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Securities and Exchange Board of India (Mutual Funds) Regulation, 1996: Regns. 18(15)(c) and 39 to 42 – Interpretation of – Winding up of six mutual fund schemes – High Court interpreting Regn 18(15)(c) and Regn 39(2)(a) held that the decision of the trustees to wind up a scheme under clause (a) to Regn 39(2) must muster the consent of the majority of the unit holders as per Regn 18(15)(c) – Case of SEBI, the trustees and the Asset Management Company that prior consent of the unit holders is not envisaged when the trustees, or SEBI directs winding up of a scheme in the interest of the unit holders participate – ‘Consent’ for the purpose of Regn 18(15)(c) refers to the consent of the majority of the unitholders present and voting – Harmoniously interpreting Regns 39 to 42, it is held that the consent of the unitholders, is not required before publication of the notices under Regn 39(3) – Consent of the unitholders should be sought post publication of the notice and disclosure of the reasons for winding up under Regn 39(3) – Thus, the High Court rightly held that the consent of unitholders of the scheme would be necessary if the majority of the directors of the trustee company decide to wind up a scheme. Regn 39(2)(a), 39(3) – Trustees – Power of – Held: There are sufficient guidance and safeguards in the Regulations itself on the power of the trustees to decide on winding up of the fund – It cannot be accepted that the trustees under clause (a) to Regn 39(2) have been given absolute and unbridled power to wind up a scheme – Language of clause (a) to Regn 39(2) states that the trustees must form an opinion on the happening of any event which requires the scheme to be wound up – Further, as per Regn 39(3), the trustees are bound to give notice disclosing the circumstances leading to the winding up of the scheme – Trustees are, thus, required to come to a conclusion that due to specific circumstances articulated in writing, the scheme is required to be wound up – Trustees hold the assets of the scheme in fiduciary capacity on behalf of the investors – They are experts in the field and, thus, conferred the power under Regn 39(2)(a) to decide whether or not a scheme should be wound up – Expression ‘occurrence of any event’ is not to be read in isolation but with the words ‘requires the scheme to be wound up’ – Read in this manner, there is no vagueness which can be described as transcending into realm of arbitrariness, on the other hand, the prerequisite statutory mandate is clear – This is not a case of excessive delegation wherein the legislative function has been abdicated and passed on to the trustees who can act as per their whims and fancies – Thus, the High Court’s holding that the opinion of the trustees under clause (a) to Regn 39(2) must be consented to; and that the decision of the trustees and SEBI to wind up a scheme is final and binding on the unit holders – Appeal before this Court – This Court in its earlier order accepting the poll results, directed winding up of six mutual fund schemes – As regards, interpretation of Regns 39 to 42 and their interrelation with Regn 18(15)(c) and constitutional validity of Regns 39 to 42, held: Regulations of 1996 do not suffer from the vice of manifest arbitrariness, thus, Regulations of 1996 constitutionally valid – Applying principle of harmonious construction to Regn 18(15)(c) with Regns 39 to 42, would mean that the opinion of the trustees would stand, but the consent of the unitholders is a pre-requisite for winding up – Securities and Exchange Board of India Act, 1992. Constitutional validity of 1996 Regulations – Held: Regulations of 1996 do not suffer from the vice of manifest arbitrariness – Since the Regulations are in the nature of economic Regulations, while exercising the power of judicial review, restraint would be exercised unless clear grounds justify interference – Views would not be supplanted for that of the experts as this can put the marketplace into serious jeopardy and cause unintended complications – Regs. 18(15)(c) and 39 to 42. Regn 18(15)(c) with Regns 39 to 42 – Interpretation of Regns 39 to 42, their interplay and harmonious construction with Regn 18(5)(c) – Held: Under clause (a) of Regn 39(2) the power of winding up of a scheme is vested with the trustees, under clause (b) with the unitholders and under clause (c) with the SEBI, however, under Regn 18(15)(c), the trustees are required to seek consent of the unit holders, when they by majority decide to wind up a scheme – Use of the word ‘shall’ in Regn 18(15)(c) is couched as a command – Expression ‘when the majority of the trustees decide to wind up’ in Regn 18(15)(c) manifestly refers to clause (a) to Regn 39(2) as this is the only Regulation which entitles the trustees to wind up the scheme – Regn 18(15)(c), when it refers to trustees’ decision to wind up, it implies the trustees’ opinion to wind up the scheme – Applying principle of harmonious construction in the context of the Regulations of 1996, would mean that the opinion of the trustees would stand, but the consent of the unitholders is a pre-requisite for winding up – This interpretation does not in any way dilute or render clause (b) to Regn 39(2) meaningless or redundant – This clause applies where the winding up process is initiated at the instance of 75% of the unitholders – Clause (b) does not in any manner reflect that clause (c) to Regn 18(15) should not be read as it ordains in simple words – Regn 41 refers to and relates to the procedure and manner of winding up which cannot be equated with the requirement of consent as postulated by Regn 18(15)(c) – Regn 41(1) applies even in cases where 75% unitholders have passed the resolution for winding up of the scheme under Regn 39(2)(b) or where SEBI directs the scheme to be wound up in the interest of the unitholders under Regn 39(2)(c) – On the other hand Regn 18(15)(c) applies only when majority of the trustees form an opinion and decide to wind up or prematurely redeem the units in entirety, a situation covered by Regn 39(2)(a) – To ignore the mandate of Regn 18(15)(c) would nullify the legislative intent – Need to obtain consent of the unitholders is mandated under clause (c) to sub-Regn 15 to Regn 18 when the trustees under clause (a) to Regn 39(2) decide to wind up a scheme – To deny the unitholders a say, when Regn 18(15)(c) requires their consent, debilitates their role and right to by the unitholders in terms of the mandate of Regn 18(15)(c) is accepted. 561 A B C D E F G Unitholders and creditors – Difference between – Held: Regulations rightly draw the distinction between creditors and theunitholders – Unit holders are investors who take the risk and, thus, entitled to profits and gains and they must also bear the losses, if any – Unitholders are not entitled to fixed return or protection of the principal amount whereas creditors are entitled to fixed return as per mutually agreed contracts – Their rate of return is in the nature of interest and not profit or loss – Creditors are not risk takers as is the case with the unitholders – To equate the unitholders with either the creditors or the home buyers will be unsound and incongruous. Regn 53 – Provision regarding despatch of dividend warrents or proceeds by mutual fund and asset management company-AMC – Interpretation of – Clause (b) to Regn 53 requires that the AMC to despatch the redemption or repurchase proceeds within ten working days from the date of redemption or repurchase – Issue as regards whether the AMC or the trustees are bound to honour and pay the redemption or repurchase proceeds for requests received before the date of publication of notice in terms of Regn 39(3) – High Court held the expression ‘business’ in clause (a) of Regn 40 refers to business activity and, thus, would include payment of redemption proceeds to the unit holders, which would include the request for redemption received prior to the date of publication under Regn 39(3) – On appeal, held: There is a need for greater clarity on the factual matrix, which would be possible once the pending proceedings are concluded – In view thereof, several issues left open at this stage – Observations in the instant Order and the earlier Order not to 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, though legal interpretation of Regn 18(15)(c) and Regns 39 to 42 are conclusive and binding. Securities and Exchange Board of India Act, 1992: s. 11, 11B – Functions of Securities and Exchange Board of India-SEBI – Power to issue directions and levy penalty – Explained. G H Interpretation of statutes: Process of interpretation – Three stage, literal interpretation, propositional interpretation and purposive interpretation – Held: Interpretation is sometimes a three- stage process – At first, the words being interpreted should be understood according to their grammatical meaning in their literal and popular sense – In the second stage, it is considered whether in the given context the plain meaning is obscure as the text gives rise to choice of more than one interpretation, or the propositional interpretation fails to achieve the manifest purpose of the legislation – In such cases at the third stage, the court applying interpretative tools selects an interpretation advancing the legislative intent without rewriting the provision – Legislative intent is gathered from the object and purpose of the provision and the legislation – Courts do lean towards a pragmatic and purposive interpretation as there is an assumption that the draftsmen legislate to bring about a functional and working result. |
