SC says Section 11B of Sebi Act allows it to intervene in case of any violations, wrong decisions by trustees to wind up any scheme
Upholding the validity of the regulations of the Securities and Exchange Board of India (Sebi), the Supreme Court on Wednesday said the consent of majority unit holders will be required before closing debt schemes and the market regulator will have the power to intervene if the trustees violate the regulations.
A Bench comprising Justices S Abdul Nazeer and Sanjiv Khanna held that Section 11B of the Sebi Act allows the markets regulator to intervene in case of any violations and wrong decisions by trustees to wind up any scheme and also to prevent any intermediary to behave in a manner detrimental to investors.
Agreeing with the Karnataka High Court’s findings, the apex court said the very object of the Sebi Act is to preserve confidence of investors and to regulate the capital market, including mutual funds. “The power to regulate mutual funds, once accepted, would include the power to make regulations for winding up of a scheme of the mutual fund. Not framing any regulation in this regard would have amounted to dereliction of duty on the part of Sebi and subjected it to adverse comments.”
With regard to interpretation of the Sebi regulations governing winding up, the HC in its judgment on October 24 last year had expressed disappointment over ambiguities in the market regulator’s rules.
Rejecting Franklin’s stand that the trustees under clause (a) to Regulation 39(2) have been given absolute and unbridled power to wind up a scheme, the apex court said this argument challenging constitutional validity of the regulations “loses much of its sting and force” as there are sufficient guidance and safeguards in the regulations itself on the power of the trustees to decide on winding up of the fund.
The SC clarified that its Wednesday’s order shouldn’t be read as binding factual findings on conclusions on any disputed facts, which could be a subject matter of a show-cause notice and consequent decision before SAT or any other court of law. It also allowed Franklin Templeton and its unitholders to seek an early hearing from the SAT, which is hearing its appeal against Sebi’s decision to bar it from unveiling any new schemes for two years, besides a fine of Rs 5 crore imposed on it for closing the schemes.
An “overwhelming majority” of unitholders had voted in favour of the winding up of the six MF schemes which were wound up by FT on April 23 last year, citing difficulties in the bond market conditions due to pandemic.