SEBI makes unitholders’ consent a must for winding up mutual fund scheme

In the Frankin Templeton case, Supreme Court upheld that unitholders' consent was necessary.

The market regulator Securities and Exchange Board of India (SEBI) in its board meeting on December 28, made it mandatory for mutual fund (MF) trustees to take consent of unitholders’ when winding-up any MF scheme.

Franklin Templeton MF’s decision to wind-up six of its schemes in April 2020, had forced unitholders to move courts to question the legality of such a decision.

In the year-long legal tussle, the Supreme Court (SC) eventually upheld that unitholders’ approval was necessary for winding-up of any MF scheme.

SEBI in its board meeting stated that “the trustees shall obtain consent of the unitholders by simple majority of the unitholders present and voting on the basis of one vote per unit.”

However, if unitholders vote against such a wind-up, the scheme will be re-opened for investments and withdrawals from the second business day after the voting results are published.

SC in its order had said that after wind-up notice is sent to unitholders, fresh investments and redemptions in the schemes can be frozen, but after this unitholders’ consent on winding-up needs to be taken before moving forward.

Regulation 39 of SEBI’s MF regulations states that the fund house can close or wind-up an open-ended scheme if the trustees feel it is required or if 75 percent of the unitholders of a scheme pass a resolution to wind up the scheme or if SEBI directs the winding up in unitholders’ best interests.

Franklin Templeton had said that it exercised the first option, when deciding to wind-up six of its debt schemes.

However, certain unitholders of the schemes approached the courts, stating the fund house should have followed regulation 18(15)(c), which says trustees shall obtain consent of the unitholders before winding-up.

"The regulations now state that trustees can take the decision to wind-up, but the unitholders' consent will be a mandatory condition for the wind-up to be proceed. SEBI has now given the regulatory clarity needed for winding-up of mutual fund schemes," Abhinav Shrivastava,  co-founding Partner, GSL Chambers, who represented one of the unitholders in the Franklin Templeton case.

SEBI also made changes to MF regulations on accounting standards. From financial year 2023-2024, mutual funds will need to follow Indian Accounting Standard (IND AS). Some other changes were made “with respect to accounting related regulatory provisions to remove redundant provisions and to bring more clarity.”