there can be a ‘consent’ of the unit-holders to a proposed of winding up of a Scheme only if the majority of the unit-holders",,,,,,,

give consent to do so. Sub-clause (c) of clause (15) of Regulation 18 is silent on the nature of majority. Obviously, it is not a specific majority like",,,,,,,

three-fourth majority. Wherever three-fourth majority of the unit-holders was intended, the Mutual Funds Regulations say so. For example, sub-clause",,,,,,,

(b) of clause (15) of Regulation 18 and sub-clause (b) of clause (2) of Regulation 39. Therefore, it has to be a simple majority. For this purpose, we",,,,,,,

must make a reference to a decision of a Full Bench of the Allahabad High Court in the case of Wahid Ullah Khan v. District Magistrate, Nanital. In",,,,,,,

paragraph 32, the Allahabad High Court held thus:",,,,,,,

“32. The word “majority†speaks, of greater number out of the total number which cannot be a fixed number. In fact, the starting point of",,,,,,,

majority is more than half, but any number more than half still continues to be majority. Majority cannot be said only confining to more than half.",,,,,,,

Majority of three-fourths of the total number, two-thirds of the total number would all come within the sphere of the word ‘majority’. A person",,,,,,,

is said to have won by a majority of fifty thousand votes or thirty thousand votes. All speak about the extent of majority. A majority may start from a,,,,,,,

number which is more than half and would continue till the balance of the number excluding one number. In the matter of votes if a resolution is,,,,,,,

carried either in favour or against by all it is said to be unanimous. Majority is used in contradiction to minority. Thus, there must exist a minority vote.",,,,,,,

So, even where one vote is cast in favour or against resolution the balance of the total number of votes cast would all be a number of majority vote.â€​",,,,,,,

The meaning assigned by the Allahabad High court to the word majority appears to be most correct meaning. The Black's Law Dictionary,,,,,,,

provides that a majority means a number that is more than half of a total. Therefore, consent, as contemplated by sub-clause (c) of clause (15) of",,,,,,,

Regulation 18 will have to be by a simple majority of the unit-holders of a particular Scheme which is decided to be wound up.â€​,,,,,,,

While we partly agree with the aforesaid observations, we would like to emend the meaning given to the expression ‘the consent of the",,,,,,,

unitholders’ for the purpose of clause (c) to sub-regulation (15) of Regulation 18.,,,,,,,

However, we begin by rejecting 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. 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 sub-regulation (15) of 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 â€",,,,,,,

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.,,,,,,,

Black’s Law Dictionary (10th Edition) defines the word ‘consent’ as “a voluntary yielding to what another proposes or desires;,,,,,,,

agreement, approval, or permission regarding some act or purpose, esp. given voluntarily by a competent person; legally effective assent.†The",,,,,,,

dictionary also defines ‘general consent’ to mean “adoption without objection, regardless of whether every voter affirmatively approves.â€",,,,,,,

Shackleton on the Law and Practice of Meetings, 14th Edn., while defining majority, and the binding effect of majority, has opined:",,,,,,,

“,,,,,,,

Definition,,,,,,,

7-30. Majority is a term signifying the greater number. In legislative and deliberative assemblies, it is usual to decide questions by a majority of those",,,,,,,

present and voting. This is sometimes expressed as a “simple†majority, which means that a motion is carried by the mere fact that more votes",,,,,,,

are cast for than against, as distinct from a “specialâ€​ majority where the size of the majority is critical.",,,,,,,

The principle has long been established that the will of a corporation or body can only be expressed by the whole or a majority of its members, and the",,,,,,,

act of a majority is regarded as the act of the whole.,,,,,,,

A majority vote binds the minority,,,,,,,

7-31. Unless there is some provision to the contrary in the instrument by which a corporation is formed, the resolution of the majority, upon any",,,,,,,

question, is binding on the majority and the corporation, but the rules must be followed.†[See State of Madhya Pradesh and Another v. Mahendra",,,,,,,

Gupta and Others, (2018) 3 SCC 635]",,,,,,,

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.",,,,,,,

However, the question which still remains to be answered is whether ‘consent’ would mean majority of the unitholders who exercise their",,,,,,,

right in the poll, or majority of all the unitholders of the scheme. Connected with the question is the concern of quorum, which means the minimum",,,,,,,

number of members of the entire body of members required to be present to legally transact business.,,,,,,,

Shackleton in the above quotation has referred to distinction between simple and special majority. More appropriate for our discussion is William,,,,,,,

Paul White’s thesis ‘History and Philosophy of the Quorum as a Device of Parliamentary Procedure’ published in 1967, in which he",,,,,,,

elucidates:,,,,,,,

“Much of the controversy that has been historically associated with the quorum can be traced to the problem of simply determining just what is,,,,,,,

meant by a quorum. “From the very earliest times it has been recognised as a general rule that a majority of a group is necessary to act for the,,,,,,,

entire group.†In the case of a public body, the power or authority which establishes the body may also determine what constitutes a quorum. Sturgis",,,,,,,

states that common parliamentary law fixes the quorum as a “majority of the membersâ€. The constitution of the United States sets the quorum,,,,,,,

requirement in the House of Representatives at a majority of the membership. But to state that a quorum is a majority of the membership opens the,,,,,,,

way to potential conflict; which is precisely what has happened on numerous occasions.â€​,,,,,,,

After examining the various definitions of the term quorum, the author observes that the definitions by themselves give no key as to how to determine",,,,,,,

what is minimum number or what constitutes majority. The expression ‘majority’ can mean - (i) majority of total membership list; (ii) exclude or,,,,,,,

include delinquent members; (iii) members present and voting; or (iv) those present, voting and not voting. Different meanings, he observed, have",,,,,,,

added to the confusion around the concept of the quorum. Albeit referring to the position in 1967, the author observed:",,,,,,,

“As we have emerged into the modern era, it is not surprising that by now the method, which has been legally agreed upon by the courts, to",,,,,,,

determine minimum and majority, is well established.â€​",,,,,,,

Clause (c) to sub-regulation (15) of Regulation 18 per se does not prescribe any quorum or specify the criterion for computing majority or ratio of,,,,,,,

unitholders required for valid consent for winding up. Clause (b) of Regulation 39(2), on the other hand, specifies that seventy-five per cent of the",,,,,,,

unitholders of a scheme can pass a resolution that the scheme be wound up. Similarly, Regulation 41(1) requires the trustees to call a meeting to",,,,,,,

approve, by simple majority of the unitholders present and voting, a resolution for authorising the trustees or any other person to take steps for winding",,,,,,,

up of the scheme. Section 48 of the Companies Act, 2013 states that where share capital of a company is divided into different classes of shares, the",,,,,,,

rights attached to the shares of any class may be varied with the consent in writing of the shareholders of not less than three-fourths of the issued,,,,,,,

shares of that class. Sub-section (3) to Section 55 of the Companies Act, 2013 in case of failure to redeem or pay dividend refers to consent of",,,,,,,

holders of three-fourths in value of the preference shares. Section 103 of the Companies Act, 2013 prescribes minimum quorum for shareholder",,,,,,,

meetings.,,,,,,,

In Shri Ishwar Chandra v. Shri Satyanarain Sinha and Others (1972) 3 SCC 383, this Court on the question of quorum has held:",,,,,,,

“If for one reason or the other one of them could not attend, that does not make the meeting of others illegal. In such circumstances, where there is",,,,,,,

no rule or regulation or any other provision for fixing the quorum, the presence of the majority of the members would constitute it a valid meeting and",,,,,,,

matters considered there at cannot be held to be invalid.â€​,,,,,,,

This decision had also relied on the exposition on the subject of quorum in the Halsbury’s Laws of England, Third Edition (Vol. IX, page 48, para",,,,,,,

95), which reads:",,,,,,,

“95. Presence of quorum necessary. The acts of a corporation, other than a trading corporation, are those of the major part of the corporators,",,,,,,,

corporately assembled. In other words, in the absence of special custom or of special provision of the constitution, the major part must be present at",,,,,,,

the meeting, and of that major part there must be a majority in favour of the act or resolution contemplated. Where, therefore, a corporation consists",,,,,,,

of thirteen members, there ought to be at least seven present to form a valid meeting, and the act of the majority of these seven or greater number will",,,,,,,

bind the corporation. In considering whether the requisite number is present, only those members must be included who are competent to take part in",,,,,,,

the particular business before the meeting. The power of doing a corporate act may , however, be specially delegated to a particular number of",,,,,,,

members, in which case, in the absence of any other provision, the method of procedure applicable to the body at large will be applied to the select",,,,,,,

body.,,,,,,,

If a corporate act is to be done by a definite body along, or by definite body coupled with an indefinite body, a majority of the definite body must be",,,,,,,

present.,,,,,,,

Where a corporation is composed of several select bodies, the general rule is that a majority of each select body must be present at a corporate",,,,,,,

meeting; but this rule will not be applied in the absence of express direction in the constitution, if its application would lead to an absurdity or an",,,,,,,

impossibility. ...â€​,,,,,,,

(emphasis supplied),,,,,,,

The concept of ‘absurdity’ in the context of interpretation of statutes is construed to include any result which is unworkable, impracticable,",,,,,,,

illogical, futile or pointless, artificial, or productive of a disproportionate counter mischief [See Bennion on Statutory Interpretation, 5th Edition, at 969.].",,,,,,,

Logic referred to herein is not formal or syllogistic logic, but acceptance that enacted law would not set a standard which is palpably unjust, unfair,",,,,,,,

unreasonable or does not make any sense. Ibid at 986. When an interpretation is beset with practical difficulties, the courts have not shied from turning",,,,,,,

sides to accept an interpretation that offers a pragmatic solution that will serve the needs of society [Ibid at 971, quoting Griffiths LJ.]. Therefore,",,,,,,,

when there is choice between two interpretations, we 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. We,,,,,,,

must strive as far as possible to give meaningful life to enactment or rule and avoid cadaveric consequences [See Principles of Statutory Interpretation,,,,,,,

by Justice G.P. Singh, 14th Edition, at 50.].",,,,,,,

We would neither hesitate in stating the obvious, that modern regulatory enactments bear heavily on commercial matters and, therefore, must be",,,,,,,

precisely and clearly legislated as to avoid inconvenience, friction and confusion, which may, in addition, have adverse economic consequences [See",,,,,,,

Bennion on Statutory Interpretation, 5th Edition, at 980.]. The legislator in the present case must, therefore, reflect and take remedial steps to bring",,,,,,,

about clarity and certainty in the Mutual Fund Regulations.,,,,,,,

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.,,,,,,,

Conscious of the problem of quorum and majority in indefinite electorate, 1st Edition of Halsbury’s Laws of England on the question of quorum",,,,,,,

and meetings, had referred to the following principles:",,,,,,,

“791. Where a corporation consists of a definite number of corporate electors, a majority of that number must be present in order to constitute a",,,,,,,

valid election. But where a corporation consists of an indefinite number of corporate electors, a majority only of those existing at the time of the",,,,,,,

election need be present.,,,,,,,

When an election is to be made by a definite body only, or the electoral assembly is to consist of a definite and an indefinite body, the majority of the",,,,,,,

definite body must, as a general rule, be present in order to render the election legal. It is not necessary that a majority of the indefinite body should be",,,,,,,

present so long as there is majority of the definite body. If a constituent part of a corporation refuses to be present at an election, it cannot be held, and",,,,,,,

an election by the remaining parts will be void. But electors present at an election and abstaining from voting are deemed to acquiesce in the election,,,,,,,

made by those who vote.â€​,,,,,,,

The aforesaid exposition, for the purpose of majority and quorum, draws distinction between an electorate consisting of definite number and an",,,,,,,

electorate composed of indefinite number. Justice Seshagiri Ayyar of the Madras High Court in his concurring judgment in Syed Hasan Raza Sahib,,,,,,,

Shamsul Ulama and two others v. Mir Hasan Ali Sahib and two others AIR 1918 Mad 1131 had drawn distinction between definite and indefinite,,,,,,,

numbers in the following manner:,,,,,,,

“…In the first class of cases, the number of the select body is fixed. In the second class of cases, the number is subject to variation every year or",,,,,,,

at stated periods. For example, the number of electors of a Temple Committee or the number for a Municipality is liable to fluctuation. Residence for a",,,,,,,

particular period, or the attaining of age of minors can bring in new electors. Whereas in the case of a Select Committee, the number is fixed…â€​",,,,,,,

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. Way back in 1943, Sutherland in Statutes and Statutory Construction, Volume 2, Third Edition at page no. 523, in Note 5109, had stated:",,,,,,,

“Where a statue has received a contemporaneous and practical interpretation and the statute as interpreted is re-enacted, the practical",,,,,,,

interpretation is accorded greater weight than it ordinarily receives, and is regarded presumptively the correct interpretation of the law. The rule is",,,,,,,

based upon the theory that the legislature is acquainted with the contemporaneous interpretation of a statue, especially, when made by an",,,,,,,

administrative body or executive officers charged with the duty of administering or enforcing the law, and therefore impliedly adopts the interpretation",,,,,,,

upon re-enactment.â€​,,,,,,,

With some modifications, the principle can be applied in the present case. Practical interpretation should be accorded greater weight than it ordinarily",,,,,,,

receives, and can be regarded as presumptively correct interpretation as the draftsmen legislate to bring about a functional and working result.",,,,,,,

We 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.,,,,,,,

S.

No.",Scheme,"Total valid

votes",Voted For,,Voted Against,,

,,,Number,%,Number,%,

1.,"Franklin

Templeton

Ultra Short Bond

Fund",53805,52075,96.78%,1730,3.22%,

2.,"Franklin

Templeton Low

Duration Fund",16920,16452,97.23%,468,2.77%,

3.,"Franklin

Templeton

Dynamic Accrual

Fund",7550,7370,97.62%,180,2.38%,

4.,"Franklin

Templeton

Credit Risk Fund",11634,11398,97.97%,236,2.03%,

5.,"Franklin

Templeton Income

Opportunities

Fund",5876,5693,96.89%,183,3.11%,

S.

No.",Scheme,"Voted in Favour (by No. of

unit-holders)",,"Voted in Favour (by No. of

units)",,,

,,Number,%,Number,%,,

1.,"Franklin India Ultra

Short

Bond Fund","52,075",96.78%,"2,206,249,485",98.06%,,

2.,"Franklin India Low

Duration Fund","16,452",97.23%,"621,199,506",98.08%,,

3.,"Franklin India

Dynamic

Accrual Fund","7,370",97.62%,"206,632,312",99.18%,,

4.,"Franklin India Credit

Risk

Fund","11,398",97.97%,"914,140,990",98.05%,,

5.,"Franklin India

Income

Opportunities Fund","5,693",96.89%,"380,792,621",97.37%,,

6.,"Franklin India Short

Term

Income Plan","19,165",97.61%,"6,783,130",97.66%,,

S.

No.","Scheme

Name","First Vote

Cast Date

and Time","Last Vote

Cast Date

and Time","No. of

Votes as

per the

Database","No. of

Votes as

per the e-

Voting

Logs","No. of Votes

as per

transaction

logs",

1,"Franklin India

Credit Â

Risk Fund","26

December

2020 0900","28

December

2020 1800",11795,11795,11795,

2,"Franklin India

Dynamic

Accural Fund","26

December

2020

0900","28

December

2020

1801",7680,7680,7680,

3,"Franklin India

Income

Opportunities

Fund","26

December

2020

0900","28

December

2020

1759",5995,5995,5995,

4,"Franklin India

Low Duration

Fund","26

December

2020

0900","28

December

2020

1800",17122,17122,17122,

5,"Franklin India

Short Â

Term Income

Plan","26

December

2020

0900","28

December

2020

1800",19897,19897,19897,

6,"Franklin India

Ultra Â

Short Bond

Fund","26

December

2020

0859","28

December

2020

1803",54247,54247,54247,

Total,,,,116736,116736,116736,

S.

No.","Scheme

Name","AGM

ID","AGM VC

Start

Date and

Time","AGM VC

End Date

and Time","First

Insta

Vote

Cast

Date and

Time","Last

Insta

Vote Cast

Date and

Time","Instpoll

Votes

1,"Franklin India

Credit Risk

Fund",4274,"29-12-

2020

1400","29-12-2020

1500","29-12-

2020

14:01","29-12-

2020

14:07",64

2,"Franklin India

Dynamic

Accrual Fund",4275,"29-12-

2020

1200","29-12-2020

1300","29-12-

2020

12:04","29-12-

2020

12:48",33

3,"Franklin India

Income

Opportunities

Fund",4276,"29-12-

2020

1515","29-12-2020

1615","29-12-

2020

15:16","29-12-

2020

16:00",30

4,"Franklin India

Low Duration

Fund",4277,"29-12-

2020

1045","29-12-2020

1145","29-12-

2020

10:46","29-12-

2020

11:58",93

5,"Franklin India

Short Term

Income Plan",4278,"29-12-

2020

1630","29-12-2020

1730","29-12-

2020

16:17","29-12-

2020

17:41",104

6,"Franklin India

Ultra Short

Bond Fund",4279,"29-12-

2020

0900","29-12-2020

1030","29-12-

2020

09:00","29-12-

2020

10:34",356

Total,,,,,,,680

AUM as of

December

1, 2020","C a s h available for

distribution as of

December 1, 2020*","Voting “Yes†to the

Resolution means opting for

an orderly Winding-up of the

Scheme with a potential to

realize fair value for the

assets","Voting “Noâ€​ to the Resolution

means opting for the Scheme to

be re-opened, potentially leading

to distress sale of assets and loss

of value",,,,

10,128","4,683 (46.24% of AUM)","(i) The securities in the Scheme

can be liquidated in an orderly

manner without the need to

proceed with distress sale (as

redemptions are not allowed)

therefore enabling orderly

liquidation of the portfolio assets","(i) The Scheme would be required to

reopen immediately and may need an

emergency liquidation of securities, if

a high volume of redemption is

received.

(ii) This may entail distress sales of

securities in order to meet the

redemptions received. The market is

unlikely to have the liquidity to absorb

such large quantities of securities over

a short period of time and it may not

be possible to get bids at reasonable

prices for all securities in such

circumstances.

(iii) A distress sale of securities held

in the portfolio could result in a rapid",,,,

,,at fair value. The proceeds,,,,,

,,realized by the Scheme will be,,,,,

,,distributed to the Unitholders in,,,,,

,,proportion to the units held by,,,,,

,,"them, at regular intervals.

(ii) This option will enable

recovery of maximum value of

securities held by the Scheme.

(iii) The Authorised Person would

be in a position to take the most

appropriate action with regard to",,,,,

,,,and steep decline in the NAV leading,,,,

,,,to substantial losses for Unitholders,,,,

,,"liquidation of each security as

there will be no undue haste or

selling pressure.

(iv) The NAV would not be

negatively impacted as liquidation

would be orderly and there would

be no need for distress sales.

( v) Unitholders will not be

required to apply for redemptions.",(irrespective of market conditions.,,,,

,,,"While the endeavor would be to

minimize losses, however there is no

assurance that the Scheme will be

successful in doing so.

(iv) Unitholders will need to apply for

redemptions if they wish to receive

monies. This may result in

disproportionate distribution of any

c a s h generated to Unitholders

depending on the time of redemption.

(v) An adjustment in valuation and

consequential reduction in the NAV

may be required on account of the

abovefactors in accordance with

applicable regulations.",,,,

,,"Unitholders will receive regular

prorate distributions of investment

proceeds as assets are

systematically liquidated by the

Scheme.",,,,,

general public may not be fully aware of the commercial considerations and niceties relating to mutual funds and debt securities market. This is the,,,,,,,

precise reason why most people do not make direct investment in the securities market and prefer mutual funds. Further, the trustees had earlier vide",,,,,,,

document No. 16 (enclosed at pages 1253 to 1255 in the appeal arising out of Special Leave Petition (C) No. 14288 of 2020) communicated the,,,,,,,

reasons for their decision to wind up the six schemes. The relevant portions this notice read as under:,,,,,,,

“The unprecedented lockdown of the Indian economy in the wake of Covid-19 has impacted livelihoods and businesses across the country. Despite,,,,,,,

several measures by the Reserve Bank of India (RBI), the liquidity in certain segments of the corporate bond markets has fallen-off dramatically and",,,,,,,

has remained low for an extended period.,,,,,,,

In this scenario, mutual funds are facing unprecedented liquidity challenges due to a variety of factors â€" rising redemption pressures due to",,,,,,,

heightened risk aversion, mark to market losses following a spike in yields and lower trading volumes in the bond markets. These factors have together",,,,,,,

caused a significant and worsening liquidity crunch for open-end mutual fund schemes investing in corporate credits across the credit rating spectrum.,,,,,,,

Important Announcement: In this situation, we find that the ability to liquidate assets at a reasonable price to fund redemptions for the schemes",,,,,,,

identified below is under severe stress and it is no longer possible for certain schemes of Franklin Templeton to generate adequate liquidity to fund,,,,,,,

daily redemptions. Accordingly, we wish to inform you, that the Trustees of Franklin Templeton Mutual Fund in India have, after careful analysis and",,,,,,,

review of the recommendations submitted by Franklin Templeton AMC, and in close consultation with the investment team, voluntarily decided to",,,,,,,

wind up its suite of six yield -oriented fixed income funds, post cut-off time from April 23, 2020 (refer to Annexure I- Notice to",,,,,,,

Investors) as they are of the considered opinion that an event has occurred, which requires these schemes to be wound up. This decision has been",,,,,,,

taken in light of the severe market dislocation illiquidity caused by the Coid-19 pandemic, and in order to protect value for investors via managed sale",,,,,,,

of the portfolio. The list of schemes being wound up is as follows:,,,,,,,

Franklin India Ultra Short Bond Fund (FIUBF),,,,,,,

Franklin India Short Term Income Fund (FISTIP),,,,,,,

Franklin India Credit Risk Fund (FICRF),,,,,,,

Franklin India Low Duration Fund (FILDF),,,,,,,

Franklin India Dynamic Accrual Fund (FIDA),,,,,,,

Franklin India Income Opportunities Fund (FIIOF),,,,,,,

Factors leading to Winding-Up: The impact schemes of Franklin Templeton were able to meet their redemption obligationacross all market,,,,,,,

conditions and even during the initial phase of the Covid-19 pandemic lockdown despite redemption pressures and increased market illiquidity.,,,,,,,

However, the extension of the lockdown has heightened redemption volumes and reduced inflows to unsustainable levels. The schemes even resorted",,,,,,,

to borrowings within permissible limits in line with market practice to fund redemptions during this time but given the situation, we felt that it would not",,,,,,,

be prudent to leverage the schemes further. While the respective valuations of these schemes have been marked promptly and conservatively thus far,",,,,,,,

continuous redemption pressures in the backdrop of a severe dislocation in the corporate bond markets would place great strain on our ability to ensure,,,,,,,

equitable treatment of all investors.,,,,,,,

Further, given the current unprecedented situation even the committed borrowing lines maintained by the funds are inadequate to meet the demand for",,,,,,,

sustained narrowing across the schemes.,,,,,,,

We explored the possibility of suspending redemptions until market conditions stabilize without winding up the schemes. However, conditions for such",,,,,,,

a suspension under the current regulatory framework, such as a maximum suspension period of 10 working days (in 90 days) and the requirement to",,,,,,,

honour redemptions up to INR 2 lakh per day per investor, rendered this approach unviable to meet the severe sustained impact of the current crisis",,,,,,,

(refer Annexure III-FAQ for options considered besides winding up).,,,,,,,

The Trustees were hence left with no option except to initiate the winding up of the schemes with a view to protect the interests of unitholders,",,,,,,,

Winding up the schemes was determined to be the best way to ensure a fair and equitable distribution of monies to unitholders while minimizing,,,,,,,

erosion in value for investors.â€​,,,,,,,

It is also the contention of the trustees that they were required to justify and explain the reasons for winding up of the six schemes and hence the,,,,,,,

notice was worded in this manner. The notice had also informed the investors that there would be suspension of subscription and redemption post the,,,,,,,

cut-off time from 23rd April, 2020. All Systematic Investment Plans, Systematic Transfer Plans and Systematic Withdrawal Plans into and from the",,,,,,,

above-mentioned funds stood cancelled post the cut off time from 23rd April, 2020. The notice had also furnished information and clarification",,,,,,,

regarding distribution of monies from the Fund Assets, inter alia stating that following the decision to wind up the six schemes, the trustees would",,,,,,,

proceed for orderly realization and liquidation of the underlying assets with the objective of preserving value for unitholders. Their endeavour would be,,,,,,,

to liquidate the portfolio holdings at the earliest opportunity, to enable an equitable exit for all investors in the ‘unprecedented circumstances’.",,,,,,,

We do not think, in the facts of the present case, the notice for e-voting and the contents would justify annulling the consent given by the unitholders",,,,,,,

for the winding up of the six schemes.,,,,,,,

We will now refer to and deal with some of the other objections to the consent/e-voting results which, in our opinion, are merely assertions, or at",,,,,,,

best minor irregularities, which do not have any substance. These contentions are:",,,,,,,

(i) Mr. T.S. Krishnamurthy’s appointment as the Observer by SEBI vide its letter dated 18th December, 2020 was made public belatedly on 26th",,,,,,,

December, 2020;",,,,,,,

(ii) Notice for e-meeting dated 6th December, 2020 issued under the name of Mr. Alok Sethi, Director of the Trustees, was not digitally signed by",,,,,,,

him. However, Mr. Alok Sethi had digitally signed the notice subsequently on 28th December, 2020;",,,,,,,

(iii) M/s. J. Sagar and Associates should not have been appointed as the Scrutiniser to oversee the conduct of the e-voting and the Observer Mr. T.S.,,,,,,,

Krishnamurthy should have acted as the Scrutinser;,,,,,,,

(iv) KFin Technologies was appointed for providing electronic platform for e-voting vide meeting of the Board of Directors of the trustees dated,,,,,,,

29thApril, 2020 and thereafter the agreement dated 8th June, 2020 was entered into, but this agreement was digitally signed on 30th June, 2020.",,,,,,,

Similarly, M/s. J. Sagar and Associates, the law firm, was appointed as the Scrutiniser by letter of engagement dated 13th May, 2020 and the law firm",,,,,,,

had conveyed its willingness to act as the Scrutiniser. However, the resolution by the Board of Directors of the trustees was approved by circulation",,,,,,,

on 21st May, 2020. Further addendum to their letter of engagement was issued on 22nd December, 2020; and",,,,,,,

(v) Notices for e-voting did not specify with clarity whether e-voting was possible on any technology platform, viz. laptop/ desktop or smartphone, etc.,",,,,,,,

though such facility was available.,,,,,,,

These contentions are mere nitpicks and would hardly justify rejection of the consent to winding up which has been expressed by more than 95%,,,,,,,

of the unitholders who had voted. Mr. T.S. Krishnamurthy was appointed as the Observer by SEBI in view of the directions given by this Court to,,,,,,,

ensure fairness and transparency. He was not to conduct the meeting or the process, but only to oversee and give his report on the entire process.",,,,,,,

Being an independent observer, his observations and comments vide the report would help resolve any debate, doubt or questions. The observer is the",,,,,,,

eyes and ears, which the Court could rely. Mr. T.S. Krishnamurthy in his report has mentioned that many calls, messages and e-mails were received",,,,,,,

by him expressing difficulty in voting, non-receipt of passwords and difficulty in reaching the helplines. He had, therefore, conveyed these messages to",,,,,,,

the trustees and KFin Technologies. Based on the response, the number of helplines were increased. Missed calls were returned and answered. The",,,,,,,

Observer’s report vide Annexure-10 refers to the complaints/calls made to Mr. T.S. Krishnamurthy and also records that these were redressed.,,,,,,,

No unitholder has expressed or stated that they could not vote or their queries were not answered. Absence or lack of digital signatures on the notice,,,,,,,

is a technical and not a substantive objection. Moreover, the trustees have explained that in view of the objection raised by the Technical Assistance",,,,,,,

Team, Mr. Alok Sethi had digitally signed a copy of the notice for the purpose of the record. This digitally signed notice was made available to the",,,,,,,

Technical Assistance Team. M/s. J. Sagar and Associates and KFin Technologies had been earlier appointed by the trustees possibly for compliance,,,,,,,

of clause (c) to Regulation 18(15) of the Regulations. Agreements earlier in point of time with KFin Technologies and M/s. J. Sagar and Associates,,,,,,,

would not, in any manner, be an irregularity. Further, Mr. T.S. Krishnamurthy was not to himself count the votes as this exercise had to be undertaken",,,,,,,

essentially by the Scrutiniser, M/s. J. Sagar and Associates. To conduct the e-voting, for the purpose of consent, the trustees had engaged services of",,,,,,,

KFin Technologies and M/s. J. Sagar and Associates. M/s J. Sagar and Associates being a law firm, it is obvious, are not experts in information",,,,,,,

technology. Necessarily, they would rely on the data and details made available by KFin Technologies. We have already dealt with the question of",,,,,,,

integrity and authenticity of the e-voting data and that it was checked by two technical experts who are Assistant Directors at CFSL, Hyderabad. The",,,,,,,

comments of the forensic experts have been examined and considered in detail.,,,,,,,

In the present case, we do not think the procedure prescribed by Regulation 41 is 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, we have appointed M/s. SBI Funds",,,,,,,

Management Private Limited to undertake the exercise of winding up, which would include liquidation of the holdings/assets/portfolio and",,,,,,,

distribution/payment to the unitholders.,,,,,,,

Regulation 41: Procedure and manner of winding up,,,,,,,

(1) The trustee shall call a meeting of the unitholders to approve by simple majority of the unitholders present and voting at the meeting resolution for,,,,,,,

authorising the trustees or any other person to take steps for winding up of the scheme.,,,,,,,

Provided that a meeting of the unitholders shall not be necessary if the scheme is wound up at the end of maturity period of the scheme.,,,,,,,

(2) (a) The trustee or the person authorised under sub-regulation (1) shall dispose of the assets of the scheme concerned in the best interest of the,,,,,,,

unitholders of that scheme.,,,,,,,

(b) The proceeds of sale realised under clause (a), shall be first utilised towards discharge of such liabilities as are due and payable under the scheme",,,,,,,

and after making appropriate provision for meeting the expenses connected with such winding up, the balance shall be paid to the unitholders in",,,,,,,

proportion to their respective interest in the assets of the scheme as on the date when the decision for winding up was taken.,,,,,,,

(3) On the completion of the winding up, the trustee shall forward to the Board and the unitholders a report on the winding up containing particulars",,,,,,,

such as circumstances leading to the winding up, the steps taken for disposal of assets of the fund before winding up, expenses of the fund for winding",,,,,,,

up, net assets available for distribution to the unit holders and a certificate from the auditors of the fund.",,,,,,,

(4) Notwithstanding anything contained in this regulation, the provisions of these regulations in respect of disclosures of half-yearly reports and annual",,,,,,,

reports shall continue to be applicable until winding up is completed or the scheme ceases to exist.,,,,,,,

As per the consolidated affidavit filed by the trustees and AMC, securities equivalent to more than Rs.17,000 crores are yet to be realised. This is",,,,,,,

a substantial amount. The trustees and SEBI were not at ad idem and have given different time frames within which they felt the securities can be,,,,,,,

liquidated. However, both the trustees and SEBI, have stated in unison that the liquidation/realisation has to be proceeded with caution, as an attempt",,,,,,,

to offload the securities in haste can result in losses which would be detrimental and cause reduction in realisable value. We would not like to enter,,,,,,,

into this debate or give any specific directions but would observe that M/s. SBI Funds Management Pvt. Ltd. shall follow the best effort principle so,,,,,,,

as to ensure expeditious and timely payment to the unitholders and assure the best possible liquidation value of the assets/ securities to the unitholders.,,,,,,,

However, we have no hesitation in directing that distribution/disbursement of funds to the unitholders can be made in tranches without waiting for",,,,,,,

liquidation of all the securities/assets.,,,,,,,

In view of the aforesaid discussion, we hold that 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 above, we reject the objections to poll results and hold 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 our directions in earlier orders dated 2nd February, 2021 and 9th",,,,,,,

February, 2021 and paragraph 41 above. We, however, clarify that 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.",,,,,,,