WILL THE WATCH DOG AMEND THE
MUTUAL FUND REGULATIONS TO CURTAIL THE POWER OF THE TRUSTEES TO WOUND UP THE MF
SCHEMES
SEBI has drawn flak from the Karnataka High Court (HC) for its
handling of the Franklin Templeton (FT) crisis that led the asset manager
to shut six of its debt schemes.
SEBI did not possess a copy of the resolution dated April 23 passed by the
board of directors of FT trustees providing for winding up and did not respond
to the email of April 14 sent by the asset management company (AMC), the court
observed in its judgment
SEBI also failed
to reply to the letter dated April 20 addressed by the trustees, in which
permission and guidance of the regulator was sought for winding up the schemes.
The court further
observed that SEBI was not aware whether compliance of sub-clauses (a) and (b) clause (3)
of Regulation 39 of Mutual Fund Regulations was made by the trustees. This
clause deals with the trustees giving notice disclosing the circumstances
leading to the closure the scheme to the board and in two daily newspapers and
a vernacular one
SEBI did not bother to even enquire about the compliance with
clause (3) of Regulation 39 by the trustees of MF .
SEBI did not bother to ascertain whether redemptions and
borrowings ceased, assuming that compliance of clause (3) of Regulation 39 was
made,” the court
The court also
criticized SEBI for not placing on record a copy of an order appointing a
forensic auditor, and producing it before the court on September 2, even though
the hearing had commenced on August 12.
As a watchdog,
SEBI was expected to play a very proactive role by questioning the AMC,
trustees, and sponsor about the compliances with the provisions of the MF
regulations. The investors/unitholders of the said schemes will be justified in
their criticism that Sebi was a silent spectator,” the court observed.
HC’s observation
may lead SEBI to review the regulations governing the cessation of MFs, which
give power to the trustees to conclude schemes after taking unitholders’
consent without requiring any approval from SEBI.
As per Regulation
39 (2)(a), whereby 75 per cent of unitholders may require a scheme to be wound
up.
While upholding
the validity of Regulations 39 to 40 of the MF regulations, the court has
observed that when the trustees decide to wind up a scheme by taking recourse
to sub-clause (a) of clause (2) of Regulation 39, the trustee company is bound
by its statutory obligation under sub-clause (c) of clause (15) of Regulation
18 to obtain the consent of unitholders.
SEBI now has the
option of challenging the judgment by filing a special leave petition before
the Supreme Court (SC). “SEBI may not immediately change the regulation
pertaining to winding-up of schemes, but will appeal to the SC on the
observation that it didn’t act proactively
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