After a year’s wait, the Supreme Court on July 14, 2021 ruled on Franklin Templeton Mutual Fund’s (FT MF) wind-up case that unitholders’ consent is necessary before the fund house decides to wind up a scheme. However, the question is how to decide the majority and what is the required quorum to approve the winding up. The SC has asked SEBI to come up with a clear set of rules on arriving at consent for winding-up of a mutual fund scheme, through unitholders’ voting.
The SC bench was responding on some unitholders arguments that the wind-up decision should only be applicable to those unitholders who have given their consent for it.
In January, 2021, unitholders of FT MF voted in favour of winding-up of the schemes. However, the observers’ report pointed out that only 38 percent of the unitholders had cast their votes. According to SC, if the argument of the objecting unitholders is accepted, then any wind-up will become practically impossible as there will always be two class of unitholders, “one bound by the consent” and the others “not bound by consent”.
What is a majority?
However, SC bench admitted that there are still questions on what amounts to consent.
“…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,” the order read.
Further, the SC bench found discrepancies in SEBI’s current regulations. It pointed out that regulation 18(15)(c) does not “prescribe any quorum or specify the criterion for computing majority or ratio of unitholders required for consent of winding-up. On the other hand, regulation 39(2)(b), specifies that 75 percent of the unitholders of a scheme can pass a resolution for winding-up of a scheme.
But the regulation 41(1) requires trustees to call a meeting of unitholders to authorise trustees or any other person to take steps for winding up of the scheme, by a simple majority.
SC said regulations can bear heavily on commercial matters and therefore must be “precisely and clearly legislated” to avoid inconvenience, friction and confusion. It advised SEBI to “reflect and take remedial steps to bring about clarity and certainty in the Mutual Fund Regulations.”
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