Why the confusion? Regulation 39 of SEBI`s MFI regulations specifically address the “resolution” of systems. This regulation stipulates that the fund house may close an open system if the directors have an urgent need, if 75% of the shareholders of a system adopt a decision to liquidate the system or if SEBI directs the liquidation in the best interests of shareholders. Each of these three reasons is sufficient. Investors were not happy. They referred to Regulation 18 (15) (c). This regulation stipulates that the directors have obtained the consent of the shareholders when the majority of the directors decide to liquidate the plans. This error was the reason why some angry investors took the fund`s house to court. But Regulation 18 remains silent on the nature of the majority and seeks the agreement of the shareholders. According to the High Court, this approval can only be a simple majority.

The High Court explained that shareholder agreement is necessary even if the directors themselves decide that they are dissolved. In short, regulations 18 and 39 must be understood consistently; Something that the fund house and the SEBI have not done. At the heart of the legal battle between Franklin Templeton Mutual Fund and some of its investors, who brought him to court earlier this year, is the liquidation of six debt funds without obtaining shareholder approval. On October 24, Karnataka High Court decided that the fund`s house had to get investor approval before closing the plans. In doing so, it rejected the arguments of the Fund and the Securities and Exchange Board of India (SEBI) that the SEBI rules should not obtain investor approval prior to liquidation. Franklin Templeton did both. Since the regulations (Regulation 39) explicitly stipulate “liquidation,” they did everything SEBI had planned in the event that a fund house did in fact liquidate a system prematurely. Didn`t Franklin Templeton ask for the agreement of the unitholders? In its argument, the fund`s house stated that it had asked shareholders to approve the award of an authority (trustee or Deloitte) to oversee the liquidation of the systems and return money to investors. This is a direct link between the consent referred to in Regulation 18-15-c and the authorization that Regulation 41 requires. The fund houses had stated in court that there was no difference between the word “authorization” and “consent.” The High Court also advanced this argument.

He reminded the fund home that the authorization sought under Regulation 41 “is only about who will take action to dissolve the plan … authorization under Regulation 41 has nothing to do with the decision to set up a system. The Karnataka Supreme Court has firmly considered the obligations of directors, as expressed in Regulation 18. “An obligation is a legal obligation to do or not to do any act,” she said. But doesn`t Regulation 39 give both trustees and 75% of investors, both, the power to dissolve a system? She reminded Franklin Templeton and SEBI that 75 per cent of shareholders who meet and choose to dismantle a system differ from directors who obtain shareholder approval after the directors have received a call for liquidation (in accordance with Regulation 18-15-c). Franklin Templeton also invoked two other “dissolution” regulations. Regulation 40 stipulates that the plan must cease all withdrawals and investments immediately after the directors of a fund house have decided to dismantle a system. Regulation 41 provides that the directors then obtained the consent of the shareholders to authorize the directors or any other person to take over the liquidation process by a simple majority.