Mutual fund unitholders' consent must before winding up schemes, says SC

Trustees must seek consent of majority unitholders before closing a mutual fund scheme, and the Securities Exchange Board of India (Sebi) is entitled to conduct an inquiry and investigation when justified and necessary “to ascertain whether the trustees have acted in accordance with their fiduciary duty,” the Supreme Court ruled Wednesday.

The top court’s judgement came on a batch of pleas, including the appeal filed by Franklin Templeton, against the Karnataka High Court order restraining the company from winding up its six of mutual fund (MF) schemes without obtaining the consent from a majority of its investors.

A bench of justices S Abdul Nazeer and Sanjiv Khanna, while interpreting various provisions of the Sebi on winding up of mutual funds said that the regulations “rightly draw the distinction between creditors and the unit holders.”

Equating mutual fund holders with creditors or the home buyers under the relevant laws is “unsound and incongruous”, the SC said.

“The unit holders are investors who take the risk and, therefore, entitled to profits and gains. Having taken the calculated risk, they must also bear the losses, if any. Unit holders are not entitled to fixed return or even protection of the principal amount. Creditors, on the other hand, 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 unit holders,” the ruling noted.

Not taking consent of the unitholders after the trustees decide to wind up the debt schemes “debilitates their role and right to participate,” the apex court noted.