Unitholders’ Consent Required For Winding Up Mutual Fund Schemes, Says Supreme Court

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The Supreme Court has ruled that the consent of unitholders will be required for winding up mutual fund schemes.

In exceptional cases, when trustees seek to wrongfully wind up a scheme, market regulator SEBI can intervene, the apex court said on Wednesday in the Franklin Templeton Asset Management Co. case.

The Supreme Court was hearing an appeal filed by Franklin Templeton against the Karnataka High Court order, which had stopped the fund house from winding up six of its debt schemes without the prior consent of the investors.

In December last year, the apex court had directed Franklin Templeton to call a meeting of the unitholders to seek their consent to wind up the schemes. SEBI was asked to appoint an observer to oversee the e-voting process.

The top court clarified that it has not dealt with the specific facts of the Franklin Templeton case in the judgment but only clarified the legal position on the requirement of unitholders’ consent when the trustees seek winding up under Regulation 18(15)(c) of SEBI’s mutual fund rules.

Regulation 18(15)(c) directs the trustees of a mutual fund to obtain the consent of the unitholders when the majority of trustees decide to wind up or prematurely redeem the units.

In April last year, Franklin Templeton closed the six debt schemes citing redemption pressure and lack of liquidity in the bond market. Some unitholders challenged the move in the Karnataka High Court, which held that the schemes could not be wound up without the majority consent of unitholders.

The case then landed in the Supreme Court in an appeal by Franklin Templeton.

In February, the top court passed an order that Rs 9,122 crore should be disbursed among the unitholders of the six debt schemes. The bench had said the disbursal would be done in proportion to the unitholders’ interest in the assets. State Bank of India Mutual Fund was tasked with disbursing the money to the unitholders.

Wednesday’s judgment was pronounced by a bench of Justice S Abdul Nazeer and Justice Sanjeev Khanna.