Franklin Templeton Trustee … vs Amruta Garg And Ors. Etc. Etc. on 12 February, 2021


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Supreme Court of India

Franklin Templeton Trustee … vs Amruta Garg And Ors. Etc. Etc. on 12 February, 2021

Author: Sanjiv Khanna

Bench: S Khanna, S A Nazeer

                                                                                                 REPORTABLE

                                                IN THE SUPREME COURT OF INDIA

                                                  CIVIL APPELLATE JURISDICTION

                                          CIVIL APPEAL NOS. 498-501 OF 2021
                                   (ARISING OUT OF SLP (C) NOS. 14288-14291 OF 2020)


                      FRANKLIN TEMPLETON TRUSTEE SERVICES
                      PRIVATE LIMITED AND ANOTHER         .....                                APPELLANT(S)

                                                     VERSUS

                      AMRUTA GARG AND OTHERS ETC.                                        ..... RESPONDENT(S)

                                                                     WITH

                                               CIVIL APPEAL NO. 502 OF 2021
                                         (ARISING OUT OF SLP (C) NO. 14734 OF 2020)

                                               CIVIL APPEAL NO. 503 OF 2021
                                         (ARISING OUT OF SLP (C) NO. 14929 OF 2020)

                                              CIVIL APPEAL NO. 508    OF 2021
                                         (ARISING OUT OF SLP (C) NO. 15205 OF 2020)

                                         CIVIL APPEAL NOS. 504-507 OF 2021
                                   (ARISING OUT OF SLP (C) NOS. 15008-15011 OF 2020)

                                                                      AND

                                                CIVIL APPEAL NO. 509 OF 2021
                                         (ARISING OUT OF SLP (C) NO. 15206 OF 2020)
Signature Not Verified

Digitally signed by
Neelam Gulati
Date: 2021.02.12
14:17:30 IST
Reason:




                         Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc.            Page 1 of 54
                                       ORDER
SANJIV KHANNA, J.

Leave is granted in the above captioned Special Leave

Petitions which emanate from the judgment dated 24 th 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 – 2),

(ii) Franklin India Ultra Short Bond Fund (Number of Segregated
portfolios – 1),

(iii) Franklin India Short Term Income Plan (Number of Segregated
portfolios – 3),

(iv) Franklin India Credit Risk Fund (Number of Segregated
portfolios – 3),

(v) Franklin India Dynamic Accrual Fund (Number of Segregated
portfolios – 3), and

(vi) Franklin India Income Opportunities Fund (Number of
Segregated portfolios – 2).

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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 2 of 54
Exchange Board of India (‘SEBI’) to hold that clause (c) to sub-

regulation (15) of Regulation 18 1 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 2 of the

Mutual Fund Regulations. To this extent, the judgment under

1 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.

2 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,—

(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:—

(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.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 3 of 54
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.

3. The objecting unitholders’3 (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
3 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.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 4 of 54
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.

4. 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 4 from the date of publication of
4 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 —

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 5 of 54
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.

5. 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

(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.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 6 of 54
was marginally lower;5 (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 15 th January, 2021.

Lastly and importantly, during the course of hearing on 2 nd 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.

5 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.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 7 of 54

6. 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 –

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.”

7. 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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 8 of 54
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.”

222. 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.”

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 9 of 54
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.

8. 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 – one bound by the consent, and others who

are not bound by consent. Consequently, the scheme would not wind

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 10 of 54
up. The intent behind the provision is to bind even those who do not

consent.

9. 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.”

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 “special” 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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 11 of 54
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.” 6

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.

10. 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.
6 See State of Madhya Pradesh and Another v. Mahendra Gupta and Others, (2018) 3 SCC 635.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 12 of 54

11. 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 members”. 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.”

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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 13 of 54
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.”

12. 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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 14 of 54
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.

13. In Shri Ishwar Chandra v. Shri Satyanarain Sinha and Others,7

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.”

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
7(1972) 3 SCC 383

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 15 of 54
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. …”
(emphasis supplied)

14. 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 mischief8. Logic referred to herein is not

8 See Bennion on Statutory Interpretation, 5th Edition, at 969.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 16 of 54
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.9 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 society10. Therefore, when there is choice between two

9 Ibid at 986.

10 Ibid at 971, quoting Griffiths LJ.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 17 of 54
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 consequences11.

15. 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 consequences12. The legislator in the present

11 See Principles of Statutory Interpretation by Justice G.P. Singh, 14 th Edition, at 50.

12 See Bennion on Statutory Interpretation, 5th Edition, at 980.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 18 of 54
case must, therefore, reflect and take remedial steps to bring about

clarity and certainty in the Mutual Fund Regulations.

16. 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.

17. 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:

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 19 of 54
“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.”

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 others13 had drawn
13 AIR 1918 Mad 1131

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 20 of 54
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…”

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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 21 of 54
positive votes as either denying or giving consent to the proposal for

winding up.

18. 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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 22 of 54
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.”

With some modifications, the principle can be applied in the

present case. Practical interpretation should be accorded greater

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 23 of 54
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.

19. 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.

20. In the first hearing before this Court on 3 rd December, 2020, we had,

without prejudice to the rights and contentions of the parties,

permitted the trustees to call a meeting of the unitholders to seek

their approval/consent for winding up. Steps in this regard were to be

taken within a period of one week from the date of the order.

Pursuant to the order, the trustees in their meeting held on 5 th

December, 2020 had approved the notices to be sent to the

unitholders of the six schemes. It was decided that the unitholders

were to be provided e-voting facility from 09:00 a.m. on 26 th

December, 2020 till 06:00 p.m. on 28 th December, 2020. Meeting by

way of video conferencing would be held on 29 th December, 2020 to
Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 24 of 54
seek approval of the unitholders, for or against the winding up of the

six schemes. The unitholders participating in the meeting could opt

to vote on 29th December, 2020, in the duration starting with the

commencement of the meeting till the conclusion of fifteen minutes

after the closure of the meeting.

21. By order dated 9th December, 2020, this Court had directed SEBI to

appoint an Observer for the e-voting by the unitholders scheduled

between 26th and 29th December, 2020. However, it was clarified that

the trustees were undertaking the exercise of e-voting and that SEBI

would appoint an Observer in terms of our directions. The results of

the e-voting, it was directed, would not be declared and would be

produced before this Court in a sealed cover along with the report of

the Observer appointed by SEBI.

22. SEBI, vide its letter dated 18th December, 2020, had appointed Mr.

T.S. Krishnamurthy, former Chief Election Commissioner of India, to

act as the Observer ‘regarding e-voting of the unitholders’ of the six

schemes. A Technical Assistance Team was also constituted by SEBI

to assist Mr. T.S. Krishnamurthy. The Technical Assistance Team

comprised the following persons:

(i) Mr. B.N. Sahoo, Chief General Manager, SEBI, Mumbai;
Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 25 of 54

(ii) Ms. Nayana Ovalekar, Chief Operating Officer, Central
Depository Services (India) Limited (CDSL), Mumbai;

(iii) Mr. K. Sriram, Practising Company Secretary and Scrutiniser,
Chennai;

(iv) Mr. M. Krishna, Assistant Director, Central Forensic Science
Laboratory (CFSL), Hyderabad; and

(v) Mr. Ch E Sai Prasad, Assistant Director, CFSL, Hyderabad.

23. Order of this Court dated 18 th January, 2021 records that Mr. T.S.

Krishnamurthy had submitted his report, and the e-voting results

recorded therein were read out in the Court. The Registry was

directed to scan the report and make e-copies of the Observer’s

report available to the counsels for the parties, including Advocates-

on-Record who had filed applications for intervention/impleadment.

Parties were given liberty to file objections to the Observer’s report/e-

voting results, with right to others to file response/reply to the

objections. It was also directed that the Court would first decide the

objections, the procedure to be followed and the question whether

the procedure under Regulation 41(1) in the facts of the present case

is mandated.

24. Order of this Court dated 25 th January, 2021, clarified that the Court

would first examine the objections to the e-voting results and the
Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 26 of 54
issue/question whether or not disbursal/payment to the unitholders

should be made. Interpretation of Mutual Fund Regulations and other

aspects would be examined and decided thereafter. This order also

granted liberty to the objectors to file an application to place on

record new facts, which had statedly come to their knowledge on 25 th

January, 2021. Option to file response/reply to the application

disclosing new facts was given to the opposite parties.

25. The Observer’s report states that the six schemes put together as on

3rd December, 2020 had 3,15,600 unitholders. The figure was

computed by consolidating folios on PAN basis. Out of this, 3,09,360

unitholders, amounting to 98% of the total, had either given their e-

mail ID or mobile number. In respect of 6,754 unitholders, neither e-

mail ID nor mobile numbers were available. On 11 th December, 2020,

notices via email were sent to 2,98,704 unitholders. On 17 th

December, 2020, information by way of SMS was sent to 5,872

unitholders on their mobile numbers. On 17 th December, 2020

information through SMS was sent to 10,548 unitholders where no e-

mail addresses were available. However, delivery of 1,766 SMSs

failed. Accordingly, the report observes that login IDs and passwords

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 27 of 54
were communicated to 3,09,052 unitholders amounting to 97.92% of

the total number of unitholders.

26. M/s. J. Sagar Associates, a law firm, was appointed as the

Scrutiniser for the e-voting process, its role being to oversee the

conduct of e-voting for all the six schemes in a fair and transparent

manner. On 9th January, 2021, the Scrutiniser had submitted its

report to the Observer setting out the final results. The Observer in

paragraph 36 of his report has reproduced the results as set out in

the Scrutiniser’s report, in a tabular form, which is as under:

       S.    Scheme                    Total valid          Voted For         Voted Against
       No.                               votes          Number          %    Number         %
        1.   Franklin Templeton
                                         53805           52075      96.78%    1730        3.22%
             Ultra Short Bond Fund
        2.   Franklin Templeton Low
                                         16920           16452      97.23%    468         2.77%
             Duration Fund
        3.   Franklin Templeton
                                          7550           7370       97.62%    180         2.38%
             Dynamic Accrual Fund
        4.   Franklin Templeton
                                         11634           11398      97.97%    236         2.03%
             Credit Risk Fund
        5.   Franklin Templeton
             Income Opportunities         5876           5693       96.89%    183         3.11%
             Fund
        6.   Franklin Templeton
             Short Term Income           19634           19165      97.61%    469         2.39%
             Plan



27. The aforesaid results have been computed/tabulated on unitholders’

vote on one vote per unitholder basis. The trustees have also filed

computation before us on the basis of one vote per unit held, i.e.

proportionate or value basis. If calculated on proportionate/value

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 28 of 54
basis, the percentage of votes cast in favour of winding up would

increase as per the table given below:

                                               Voted in Favour           Voted in Favour
        S.
                      Scheme               (by No. of unit-holders)      (by No. of units)
        No.
                                             Number            %        Number             %
              Franklin India Ultra Short
        1.                                   52,075         96.78%    2,206,249,485       98.06%
              Bond Fund
              Franklin India Low
        2.                                   16,452         97.23%    621,199,506         98.08%
              Duration Fund
              Franklin India Dynamic
        3.                                   7,370          97.62%    206,632,312         99.18%
              Accrual Fund
              Franklin India Credit Risk
        4.                                   11,398         97.97%    914,140,990         98.05%
              Fund
              Franklin India Income
        5.                                   5,693          96.89%    380,792,621         97.37%
              Opportunities Fund
              Franklin India Short Term
        6.                                   19,165         97.61%     6,783,130          97.66%
              Income Plan



28.    Three other aspects may be noted:

       (i)     Regulation 18(15)(c) mandates and requires consent of the

unitholders for winding up, but does not prescribe any mode or

manner for taking consent. Therefore, by implication, the Regulation

gives option of holding a physical meeting, postal poll or e-poll. In

physical meetings, voting may be by show of hands or by holding a

poll. Show of hands is quick and an easy way to administer option

but would not reflect and take into account the relative number of

units held by the unitholders. Unitholders with fewer units have the

same say as those with a greater number of units. It is not a good

option when the proposal is contested. Poll, whether in a physical

meeting, by way of a postal ballot or e-poll, has an advantage as

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 29 of 54
each unitholder has one vote for every unit/share held. Therefore, in

cases where there is huge disparity between the units held, or

possibility of contest/dispute, poll is the preferred method for

ascertaining preference of the unitholders. The value of poll lies in

the fact that the weighted voting strength based upon the number of

units gives more accurate and precise results. Majority consent of

the investors/unitholders should depend upon the number of units

held by them14.

(ii) Polls are akin to election. Poll results like the election results

are not to be lightly interfered with. More so, when it is fault of a third

party and not of the proposer/successful candidate. Poll results like

election results are not to be regarded as vitiated by breach of rules

or mistake, until and unless the breach or mistake, it is proved has

materially affected the result of the poll. This general principle may

be deviated from only when poll/election is conducted so badly that it
14 Sections 107 to 110 of Companies Act, 2013 are express provisions and will accordingly
apply in case of meeting of shareholders.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 30 of 54
is not substantially in accordance with law as to elections, in which

case it would not matter whether the result was affected or not. 15

(iii) When the poll or voting is on issues or choices of commercial

nature, normally it is not a part of the judicial process for the court to

ferret out flaws by examining merits or wisdom of the unitholders

who have voted. The court is not equipped and should refrain from

entering into such oversights as doctrine of internal management,

institutional sovereignty and right to opt and decide come into play. 16

The unitholders are the best judge and are more conversant with

15 See Morgan v. Simpson [1975] QB 151.

16 See Fertilizer Corpn. Kamgar Union (Regd.) v. Union of India, (1981) 1 SCC 568.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 31 of 54
their own interests. All that is to be seen is that broad parameters of

fairness in the administration, bona fide poll/election, and that

fundamental rules of reasonable management of public business

have not been breached.

29. The objectors to the e-voting results are sixteen in number and, as

per details, they hold 20,02,114.041 units in the six schemes of value

of Rs. 8,69,28,507.62. In percentage terms, the share of objectors in

the total units is merely 0.024% and their share in the total AUM is

0.033%. (Chennai Financial Markets and Accountability, one of the

parties and an objector, does not hold any unit in the six schemes.

Trustees/AMC have questioned the locus and the role of CFMA. We

are not presently examining the said aspect which is left open to be

examined and decided, if required, later.)

30. Faced with the aforesaid position, the objectors have submitted that

only 38% of the unitholders had voted. On the other hand, the

trustees/AMC have submitted that the votes cast represent

approximately 54% of the total number of units outstanding, i.e.

nearly 54% of the unitholders on proportionate/value basis. Though

we have not been provided with scheme-wise break-up of the votes

which should have been given, it does not matter in view of the
Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 32 of 54
overwhelming consent for winding up of the schemes. The trustees

also state that a large number of corporate votes were rejected by

the Scrutiniser on technical grounds of absence of corporate

formalities for authorisation of the concerned representatives. The

rejected votes represent 1,997 unitholders holding approximately

68.10 crore units valued at Rs. 2,464 crores. Further, an

overwhelming majority of the rejected votes – Rs. 2,420 crores by

value, 98.6% by units and 97.5% by number of unitholders – were in

favour of the scheme. Accordingly, if these rejected votes are taken

into consideration, the total votes being polled in proportionate terms

would increase from approximately 54% to approximately 62%.

31. We do not think we are required to go into the said aspect in great

detail. As already held above, the unitholders were given a chance

and option to vote and about 38% of the unitholders in numerical

terms and 54% in value terms had exercised their right to give or

reject consent to the proposal for winding up. In the absence or need

for minimum quorum, which is not provided or stipulated in the

Regulations nor mandated under law, the e-voting result cannot be

rejected on the ground that 38% of the unitholders in numerical

terms and 54% in value terms, even if we do not account for the

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 33 of 54
rejected votes, had participated. This cannot be a ground to reject

and ignore the affirmative result consenting to the proposal for

winding up of the six mutual fund schemes.

32. Primary objection raised relates to appointment of M/s. KFin

Technologies Pvt. Ltd. (‘KFin Technologies’) for providing e-voting

platform services. The submission being that KFin Technologies is an

associate/sister of M/s. Karvy Stock Broking Limited. This company,

M/s. Karvy Stock Broking Limited, indicted by an adverse order

dated 24th November, 2020 under Sections 11(1), 11(4) and 11B of

the SEBI Act read with Regulation 35 of SEBI (Intermediary)

Regulations, 2008, is barred from accepting new clients on grounds

of investor fraud, falsification of records of investors/clients and

misuse of client funds.

33. This argument does not impress us and cannot be a ground to reject

the results. KFin Technologies, it has been pointed out, has been

providing e-voting platform services to listed public limited

companies ever since the Ministry of Corporate Affairs mandated

them to secure approval of the resolutions by the shareholders

through electronic voting. The e-voting platform of KFin Technologies

is certified by the Ministry of Corporate Affairs approved certification
Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 34 of 54
agency, viz. STQC Website Quality Certification Services. KFin

Technologies has conducted more than 4,500 e-voting events since

2013. To reject the voting results on this rather specious submission

would cast doubts with serious repercussions on e-voting results of

several reputed companies. The objectors are unable to point out

even a single instance where KFin Technologies has been indicted.

In the present case, the e-voting exercise was also supervised by a

team of technical experts, including Mr. M. Krishna and Mr. Ch E. Sai

Prasad, Assistant Directors, CFSL, Hyderabad.

34. Faced with the aforesaid situation, learned counsel for the objectors

have drawn our attention to the report of the Assistant Directors,

CFSL, Hyderabad which has been enclosed as Annexure-11 to the

Observer’s report. The relevant portion of the analysis in the report of

the forensic experts is as under:

“C. The Website ‘https://evoting.kfintech.com’ fulfills the
requirement of the e-Voting Website Quality
Certification Scheme Quality Level II as per the STQC
Website Quality Certification Services, MeitY, Govt. of
India, New Delhi. The certificate bears the approval
Number CQW/198 and valid up to 4th Feb, 2022.

OBSERVATIONS OF THE ANALYSIS

1) The E-Voting took place during the period 26th
December 2020 to 28th December 2020.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 35 of 54

A. Analysis of the E-Votes cast has been performed
on the basis of E-Voting Logs, E-Voting
Transaction Logs and the E-Voting related data
taken from the Master Data Base. The below
table provides the details of the E-Votes cast
against each Scheme.

                                                                          No. of
                                                               No. of                 No. of Votes
                                   First Vote    Last Vote               Votes as
           S.      Scheme                                     Votes as                   as per
                                   Cast Date     Cast Date               per the e-
           No.      Name                                       per the                transaction
                                   and Time      and Time                 Voting
                                                              Database                    logs
                                                                           Logs
                 Franklin India
                                  26 December   28 December
            1    Credit    Risk                                 11795     11795          11795
                                   2020 0900     2020 1800
                 Fund
                 Franklin India   26 December   28 December
            2    Dynamic              2020          2020        7680       7680           7680
                 Accural Fund         0900          1801
                 Franklin India
                                  26 December   28 December
                 Income
            3                         2020          2020        5995       5995           5995
                 Opportunities
                                      0900          1759
                 Fund
                 Franklin India   26 December   28 December
            4    Low Duration         2020          2020        17122     17122          17122
                 Fund                 0900          1800
                 Franklin India   26 December   28 December
            5    Short    Term        2020          2020        19897     19897          19897
                 Income Plan          0900          1800
                 Franklin India   26 December   28 December
            6    Ultra    Short       2020          2020        54247     54247          54247
                 Bond Fund            0859          1803
                                   Total                       116736     116736         116736


B. 0.5% of the above votes have been selected
randomly; scheme wise and the same have been
verified in the Master Database. The screen
captures of the same are provided at Annexure I
(Page Nos. 01 to 16). On verification the E-

Voting Logs match with the Master Database.

2) Analysis of the Instapoll Votes during the AGM
VCs conducted on 29th December 2020 indicate:

A. On 29th December 2020, AGM through video
conferencing for the SIX Schemes took place at
scheduled time intervals. The details are given
below.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 36 of 54
B. It was informed by KFin Tech. that the customers
who had voted already during the E-Voting on
26th December 2020 to 28th December 2020 are
not allowed to vote again during the Insta Voting
process.

C. The below table shows the details of Instapoll
Votes Cast against the each Scheme:

First Insta Last Insta
AGM VC AGM VC
S. Scheme AGM Vote Cast Vote Cast Instpoll
Start Date End Date
No. Name ID Date and Date and Votes
and Time and Time
Time Time
Franklin India
29-12-2020 29-12-2020 29-12-2020 29-12-2020
1 Credit Risk 4274 64
1400 1500 14:01 14:07
Fund
Franklin India
29-12-2020 29-12-2020 29-12-2020 29-12-2020
2 Dynamic 4275 33
1200 1300 12:04 12:48
Accrual Fund
Franklin India
Income 29-12-2020 29-12-2020 29-12-2020 29-12-2020
3 4276 30
Opportunities 1515 1615 15:16 16:00
Fund
Franklin India
29-12-2020 29-12-2020 29-12-2020 29-12-2020
4 Low Duration 4277 93
1045 1145 10:46 11:58
Fund
Franklin India
29-12-2020 29-12-2020 29-12-2020 29-12-2020
5 Short Term 4278 104
1630 1730 16:17 17:41
Income Plan
Franklin India
29-12-2020 29-12-2020 29-12-2020 29-12-2020
6 Ultra Short 4279 356
0900 1030 09:00 10:34
Bond Fund
Total 680

In particular, our attention was drawn to paragraphs 4 and 5 of

the report which records that complete database activity monitoring

logs were not provided and that, for many votes, the IP address

captured was the IP address of the Load Balancing Server of KFin

Technologies. It was submitted by some of the objectors that the

report given by KFin Technologies should be sent to the forensic

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 37 of 54
experts for their comments. Paragraphs 3 to 5 of the analysis report

of the forensic experts, reads:

“3) The event logs of the two Web Servers (P1WB1WV-
1122 and P1WB1WV-1146) and the database servers
(P1DBWV-1707) have been provided by the KFin Tech
Pvt. Ltd. The analysis of these event logs reveals no
abnormal events indicating the normal functionality of
the systems.

4) The analysis of the E-Votes, Instapoll Votes cast on
the basis of the IP Addresses indicate that there are
instances of casting multiple votes from the same IP
Address. The details are provided at Annexure I (Page
Nos. 17 to 104). The customer details (scheme wise)
wherein the same IP address has been logged for
multiple E-Votes have been provided at Annexure I
(Page Nos. 105 to 1988).

On analysis it is observed that for many of the
votes the IP Address captured is 10.41.3.252,
which is the IP Address of the Load Balancing
Server of KFin Tech. KFin Tech informed that the
capturing of the public IP Addresses of the
incoming requests for E-Votes was effective only
after 26th December 2020 at 1231 Hrs. due to
issues in implementing the configuration. The
details of these E-Votes are provided at Annexure
I (Page Nos. 1989 to 2928).

5) The complete Database Activity Monitoring Logs
could not be provided by the KFin Tech Pvt. Ltd.”

35. The trustees/AMC and KFin Technologies have disputed paragraph

5 of the report stating that database monitoring logs were provided to

the forensic experts. However, we need not go into the said aspect,

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 38 of 54
for, in our opinion, paragraph 4 of the report is being misread and

misunderstood by the objectors. It is correct that for some of the

votes, the IP address 10.41.3.252 as captured was that of the Load

Balancing Server of KFin Technologies. However, the report also

records that KFin Technologies has explained that due to technical or

implementation issues it was able to capture public IP address of e-

votes after 1231 hours on 26 th December, 2020. Paragraph 4 states

that details of the customers, scheme-wise, where the same IP

address has been logged for multiple e-votes, had been provided to

the forensic experts. Clearly, the details of each customer /unitholder

where one or same IP address was used for casting multiple votes

was furnished. It is not the case of the objectors that any of the

unitholders/voters have complained of impersonation or misuse of

their identity. KFin Technologies has explained that in total 1,17,416

votes were registered in the system. The source IP address was

captured in 88,293 cases. In 29,123 cases, votes with Load

Balancing Server IP was captured in the IIS logs for which end-user

IP report in the firewall between 26 th December 2020 (09:00 a.m. till

12:31 p.m.) was available. They have, by way of data flow diagram,

elucidated and explained the e-voting platform. The e-voting platform

on valid login would issue a one-time password which would be sent
Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 39 of 54
via e-mail or SMS to the unitholder. This one-time password was

randomly and automatically generated without human intervention.

The unitholder was required to enter the one-time password and

thereupon cast their vote. After the vote was cast, acknowledgement/

confirmation e-mail/SMS was sent to the registered voter’s ID/mobile

number. Further, the data stored in the database was one-way

encrypted. E-voting window was not open and the application would

not allow the user or the unitholder to enter any details. Importantly,

the Observer’s report mentions that before the e-voting, a thorough

examination of the system was done by the experts. The report

(Annexure-11) records that to check, 0.5% of the votes were

selected randomly and on verification, e-logs were matched with the

master database. Further on examination and analysis of the event

logs of the two web servers no abnormal events were witnessed,

indicating normal functionality of the system. We are satisfied with

the explanation given by the trustees/AMC and KFin Technologies

with reference to the observations in the report of the forensic

experts from CFSL.

36. The third objection to the e-voting results emanates from the notice

to the unitholders, which, it is inter alia submitted, misguides and

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 40 of 54
effectively prompts and canvasses the unitholders to give their

consent for winding up. Our attention was specifically drawn to the

following paragraphs of the notice for e-voting and the meeting of the

unitholders to highlight the aforesaid submission:

“The Trustee has given due consideration to the
judgment of the Hon’ble High Court and preferred an
appeal to the Hon’ble Supreme Court of India on certain
aspects of the judgement. However, with a view to
proceed with orderly realization of value form Scheme
assets and distribution to Unitholders at the earliest, the
Trustee had sought permission of the Hon’ble Supreme
Court to seek the approval of Unitholders for winding up
the Schemes, which permission was granted by the
Hon’ble Supreme Court on December 3, 2020 without
prejudice to the rights and contentions of all parties.

xx xx xx

As disclosed in the Scheme Portfolio published on
the website (www.franklintempletonindia.com),
Unitholders may note that a significant portion of
the scheme assets is held insecurities and the
liquidity position of each security, and consequently
the value realized may vary depending on the time
available to generate liquidity. An orderly liquidation
would obtain better value for Unitholders.

xx xx xx

For all the reasons explained above, the Trustee
believes that it will be beneficial for Unitholders to
vote ‘YES’ to the proposed resolution.”

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 41 of 54

37. At the first blush there does appear to be merit in the contention,

albeit the notice for e-voting and meeting of the unitholders has to be

read in entirety. We must also account for the history leading to the

e-voting process. It is but obvious that the trustees had already taken

a decision to wind up the six schemes. Regulation 39(3) requires the

trustees to disclose the circumstances leading to winding up of the

schemes. The trustees accordingly, in the notice for e-voting and

meeting of the unitholders, had furnished their explanation and

reason for winding up of the six schemes and had also stated as

under:

“The Trustee is providing the following explanation to
help Unitholders assess the pros and cons of the voting
options available to them. There can be no guarantee
that the outcomes will be exactly as the Trustee
expects. We urge Unitholders to carefully consider the
following and seek appropriate advice and guidance in
making this important decision.

AUM as of Cash Voting “Yes” to the Voting “No” to the
December available for Resolution means opting for Resolution means opting for
1, 2020 distribution an orderly Winding-up of the the Scheme to be re-opened,
as of Scheme with a potential to potentially leading to
December 1, realize fair value for the distress sale of assets and
2020* assets loss of value
10,128 4,683 (i) The securities in the (i) The Scheme would be
(46.24% of Scheme can be liquidated required to reopen
AUM) in an orderly manner immediately and may
without the need to need an emergency
proceed with distress sale liquidation of securities, if
(as redemptions are not a high volume of
allowed) therefore enabling redemption is received.
orderly liquidation of the
portfolio assets at fair (ii) This may entail distress
value. The proceeds sales of securities in order
realized by the Scheme will to meet the redemptions

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 42 of 54
be distributed to the received. The market is
Unitholders in proportion to unlikely to have the
the units held by them, at liquidity to absorb such
regular intervals. large quantities of
securities over a short

(ii) This option will enable period of time and it may
recovery of maximum value not be possible to get bids
of securities held by the at reasonable prices for all
Scheme. securities in such
circumstances.

(iii) The Authorised Person
would be in a position to (iii) A distress sale of
take the most appropriate securities held in the
action with regard to portfolio could result in a
liquidation of each security rapid and steep decline in
as there will be no undue the NAV leading to
haste or selling pressure. substantial losses for
Unitholders (irrespective

(iv) The NAV would not be of market conditions.

                                         negatively impacted as          While the endeavor would
                                         liquidation would be orderly    be to minimize losses,
                                         and there would be no           however there is no
                                         need for distress sales.        assurance      that     the
                                                                         Scheme will be successful
                                   (v) Unitholders will not be           in doing so.
                                         required to apply for

redemptions. Unitholders (iv) Unitholders will need to
will receive regular prorate apply for redemptions if
distributions of investment they wish to receive
proceeds as assets are monies. This may result in
systematically liquidated by disproportionate
the Scheme. distribution of any cash
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.
                                                                                                        ”

The controversy relating to winding up of the six mutual fund

schemes has been in the public domain for a long time. The court

would also take judicial notice that the unitholders were aware and

conscious of the litigation against the winding up, including the

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 43 of 54
procedure. At the same time, many in the 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 – 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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 44 of 54
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:

1. Franklin India Ultra Short Bond Fund (FIUBF)

2. Franklin India Short Term Income Fund (FISTIP)

3. Franklin India Credit Risk Fund (FICRF)

4. Franklin India Low Duration Fund (FILDF)

5. Franklin India Dynamic Accrual Fund (FIDA)

6. 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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 45 of 54
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.”

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 23 rd April,

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 46 of 54
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 23 rd 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.

38. 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:

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 47 of 54

(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
Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 48 of 54
to their letter of engagement was issued on 22 nd 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.

39. 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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 49 of 54
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
Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 50 of 54
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.

40. In the present case, we do not think the procedure prescribed by

Regulation 4117 is required to be followed as the trustees themselves

17 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.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 51 of 54
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.

41. 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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 52 of 54
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.

42. 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 2 nd 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

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 53 of 54
objecting unitholders regarding misfeasance, malfeasances, fraud

and the effect thereof.

………………………………..J.

(S. ABDUL NAZEER)

………………………………..J.

(SANJIV KHANNA)
NEW DELHI;

FEBRUARY 12, 2021.

Civil Appeals arising out of SLP (C) Nos.14288-14291 of 2020 etc. Page 54 of 54



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