2021 INSC 0303 Page 1 of 77 REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 498 -501 OF 202 1 FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANOTHER ... .. APPELLANT(S) VERSUS AMRUTA GARG AND OTHERS ETC . ... .. RESPONDENT(S) W I T H CIVIL APPEAL NO. 502 OF 202 1 CIVIL APPEAL NO. 503 OF 202 1 CIVIL APPEAL NOS. 504 -507 OF 202 1 CIVIL APPEAL NO. 508 OF 202 1 CIVIL APPEAL NO. 509 OF 202 1 SPECIAL LEAVE PE TITION (CIVIL) NO. 1486 OF 2021 A N D SPEC IA L LEAVE PETITION (CIVIL) NO. ______ OF 2021) (ARISING OUT OF DIARY NO. 1563 OF 2021) O R D E R SANJIV KHANNA , J. By the order dated 12 th February 2021, inte rpreting Regulation 18(15)(c) of the Securities and Exchange Board of India ( Mutual Page 2 of 77 Fund s) Regul ations, 1996 ( hereafter referred to as ‘Regulations’ ) and accepting the poll results , we have directed winding up of six mutual fund schemes : (i) Franklin India Lo w Duration Fund (Number of Segregated portfolios – 2), (ii) Franklin India Ultra Short Bond F und (Nu mber of Segregated portfolios – 1), (iii) Franklin India Short Term Income Plan (Number of Segregated portfolios – 3), (iv) Franklin India Credit Risk Fund (Number of Se gregated portfolios – 3), (v) Franklin India Dynamic Accrual Fund (Number of Segregated port folios – 3), and (vi) Franklin India Income Opportunities Fund (Number of Segregated portfolios – 2). 2. We would now proceed to interpret Regulations 39 to 42 and the ir interrelation with Regulation 18(15)(c) . We shall also examine and decide the challenge to the con stitutional validity of Regulations 39 to 42 . As elucidated in the course of hearings and reflected in the order dated 12 th February 2021 , it would be inoppor tune to decide and dispose of these appeals, as facts remain disputed and are sub - judice al ong wit h other substantive issues in the adjudication Page 3 of 77 proceeding s under the Securities and Exchange Board of India Act, 1992 (hereafter referred to as the ‘SEBI Act ’). The forensic r eport of the auditors , possibly the foundation of the show cause notice(s ), is a subject matter of consideration before the statutory authorities that are bestowed with wide powers. It is not anyone’s case that the statutory adjudication proceedings should be eschewed or nullified . At the same time, we are not inclined to dispos e of th ese appeals as this would not be in the interest of the unitholders , who are hopeful , yet concerned and apprehensive. Final and conclusive adjudication , on contested factual and related issues, post t he statutory adjudication would be in the interes t of th e parties. No pre judice should be caused . Directions to await the orders in the adjudication proceeding have been incorporated in the order dated 12 th February 2021. We hope and trust that the proceedings under the SEBI Act would conc lu de expeditiou sly. Ge neral overview of the Regulations 3. We shall begin with an overview of the Regulations as they would aid us in deciding the two issues ; though , to avoid prolixity , we are not reprodu cing the Regulations . We would subsequently se lectively quote the R egulation s requiring interpretation . 4. The Regulations envisage a three -tier structure for mutual funds in the form of the sponsor, the board of trustees or the trustee Page 4 of 77 company , and the asset management company (the AMC). The sponsor , as defined by Regulatio n 2(x), mean s a person who, acting alone or in combination with another body corporate, establishes a mutual fund . For this purpose, the sponsor is required to make an application to the Securities and Exchange Board of India (here inafter referred to as th e ‘SEBI’ ) in the prescribed form for registration of the mutual fund. Chapter II of the Regulations spell s out the eligibility criteria and requirements for registration of a mutual fund. 5. The term ‘trustees’ has been defined in R egulation 2 (y) to mean th e board of trustees or the trustee company who hold the property of the mutual fund in trust for the benefit of the unitholders. The expression ‘unit’ has been defined in Regulation 2 (z) to mean the interest of the unitholder s in t he scheme , which consists of each unit representing one undivided share in the assets of the scheme , and the term ‘unitholder’ ha s been defined in Regulation 2 (z)(i) to mean a person holding a unit in the scheme of a mutual fund. 6. The AMC is a company, ap proved by SEBI under Regu lation 2 1(2), which undertakes business activities in the nature of management and advisory services provided to the poo led assets. The services Page 5 of 77 may be specified by SEBI from time to time. The AMC is forbidden by the Regulations fr om acting as a trustee of any mut ual fund. 7. Chapter III relates to the constitution and management of mutual funds and operation of trustees etc. Regulation 14 stipulates that a mutual fund shall be constituted in the form of a trust and the instrument of the trust shall be in the form of a deed, registered under the provisions of the Indian Registration Act, 1908 , executed by the sponsor in favour of the trustees. Regulation 15(1) requires that the trust deed shall incorporate such clauses as are mentioned in the Third Schedule of the Reg ulations, and such other clauses as are necessary for safeguarding the interests of the unitholders. Regulation 15(2) mandates that no trust deed shall contain a clause which has the effect of – (a) limiting or extinguishin g the obligations and lia bilities of the trust in relation to any mutual fund or the unitholders; or (b) indemnifying the trustees or the AMC for loss or damage caused to the unitholders by acts of negligence or acts of commission or omission on part of th e trustees or the AMC. Re gulation 16 itemises the criteria for disqualification from appointment as a trustee. In effect, it stipulates the eligibility requirements for appointment of the trustees. In particular, it states that two -third s of the trustees s hall be independent perso ns, not associated with the sponsors in any manner. Further, a person Page 6 of 77 appointed as a trustee of a mutual fund is not eligible to be appointed as a trustee of another mutual fund. An AMC and its directors (including independent dire ctor), officers or employ ees are ineligible to be appointed as a trustee of any mutual fund. Regulation 17 requires prior approval of SEBI before a person is appointed as a trustee. In the case of existing trustees of any mutual fund, they may form a trust ee company to act as a tr ustee, albeit with prior approval of SEBI . The trustees are bound by the Code of Conduct specified in the Fifth Schedule, as well as general and specific due diligence mandates. 8. Regulation 18 is critical as it elaborately enlists t he rights and obligations of the trustees, in as many as 29 sub -regulations. The trustees and the AMC, as per Regulation 18(1), can enter into an investment management agreement with the prior approval of SEBI . Such an agreement must contain clauses mentio ned in the Fourth Schedul e and o ther clauses as are necessary for the purpose of making investments. The sub -regulations enumerate the requirements to be satisfied before a scheme is launched by the AMC. They obligate that the trustee shall ensure that the AMC has been diligent in empane lling the brokers, and in monitoring securities transactions with the brokers and in avoiding undue concentration of business with any broker. The trustees have to also Page 7 of 77 ensure and check that the AMC has not given any undue o r unfair advantage to any associ ates or dealt with any of its associates in any manner detrimental to the interest of the unitholders and that the transactions entered into by the AMC are in accordance with the regulations and the scheme. The trustees are entitled to call for deta ils of transactions in securities by the key personnel of the AMC in their own name or on behalf of the AMC and report the same to SEBI , as and when required. The sub -regulations require the trustees to carry out quarterly reviews of all transactions betwe en the mutual funds, the AMC and its associates. The trustees are to also review the net worth of the AMC on a quarterly basis . In case of any shortfall in net worth, the trustees we re to ensure that the AMC makes up for the shortfall in terms of Regulatio n 21(1) (f). 1 The trustees are to furnish to SEBI , on a half -yearly basis, a report on the activities of the mutual fu nd with certificates that there have been no instances of self -dealing or front running by any of the trustees, directors or key personnel of the AMC, and that the AMC has been managing the schemes independently of any other activities, and in case any act ivities of the nature referred to in Regulation 24(b) have been undertaken by the AMC, that it has 1 The position post the SEBI (Mut ual Funds) (Amendment) Regulations, 2021 with effect from 5 th Marc ch 2021 has not been examined. Page 8 of 77 taken adequate steps to ensure that the interes ts of the unitholders are protected. 2 9. Chapter IV of the Regulations relates to the constitution and management of the AMC and the custodian. The AMC is appointed by the sponsor , or by the trustee , if so authorised by the trust deed . However, the appointm ent needs approv al by SEBI under Regulation 21 (2) . As per Regulation 20 (2), the appointment of the AMC can be te rminated by majority of the trustees or by 75% of the unitholders of the scheme. Regulation 20 (3) states that any change in the appointme nt of t he AMC is subject to the approval of SEBI and the unitholders. Regulation 21 enumerates the eligibility criteria for appointment as an AMC . T he directors of the AMC should be persons having adequate professional experience in finance and financial s ervices related fields and should not be found guilty of moral turpitude or convicted of any economic offence or violat ion of any securities law s. The key personnel of the AMC should not have been found to be guilty of the above , nor should they have worke d for a ny AMC/mutual fund/intermediary during the period when its registration was suspended or cancelled by SEBI . The board of directors of the AMC must have at least 50% of directors who are not associate s, or associated in any manner with the sponsor or any 2 Legal effect of Regulation 24 has not been examined. Page 9 of 77 of its subsidiaries or the trustee. The net worth of the AMC should not be less than Rs.50 crores. Regulation 24 specifies the restrictions on the business activities of the AMC. Regulation 25 specifies the obligations and the responsibilities of the AMC, wh ich include tak ing reasonable steps and exercis ing due diligence to ensure that the investment of funds pertaini ng to any scheme is not contrary to the provisions of the regulations and the trust deed. The AMC is responsible for the acts of commissi on or o mission by its employees , or persons whose services have been procured by the AMC. Sub -regulation (6) states tha t the AMC and its directors, notwithstanding any contract or agreement, shall not be absolved of the liability to the mutual fund for the ir acts of omission and commission, while holding such position or office. 10. There are a number of stipulations and rest rictions to ensure objectivity, fidelity and transparency in business transactions by the AMC and compliance with the Regulations. A syst em of regulation involving checks , responsibility and po wer of free decision is envisaged. The Chief Executive Officer, by whatever name called, is mandat ed by sub -regulation (6A) 3 to Regulation 25 to ensure that the mutual fund complies with all the provi sions of the Regulations, guidelines and circulars issued in relation thereto from time to time 3 SEBI (Mutual Funds) (Second Amendment) Regulations, 2020, w.e.f. 29.10.2020 Page 10 of 77 and that the investments made by the fund managers are in the interest of the unitholders. This officer is responsible for the overall risk management function of the mutual fund. Sub -regulation (6B )4 to Regulation 25 states that the fund managers, whatever be th e designation, shall ensure that the funds are inve sted to achieve the objectives of the scheme and in the interest of the unitholders. 11. Chapter V dea ls wit h schemes of mutual fund s and Regulation 28(1) thereunder states that no scheme shall be launched by the AMC unless it is approved by the trustees a nd a copy of the offer document has been filed with SEBI . Regulations 32 and 33 pertain to the listing and r epurchase respectively of units in close -ended schemes, while Regulation 35 deals with the allotment of units and refunds of moneys. In terms of Reg ulation 38, guaranteed return is not to be provided in a scheme, unless such returns are fully guarant eed by the sponsor or the AMC, and a statement to that effect is made in the offer document, indicating the name of the person who will guarantee the retu rn and the manner in which the guarantee is to be met. Regulation 38A permits launching of a capital p rotect ion -oriented scheme subject to: (a) the units of the scheme being rated by a registered credit rating agency from the viewpoint of the ability of it s portfolio structure to attain the 4 Ibi d. Page 11 of 77 protection of the capital invested therein ; (b) the scheme being close -ended ; and (c) compliance with other requirements as may be specified by SEBI . Regulation 48 requires that every mutual fund shall compute the Net As set Value of each scheme as specified and the same shall be calculated on daily basis and disclosed in the m anner as stated by SEBI . 12. Regulation 49 is titled ‘pricing of units ’ and states that the price at which the units may be subscribed / sold / repurch ased by the mutual fund shall be made available to the investors in the manner specified by SEBI . The method ology for calculating the sale and re purchase price of the units is to be provided by the mutual fund in the manner specified by SEBI . Sub -regulatio n (3) state s that in determining the price of the units, the mutual fund shall ensure that the repurch ase pr ice is not lower than 93% of the N et Asset Value and the sale price is not higher than 107% of the Net Asset Value . As per t he second proviso to sub -regulation (3) , difference between the repurchase price and the sale price of the unit shall not exce ed 7% calculated on the sale price. 5 13. Regulation s 54 and 55 relate to the annual report and the auditor’s report respectively. Regulation 56 requires provi ding a cop y of the 5 Post amendment w.e. f. 5.3.2021 Regulation 49(3) states that the repurchase price of units of an open - ended scheme shall not be lower than 95 % of the NAV. There is no stipulation in the Regulations regarding the sale price. Page 12 of 77 annual report and the summary thereof to the unitholders . Regulation 58 mandates period ic and continu al disclosures by the AMC, the trustee, the sponsors, and the custodians , re quir ing them to make such disclos ures and submit such docume nts as may be provi ded by SEBI and comply with sub -regulation s (2) and (3). Regulation 59 deals with half -yearly disclosures. Regulation 60 imposes a general obligation to disclose information and , being of some importance , is reproduced below: “Disclosures to the investors 60. The trustee shall be bound to make such disclosures as are essential in order to ke ep them informed about any information which may have an adverse bearing on their investments.” The trustees are mandated and bound to make such disc losures to the unitholders as are essential to keep them informed about any information that may ha ve ad verse bearing on their investments. 14. Chapter VIII relates to and empowers SEBI to authorise and conduct inspection and audit. SEBI , under Regulation 61( 1) , may appoint one or more persons as the inspecting officers to undertake inspection of the books of a ccounts, records, documents, and infrastructure, systems, and procedures or to investigate the affairs of the mutual fund, the trustees, and the AMC for the purposes Page 13 of 77 stipulated therein. Regulation 62 requires that SEBI shall issue not less than ten da ys’ n otice to the mutual fund, trustees, or AMC, as the case may be, before ordering an inspection or investigation. However, under sub -regulation (2), notwi thstanding sub -regulation (1), SEBI can direct such inspection or investigation without any notice when it is satisfied that in the interest of the investors no such notice should be given. Regulation 63 prescribes the duties and obligations of the mutual fund/ trustees/ AMC whose affairs are being inspected or investigated. The investigating officer ca n, du ring the course of the investigation, examine or record the statements of any director, officer, or employee of the mutual fund/ trustee/ AMC and every such mutual fund/ trustee / AMC is duty -bound to give to the investigating officer all assistance in conn ection with the inspection or investigation. The inspecting officer is to submit , as soon as possible , a report to SEBI on completion of the investigati on. Regulation 65 states that SEBI or the Chairman shall after consideration of inspection or inves tigat ion report take such action as SEBI or the Chairman may deem fit and appropriate under Chapter V of the Securities and Exchange Board (Intermediaries) R egulations, 2008. Page 14 of 77 Regulations 39 to 42 and 18(15) of the Securities and Exchange Board of India (M utua l Funds) Regulations, 1996 . 15. Regulations 39 to 42 read as under: “Winding Up 39. (1) A close -ended scheme shall be wound up on the expiry of duration fix ed in the scheme on the redemption of the units unless it is rolled over for a further period under sub -regulation (4) of regulation 33. (2) A scheme of a mutual fund may be wound up, after repaying the amount due to the unit holders, — “(a) on the hap pening of any event which, in the opinion of the trustees, requires the scheme to be wound up; or (b) if seventy -five per cent of the unit holders of a scheme pass a resolution that the scheme be wound up; or (c) if the Board so directs in the interest of the unitholders. (3) Where a scheme is to be wound up under sub - regulation (2), the trustees shal l give notice disclosing the circumstances leading to the winding up of the scheme: “(a) to the Board; and (b) in two daily newspapers having circulat ion all over India, a vernacular newspaper circulating at the place where the mutual fund is formed . Effect of winding up 40. On and from the date of the publication of notice under clause ( b) of sub -regulation (3) of regulation 39, the trustee or the as set management company as the case may be, shall — Page 15 of 77 “(a) cease to carry on any business activities in respect of the scheme so wound up; (b) cease to create or cancel units in the scheme; (c) cease to issue or redeem units in the scheme. Procedure and manner of winding up 41. (1) The trustee shall call a meeting of the unitholders to approve by si mple majority of the unitholders present and voting at the meeting resolution for authorising the trustees or any other person to take steps for winding up o f the scheme: Provided that a meeting of the unitholders shall not be necessary if the scheme is woun d up at the end of maturity period of the scheme. (2)(a) The trustee or the person authorised under sub - regulation (1) shall dispose of the assets of t he scheme concerned in the best interest of the unitholders of that scheme. (b) The proceeds of s ale realised under clause (a), shall be first utilised towards discharge of such liabilities as are due and payable under the scheme and after making appropr iate provision for meeting the expenses connected with such winding up, the balance shall be paid t o th e unitholders in proportion to their respective interest in the assets of the scheme as on the date when the decision for winding up was taken. (3) On the completion of the winding up, the trustee shall forward to the Board and the unitholders a repo rt on the winding up containing particulars such as circumstances leading to the winding up, the steps taken for disposal of assets of the fund before windin g up, expenses of the fund for winding up, net assets available for distribution to the unit holder s an d a certificate from the auditors of the fund. Page 16 of 77 (4) Notwithstanding anything contained in this regulation, the provisions of these regulations in respec t of disclosures of half -yearly reports and annual reports shall continue to be applicable until wi ndin g up is completed or the scheme ceases to exist. Winding up of the scheme 42. After the receipt of the report under sub -regulation (3) of regulation 41 , if the Board is satisfied that all measures for winding up of the scheme have been complied with, the scheme shall cease to exist. ” 16. Regulation 18(15)(c) reads as under: “Rights and obligations of the trustees. 18. xx xx xx (15) The trustees shall obt ain the consent of the unitholders – (a) whenever required to do so by the Board in the interest o f th e unitholders; or (b) whenever required to do so on the requisition made by three -fourths of the unitholders of any scheme; or (c) when the majority o f the trustees decide to wind up or prematurely redeem the units. ” Interpretation of Regulation s 39 to 42 , their interplay and harmonious construction with Regulation 18(15) (c) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. 17. Regulation 39 , as the heading states , relates to ‘ w inding up’ of a scheme of a mutual fund . Su b-regulation (1) to Regulation 39 Page 17 of 77 applies to close -ended schemes and is accordingly not relevant as the six schemes in question are open -ended schemes .6 18. Sub -regulation (2) to R egulation 39 uses the expression ‘a scheme of a mutual fund, ’ and accordin gly appl ies to both open -ended and close -ended schemes. 7 It is an undisputed position that sub - regulation (2) to Regulation 39 applies to the six schemes . In terms of sub -regulation (2) to R egulation 39 , a scheme of a mutual fund can be wound up : (a) on th e ha ppening of any event , which , in the opinion of the trustees , requires the scheme to be wound up ; (b) if 75% of its unitholders 8 pass a resolution for wi nding up of the scheme; or (c) SEBI directs winding up of the scheme in the interest of the unithold ers . U nder each clause the initiator is different , and the condition to be satisfied is stipulated . Clause (a) empowers the trustees, while clauses (b) and (c) empower the unitholders and SEBI respectively. 19. When a scheme “is to be wound up” under sub -regu lation (2) , the trustees are required by sub -regulation (3) of R egulation 39 to issue a public notice in two daily newspapers having all India circulati on 6 Regulation 2(f) – “close -ended scheme” means any scheme of a mutual fund in which the period of maturity of the scheme is specified. 7 Regulation 2(s) – “open -ended scheme” means a scheme of a mutual fund which offers units for sale without specifying any duration for redemption. 8 2(z)(i) of SEBI (Mut ual Fund) Regulation 1996, “unit holder” means a person holding unit in a scheme of mutual fund. Page 18 of 77 and in a vernacular paper having circulation where the mutual fund is located . The public notice shou ld state the circumstances leading to winding up of the scheme . The trustees are also required to write to SEBI and disclose the circumstances leading t o winding up of the scheme. 20. On and from the date of publication, the cease and freeze mandate of R egula tion 40 triggers . Regulation 40 , which is in the nature of statutory injunction , states that on and from the date of publication of notice under Regulat ion 39(3), the trustees and the AMC shall cease to (a) carry on any business in respect of the schem e to be wound up; (b) create or cancel units of the scheme; and (c) issue or redeem units of the scheme. 21. Regulation 41, as per the heading , relates to the procedure and manner of w inding up . The trustees , in terms of sub -regulation (1) to Regulation 41, are r equired to call a meeting of the unit holders fo r authorising either the trustees or any other person to take steps for winding up of the scheme. Voting at the meeting is by simple majority of the unit holders present and voting. In t his meeting the unit hold ers do not examine, affirm or reject the decision to wind up the scheme. The voting is restricted to selection of th e person – Page 19 of 77 either the trustee or a t hird person – who would take ‘steps for winding up of the scheme ’. 22. Regulation 41 (2)(a) , requires th at the person or the trustee authorised under Regulation 41(1) must dispose of the assets of the scheme in the best interest of the unitholders. C lause (b) to sub - regulation (2) to Regulation 41 , states that the sale proceeds shall be first utilised toward s di scharge of liabilities due and payable under the scheme. Secondly, appropriate provision is to be made for meeting the expenses connected with the windi ng up. The balance amount shall be paid to the unitholders in proportion to their respective interes ts in the scheme as on the date when the decision for winding up was taken. Th e clause differentiates between the creditors whose liability is due and payab le , and the unitholders . Payment of the amount due and payable to the creditors is prioritised and takes precedent . Thereafter , appropriate provision is required to be made for expenses connected with the winding up . The balance amount is payable to the un itholders. 23. In terms of R egulation 42(2), the unitholders are to be paid in proportion to their res pect ive interest in the assets of the scheme. The interest of the unitholders in the assets of the scheme as mentioned in Regulation 42(2) is computed on th e basis of the date Page 20 of 77 when the decision for winding up of the scheme was taken. As per Regulation 41 (3 ), o n completion of winding up, the trustees have to forward to SEBI and to the unitholders a report on the winding up containing particulars such as circum stances leading to the winding up, th e steps taken for disposal of the assets for winding up, expens es f or winding up, net assets available for distribution to the unitholders and a certificate from the auditors. Sub -regulation (4) , a non -obstante provisio n, states that the requirement in respect of disclosures in the form of half -yearly report and annua l re port shall continue until winding up is completed or the scheme ceases to exist. Regulation 42 states that after receipt of the report under Regulation 41 (3) , if SEBI is satisfied that all measures relating to winding up have been complied with, the sc heme would cease to exi st. 24. Regulation 42 A stipulates that the units of the mutual funds scheme shall be delisted from the recognised stock exchange in accor dance with the guidelines as may be specified by SEBI . 25. Regulation 18(15)(c), which relates to righ ts and obligations of the trustees, in simple words requires the trustees to take consent of the unitholders , when the y, by majority , decide to wind up or pr ematurely redeem the units. Words “winding up” in Regulation Page 21 of 77 18(15)(c), ex -facie refers to the wind ing up of the open -ended scheme and the expression “prematurely redeem the units” refers to premature redemption of units under the close -ended scheme. Dec ision of the High Court and contentions of SEBI, the trustees and the AMC. 26. The judgment under cha lle nge , interpreting R egulation 18 (15)(c) and R egulation 39 (2)(a) holds that the decision of the trustees to wind up a scheme under clause (a) to Regulation 39(2) must muster the consent of the majority of the unitholders as pe r Regulation 18(15) (c) . 27. Cont est ing th is finding and interpretation, the argument of SEBI , the trustees and the AMC is that Regulations 39 to 42 are a complete code dealing with winding up of a scheme of mutual funds. Initiators and conditions to be satisfied under c lauses (a), (b), and (c) to Regulation 39(2) are different . It is argued that p rior consent of the unitholders is not envisaged when the trustees , on the happening of any even t in terms of clause (a) , form an opinion that a scheme is required to be wound up, or when SEBI unde r clause (c) directs winding up of a scheme in the interest of the unitholders. Only when the unitholders want to windup a scheme , in terms of clause (b), a resolution by 75% of the unitholders is mandated . The need to obtain the consent of the unithold ers vide Regulation 18(15)(c) Page 22 of 77 refers to the procedure and the manner for winding up as mandated by Regulation 41(1). To put it differently, the unitholders do not come into the picture when the trustees and SEBI , under clauses (a) and (c) respectively of R egu lation 39(2) , decide to wind up a scheme. Their decision is final and binding on the unitholders. It is submitted: “a) Regulation 18(15)(c) requires Trustees to obtain consent of Unit holders “when the majority of the Trustees decide to wind up”. It i s t hus very clear that consent is required when Trustees decide to wind up the scheme(s) and when read together with Regulation 41, makes it amply clear that the consent is f or the purpose of Regulation 41 i.e. to authorize the Trustee or any other person to dispose of the asset of scheme(s), in the interest of the unit holders. (b) The consent envisaged under Regulation 18(15)(c) is a general “rights and obligations” of the T rustees and that the said consent shall be read as approval required under Regulat ion 41(1). (c) It is submitted that in the event consent under Regulation 18(15)(c) is interpreted to mean that prior consent of unitholders is required before a scheme is wo und up pursuant to a decision taken by the Trustees, the provisions of Regulation 39( 2)(b) to be rendered otiose as under the said Regulation, a scheme may be wound up at the instance of Unit holders (upon 75% of the Unit holders of a scheme passing a Reso lution for winding up). (d) Regulation 40 comes into effect “on and from the date of publication of notice” by Trustees under Regulation 39(3)(b) and not from the date of “consent of Unit holders”, which makes it abundantly clear that consent of Unit holde rs is not contemplated qua decision of Trustees to wind up a scheme(s). (e) Furthe r, Regulation 40 (a) provides that on and from the date of publication of notice under 39(3)(b), the Trustees or Asset Management Company, as the case Page 23 of 77 may be, shall cease to carry on any business activities in respect of the scheme so wound up. Therefore, whe n a decision by Trustee to wind up scheme is taken, in terms of 39(2)(a), the notice is issued and Regulation 40 comes into operation and the requirement of obtaining cons ent of Unit holders at this stage cannot arise. (f) It is submitted that Regulati on 41(1) casts an obligation on the Trustees to call a meeting of the unit holders to approve a resolution authorising the Trustees or any other person to take steps for wind ing up of the scheme. Regulation 18(15)(c) of the MF Regulations cannot be erroneo usl y interpreted so as to conclude that before implementing Regulation 41, prior approval of the unit holders has to be taken.” The s ubmission accentuate s, what is submitted would be the im practical and calamitous effect of reading Regulation 18(15)(c) in to Regulations 39 to 42 . Prior -consent from the unitholders if necessary even whe n the trustees ‘decide to wind up’ a scheme under Regulation 39(2)(a) , would inevitably del ay the publication of public notices as envisaged by Regulation 39(3). Therefore the cease and freeze legal effect of R egulation 40 would get postponed resulting in chaos and confusion , as business activities such as buying and redemption of units etc. , w ould continue despite the trustees hav ing taken the decision to wind up the scheme . In panic , m ost unitholders would rush for redemptions , which achingly w ould be the reason for winding up. Th e result would be fire -sale of sound assets in a hasty and disor ganised manner at discounted valuations in adverse market conditions. The trustees wh o stand in a fiduciary Page 24 of 77 capacity as domain experts , as mandated by clause (a) to Regulation 39( 2), act for and in the interest of the unitholders . The unitholders , a large and disparate body of lay persons without domain expertise , have been erroneously con ferred the right to veto and overrule the decision of the domain experts . G iven the grave consequences for the sponsor , trustees and AMC, a decision to wind up a scheme is take n after in -depth analysis with great care and caution . Thus , the findings of the High Court to the contrary should be reversed. Interpretation of the term ‘consent’ in Regulation 18(15)(c) vide order dated 12 th February, 2021 28. In our order dated 12 th February 2021, we have interpreted Regulation 18(15)(c) and the word ‘consent’ t here in in the following manner: “8. However, we begin by rejecting the argument raised by some of the objecting unitholders that consent would be binding only on those who ha ve consented to winding up of the mutual fund schemes and cannot be imposed on oth ers. The word ‘consent’, in the context of the clause, clearly refers to ‘consent of the majority of the unitholders’, and not consent given by individual unitholders who alo ne would be bound by their consent, that is, it excludes unitholders who are not a gree able. To accept the second or contra view, as pleaded by some of the objecting unitholders, would be to negate the very object and purpose of clause (c) to sub -regulation (15) of Regulation 18. In fact, the submission, if accepted, will make the Mutual Fun d schemes and the winding up provisions in the Mutual Fund Regulations unworkable as there would Page 25 of 77 be two different classes of unitholders – one bound by the consent, and o thers who are not bound by consent. Consequently, the scheme would not wind up. Th e in tent behind the provision is to bind even those who do not consent. 9. Black’s Law Dictionary (10th Edition) defines the word ‘consent’ as “ a voluntary yielding to what another proposes or desires; agreement, approval, or permission regarding some ac t or purpose, esp. given voluntarily by a competent person; legally effective assent .” The dictionary also defines ‘general consent’ to mean “ adoption without objection, rega rdless of whether every voter affirmatively approves .” Shackleton on the Law and P ract ice of Meetings , 14th Edn., while defining majority, and the binding effect of majority, has opined: “Definition 7-30. Majority is a term signifying the greater number. In legislative and deliberative assemblies, it is usual to decide questions by a majo rity of those present and voting. This is sometimes expressed as a “simple” majority, which means that a motion is carried by the mere fact that more votes are cast for t han against, as distinct from a “special” majority where the size of the majority is c ritical. The principle has long been established that the will of a corporation or body can only be expressed by the whole or a majority of its members, and the act of a majority is regarded as the act of the whole. A majority vote binds the minori ty 7-31. Unless there is some provision to the contrary in the instrument by which a corporation is formed, the resolution of the majority, upon any question, is binding on the majority and the corporation, but the rules must be followed.” Page 26 of 77 The word/expr essi on ‘consent’ in sub -regulation (15) to Regulation 18 refers to affirmative consent to winding up by ‘the majority of the unitholders’. Conversely, consent is denied when ‘majority of the unitholders’ do not approve the proposal to wind up the scheme. 10. However, the question which still remains to be answered is whether ‘consent’ would mean majority of the unitholders who exercise their right in the poll, or majority of all the unitholders of the scheme. Connected with the question is the concern of quor um, which means the minimum number of members of the entire body of members required to be present to legally transact business. 11. Shackleton in the above quotation ha s referred to distinction between simple and special majority. More appropriate fo r ou r discussion is William Paul White’s thesis ‘History and Philosophy of the Quorum as a Device of Parliamentary Procedure’ published in 1967, in which he elucidates: “Mu ch of the controversy that has been historically associated with the quorum can be tra ced to the problem of simply determining just what is meant by a quorum. “From the very earliest times it has been recognised as a general rule that a majority of a group is necessary to act for the entire group.” In the case of a public body, the powe r or authority which establishes the body may also determine what constitutes a quorum. Sturgis states that common parliamentary law fixes the quorum as a “majority of the me mbers”. The constitution of the United States sets the quorum requirement in the House of Representatives at a majority of the membership. But to state that a quorum is a majority of the membership opens the way to potential conflict; which is precisely wh at has happened on numerous occasions.” Page 27 of 77 After examining the various definitions of t he term quorum, the author observes that the definitions by themselves give no key as to how to determine what is minimum number or what constitutes majority. The express ion ‘majority’ can mean - (i) majority of total membership list; (ii) exclude or i nclu de delinquent members; (iii) members present and voting; or (iv) those present, voting and not voting. Different meanings, he observed, have added to the confusion around the concept of the quorum. Albeit referring to the position in 1967, the author obser ved: “As we have emerged into the modern era, it is not surprising that by now the method, which has been legally agreed upon by the courts, to determine minimum and maj ority, is well established.” 12. Clause (c) to sub -regulation (15) of Regulation 18 per se does not prescribe any quorum or specify the criterion for computing majority or ratio of unitholders required for valid consent for winding up. Clause (b) of Regu lation 39(2), on the other hand, specifies that seventy -five per cent of the unith olde rs of a scheme can pass a resolution that the scheme be wound up. Similarly, Regulation 41(1) requires the trustees to call a meeting to approve, by simple majority of th e unitholders present and voting, a resolution for authorising the trustees or any oth er person to take steps for winding up of the scheme. Section 48 of the Companies Act, 2013 states that where share capital of a company is divided into different classes of shares, the rights attached to the shares of any class may be varied with the cons ent in writing of the shareholders of not less than three -fourths of the issued shares of that class. Sub -section (3) to Section 55 of the Companies Act, 2013 in case of failure to redeem or pay dividend refers to consent of holders of three -fourths in val ue of the preference shares. Section 103 of the Companies Act, 2013 prescribes minimum quorum for shareholder meetings. Page 28 of 77 13. In Shri Ishwar Chandra v. Shri Satyanarain S inha and Others , this Court on the question of quorum has held: “If for one reaso n or the other one of them could not attend, that does not make the meeting of others illegal. In such circumstances, where there is no rule or regulation or any other provis ion for fixing the quorum, the presence of the majority of the members would const itut e it a valid meeting and matters considered there at cannot be held to be invalid.” This decision had also relied on the exposition on the subject of quorum in the Hals bury’s Laws of England, Third Edition (Vol. IX, page 48, para 95), which reads: “95. Presence of quorum necessary. The acts of a corporation, other than a trading corporation, are those of the major part of the corporators, corporately assembled. In other words, in the absence of special custom or of special provision of the constituti on, the major part must be present at the meeting, and of that major part there must be a majority in favour of the act or resolution contemplated. Where, therefore, a corpor ation consists of thirteen members, there ought to be at least seven present to fo rm a valid meeting, and the act of the majority of these seven or greater number will bind the corporation. In considering whether the requisite number is present, only those members must be included who are competent to take part in the particular busines s be fore the meeting. The power of doing a corporate act may, however, be specially delegated to a particular number of members, in which case, in the absence of any other pr ovision, the method of procedure applicable to the body at large will be applied t o th e select body. Page 29 of 77 If a corporate act is to be done by a definite body along, or by definite body coupled with an indefinite body, a majority of the definite body must be p resent. Where a corporation is composed of several select bodies, the general ru le i s that a majority of each select body must be present at a corporate meeting; but this rule will not be applied in the absence of express direction in the constitution, i f its application would lead to an absurdity or an impossibility. ...” (emphasis suppl ied) 14. The concept of ‘absurdity’ in the context of interpretation of statutes is construed to include any result which is unworkable, impracticable, illogical, futil e or pointless, artificial, or productive of a disproportionate counter mischief. Logi c referred to herein is not formal or syllogistic logic, but acceptance that enacted law would not set a standard which is palpably unjust, unfair, unreasonable or does n ot make any sense. When an interpretation is beset with practical difficulties, th e co urts have not shied from turning sides to accept an interpretation that offers a pragmatic solution that will serve the needs of society. Therefore, when there is choice between two interpretations, we would avoid a ‘construction’ which would reduce th e le gislation to futility, and should rather accept the ‘construction’ based on the view that draftsmen would legislate only for the purpose of bringing about an effective re sult. We must strive as far as possible to give meaningful life to enactment or ru le a nd avoid cadaveric consequences. 15. We would neither hesitate in stating the obvious, that modern regulatory enactments bear heavily on commercial matters and, therefo re, must be precisely and clearly legislated as to avoid inconvenience, friction a nd confusion, which may, in addition, have adverse economic consequences. The legislator in the present case must, therefore, reflect and take remedial steps to bring about clarity and certainty in the Mutual Fund Regulations. Page 30 of 77 16. Reading prescription of a q uorum as majority of the unitholders or ‘consent’ as implying ‘consent by the majority of all unitholders’ in Regulation 18(15)(c) of the Mutual Fund Regulations will not only lead to an absurdity but also an impossibility given the fact that mutual fu nds have thousands or lakhs of unitholders. Many unitholders due to lack of expertise, commercial understanding, relatively small holding etc. may not like to participate. Co nsent of majority of all unitholders of the scheme with further prescription that ‘fif ty percent of all unitholders’ shall constitute a quorum is clearly a practical impossibility and therefore would be a futile and foreclosed exercise. 17. Conscious of the problem of quorum and majority in indefinite electorate, 1st Edition of Halsbu ry’s Laws of England on the question of quorum and meetings, had referred to the following principles: “791. Where a corporation consists of a definite number of corporate e lectors, a majority of that number must be present in order to constitute a valid elec tion. But where a corporation consists of an indefinite number of corporate electors, a majority only of those existing at the time of the election need be present. Whe n an election is to be made by a definite body only, or the electoral assembly is to c onsist of a definite and an indefinite body, the majority of the definite body must, as a general rule, be present in order to render the election legal. It is not necess ary that a majority of the indefinite body should be present so long as there is m ajor ity of the definite body. If a constituent part of a corporation refuses to be present at an election, it cannot be held, and an election by the remaining parts will be v oid. But electors present at an election and abstaining from voting are deemed to acqu iesce in the election made by those who vote.” Page 31 of 77 The aforesaid exposition, for the purpose of majority and quorum, draws distinction between an electorate consisting of d efinite number and an electorate composed of indefinite number. Justice Seshagiri Ayya r of the Madras High Court in his concurring judgment in Syed Hasan Raza Sahib Shamsul Ulama and two others v. Mir Hasan Ali Sahib and two others had drawn distinction be tween definite and indefinite numbers in the following manner: “…In the first cl ass of cases, the number of the select body is fixed. In the second class of cases, the number is subject to variation every year or at stated periods. For example, the numbe r of electors of a Temple Committee or the number for a Municipality is liable to fluc tuation. Residence for a particular period, or the attaining of age of minors can bring in new electors. Whereas in the case of a Select Committee, the number is fixed…” In the case of unitholders, the number is fluctuating and ever changing and, the refo re, indefinite. Numbers of unitholders can increase, decrease and change with purchase or redemption. Therefore, in the context of clause (c) of Regulation 18(15), we wou ld not, in the absence of any express stipulation, prescribe a minimum quorum and read the requirement of ‘consent by the majority of the unitholders’ as consent by majority of all the unitholders. On the other hand, it would mean majority of unitholders who exercise their right and vote in support or to reject the proposal to wind up t he m utual fund scheme. The unitholders who did not exercise their choice/option cannot be counted as either negative or positive votes as either denying or giving consent to the proposal for winding up. 18. Investment in share market, though beneficial a nd attractive, requires expertise in portfolio construction, stock selection and market timing. In view of attendant risks, diversification of portfolio is preferred but this Page 32 of 77 consequentially requires a larger investment. Mutual funds managed by professiona l fu nd managers with advantages of pooling of funds and operational efficiency are the preferred mode of investment for ordinary and common persons. It would be wrong to expe ct that many amongst these unitholders would have definitive opinion required and nece ssary voting in a poll on winding up of a mutual fund scheme. Such unitholders, for varied reasons, like lack of understanding and expertise, small holding etc., would pr efer to abstain, leaving it to others to decide. Such abstention or refusal to exp ress opinion cannot be construed as either accepting or rejecting the proposals. Keeping in view the object and purpose of the Regulation with the language used therein, we w ould not accept a ‘construction’ which would lead to commercial chaos and deadlock . Th erefore, silence on the part of absentee unitholders can neither be taken as an acceptance nor rejection of the proposal. Regulation 18(15)(c), upon application in ground reality, must not be interpreted in a manner to frustrate the very law and object ive/ purpose for which it was enacted. We would rather accept a reasonable and pragmatic ‘construction’ which furthers the legislative purpose and objective. The underlying th rust behind Regulation 18(15)(c) is to inform the unitholders of the reason and ca use for the winding up of the scheme and to give them an opportunity to accept and give their consent or reject the proposal. It is not to frustrate and make winding up an im possibility. Way back in 1943, Sutherland in Statutes and Statutory Construction, Volu me 2, Third Edition at page no. 523, in Note 5109, had stated: “Where a statue has received a contemporaneous and practical interpretation and the statute as interprete d is re -enacted, the practical interpretation is accorded greater weight than it o rdin arily receives, and is regarded presumptively the correct interpretation of the law. The rule is based upon the theory that the legislature is acquainted with the contemp oraneous interpretation of a statue, especially, when made by an administrative bo dy o r executive officers charged with the duty of administering or enforcing the law, and therefore Page 33 of 77 impliedly adopts the interpretation upon re - enactment.” With some modifi cations, the principle can be applied in the present case. Practical interpretatio n sh ould be accorded greater weight than it ordinarily receives, and can be regarded as presumptively correct interpretation as the draftsmen legislate to bring about a funct ional and working result. 19. We would not read into Regulation 18(15)(c) a need to have affirmative consent of majority of all or entire pool of unitholders. The words ‘all’ or ‘entire’ are not incorporated and found in the said Regulation. Thus, consen t of the unitholders for the purpose of clause (c) to sub -regulation (15) of Regul atio n 18 would mean simple majority of the unitholders present and voting. ” The above interpretation resolves several grey areas and would underpin the construction of Regu lations 39 to 42 and their interplay with Regulation 18(15)(c). 29. The quotation hi ghli ghts that i nterpretation is sometimes a three - stage process. At first , the w ord s being interpreted should be understood according to their grammatical meaning in their literal and popular sense . In the second stage , w e consider whether in the given con text the plain meaning is obscure as the text give s rise to choice of more than one interpretation , or the propositional interpretation fail s to achieve the manifest purpose of the legislation , reduce s it to futility, is practically unworkable or even illo gica l. In such case s at the third stage, the court applying interpretative tools Page 34 of 77 selects or blue -pencil s an interpretation advancing the legislative inten t without rewriting the provision . The legislative intent is gathered not by restricting it to the lan guag e of the provision, rather in the light of the object and purpose of the provision and the legislation. The courts do lean towards a pragmatic and purposive interpretation as there is an assumption that the draftsmen legislate to bring about a function al a nd working result. Harmonious interpretation of Regulation 18(15)(c) with Regulations 39 to 42 30. Regulation 39 (2) under clause (a) vest s the power of winding up of a scheme with the trustees, and with the unitholders under clause (b) and with the SEBI under clause (c) , but under Regulation 18(15) (c), the trustees are required to seek consent of the unit holders , when they by majority decide to w ind up a scheme . Regulation 18(15)(c) mi rrored by use of the word ‘shall’ is couched as a command. Further , th e expression ‘when the majority of the trustees decide to wind up’ in Regulation 18(15)(c) manifestly refers to clause (a) to Regulation 39(2) as this is the only Regulation which entitl es the trustees to wind up the scheme. Regulation 18(15)(c), when it r efers to trustees’ decision to wind up, it implies the trustees’ opinion to wind up the scheme. Rather than making the decision of the trustees otiose, as suggested by SEBI , the trustees and the AMC, Page 35 of 77 Regulation 18(15)(c) itself would become otiose in c ase th eir interpretation is accepted. Principle of harmonious construction should be applied which, in the context of the Regulations in question, would mean that the opinion of the trustees would stand, but the consent of the unitholders is a pre -requisit e fo r winding up. 31. We do not think that this interpretation in any way dilutes or renders clause (b) to Regulation 39(2) meaningless or redundant. This clause appl ies where the winding up pr ocess is initiated at the instance of the unitholders, i.e. upon 75% of unitholders of the scheme passing a resolution for winding up. Clause (b) does not in any manner reflect that clause (c) to Regulation 18(15) should not be read as it ordains in simple words . 32. Regulation 41, as explained above, refers to and relat es t o the procedure and manner of winding up which cannot be equated with the requirement of consent as postulated by Regulation 18(15)(c). Argument to the contrary , equating Regulation 18(15) (c) with R egulation 41(1) overlooks the difference in language , and the object and purpose behind the two regulations. Regulation 41(1) appl ies even in cases where 75% unitholders have passed the resolution for winding up of the scheme under Regulation 39 (2)(b) or where SEBI directs the scheme to be wound up in the in tere st of the Page 36 of 77 unitholders under Regulation 39(2)(c). On the other hand Regulation 18(15)(c) applies only when majority of the trustees form an opinion and decide to wind up or prematurely rede em the units in entirety, a situation covered by Regulation 39(2 )(a) . To ignore the mandate of Regulation 18(15)(c) would nullify the legislative intent by resorting to a rather disordered and knotted argument that Regulation s 18(15)(c) and 41(1) are ident ical and serve the sam e purpose . C lause (c) to Regulation 18(15) doe s not duplicate sub -regulation (1) to Regulation 41. 33. Similarly , omission of clause (d) to Regulation 18(15) and insertion of 18(15A) w ith effect from 22nd May 2000 by SEBI (Mutual Funds) (Second Amendment) Regulations, 2000 is inconsequential . Prior t o its omission, clause (d) to Regulation 18(15) read: “(d) when any change in the fundamental attributes of any scheme or the trust or fees and expenses payable or any other change which would modify the scheme or affect the interest of the unitholders is prop osed to be carried out unless the consent of not less than three - fourths of the unit holders is obtained: Provided that no such change shall be carried out unless three fourths of the unit holders have given their consent and the unit holders who do no t gi ve their consent are allowed to redeem their holdings in the scheme. Provided further that in case of an open ended scheme, the consent of the unitholders shall not be necessary if: (i) the change in fundamental attribute is carried out after one ye ar f rom the date of allotment of units. Page 37 of 77 (ii) the unitholders are informed about the proposed change in fundamental attribute by sending individual communication and an advertisement is given in English daily newspaper having nationwide circulation and in a n ewspaper published in the language of the region where the head office of the mutual fund is situated. (iii) the unitholders are given an option to exit at the prevailing Net Asset Value without any exit load . Explanation: For the purposes of this c laus e "fundamental attributes" means the investment objective and terms of a scheme." By the same amendment 9, sub -regulation (15A) has been inserted and reads: “(15A) The trustees shall ens ure that no change in the fundamental attributes of any scheme o r th e trust or fees and expenses payable or any other change which would modify the scheme and affects the interest of unitholders, shall be carried out, unless – (i) a written communication about the proposed change Is sent to each unitholder and an adve rtis ement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Office of the mutual fund is situat ed; and (ii) the unitholders are given an option to exit at the pre vailing Net Asset Value without any exit load.” The distinction between Regulation 18(15A) and Regulation 18(15)(c) is evident . The words ‘ winding up or premature 9 SEBI (Mutual Funds) (Second Amendment) Regulat ions, 2000. Page 38 of 77 redemption of units’ in Regulation 18 (15)(c) refers to a situation covered by Regulation 39 (2)(a) , that is , when the scheme is being wound up pursuant to a decision of the trustees . On the other hand, Regulation 18(15A) does not apply when the scheme is being wound up, rather it applies when there is a proposal to change the fundamental attri bute s of the scheme, fee or expense or any other change that would modify the scheme and affect the interests of the unitholders. The effect should be not to wind up the scheme thereby bringin g it to an end, but to continue with the scheme as modified . The refo re , for Regulation 18 (15A) to apply, the scheme should not cease to exist. 34. In cases under clause (a) to Regulation 39(2) the unitholders have no right or option to exit or not exit the sc heme and are paid in terms of Regulation 41 . Regulation 18(15A) give s the option to the unitholders to exit at the prevailing ‘N et Asset Value ’ without any exit load or continue with the altered/modified scheme . Under the omitted clause (d) to Regulation 1 8(15) , consent of three -fourths of the unitholders for fundament al c hanges to the scheme was sometimes necessary . This is not necessary under Regulation 18(15A) . O mission of clause (d) to sub -regulation 18(15) and insertion of sub -regulation (15A) to Regul ation 18, as observed above is inconsequential and not relevant to t he present dispute . If Page 39 of 77 anything, the draftsmen having retained clause (c) to 18(15) , re - enforce s its link with clause (a) to Regulation 39(2) . Accordingly, the need to obtain consent of th e unitholders is mandated under cl ause (c) to sub -regulation 15 to R egulation 18 when the trustees under clause (a) to Regulation 39(2) decide to wind up a scheme. 35. The argument that the unitholders are lay persons and not well - versed with the market condi tions is to be rejecte d in light of the order dated 12 th Februar y 20 21. Relevant portion of this order , at the risk of repetition , is being reproduced below: “18. Investment in share market, though beneficial and attractive, requires expertise in portfolio construction, stock selection and market timing. In view of att enda nt risks, diversification of portfolio is preferred but this consequentially requires a larger investment. Mutual funds managed by professional fund managers with advantages of pooling of funds and operational efficiency are the preferred mode of inves tmen t for ordinary and common persons. It would be wrong to expect that many amongst these unitholders would have definitive opinion required and necessary voting in a poll on winding up of a mutual fund scheme. Such unitholders, for varied reasons, like l ack of understanding and expertise, small holding etc., would prefer to abstain, leaving it to others to decide. Such abstention or refusal to express opinion cannot be construed as either acc epting or rejecting the proposals. Keeping in view the object an d pu rpose of the Regulation with the language used therein, we would not accept a ‘construction’ which would lead to commercial chaos and deadlock. Therefore, silence on the part of absentee u nitholders can neither be taken as an acceptance nor rejection o f th e proposal. Page 40 of 77 Regulation 18(15)(c), upon application in ground reality, must not be interpreted in a manner to frustrate the very law and objective/purpose for which it was enacted. We would rather accept a reasonable and pragmatic ‘construction’ which f urth ers the legislative purpose and objective. The underlying thrust behind Regulation 18(15)(c) is to inform the unitholders of the reason and cause for the winding up of the scheme and to gi ve them an opportunity to accept and give their consent or rejec t th e proposal. It is not to frustrate and make winding up an impossibility ….” Investments by the unitholder s constitute the corpus of the scheme. To deny the unitholders a say , when Regulat ion 18(15)(c) requires their consent , de bilitates the ir role an d right to participat e. It is an in-contestable position that the u nitholders exercise informed choice and discretion when they invest or redeem the units. Regulations envision the unitholders not as domain experts, albeit as discerning investors who are perce ptive and prudent. T he trustees are therefore commanded to inform and be transparent . Summary reports, periodic and continual statements , annual reports, audit reports, etc. , mentioned in paragraph 11 above are intended to reveal the current status of the investments, future prospects, risks and factors that may have bearing on the returns to enable th e unitholders to take deliberative decisions , be it purchase, redemption or exercise of th e right to vot e. The unitholders , when in doubt , as prudent inve stor s may be advised to abstain , but they are not placid onlookers , impuissant and helpless when the trustees Page 41 of 77 decide to wind up the scheme in which they have invested . The stature and rights of the unitholders can co -exist with the expertise of the trustee s an d should not be diluted because the trustees owe a fiduciary duty to them . Thus, the contention that the trustees being specialists and experts in the field, their decision should be trea ted as binding and fait accompli has to be rejected not only in v iew of the specific language of Regulation 18(15)(c), but to be in co ncinnity with the objective and purpose of the Regulations. 36. A hypothetical submission that the unitholders may reject a valid and well -considered opinion of the trustees for winding up, and therefore Regulation 18(15)(c) is directory, should be rejected. Assumptions cannot be a ground to wrongly interpret Regulation 18(15)(c). Situations could arise when the trustees may er r in their opinion, in which event the unitholders may correct th em. Money and investment of the unitholders being at stake, a wrong decision would obviously have inimical impact on the unitholders themselves. We would brace the argument that a good and in telligible decision of winding up would invariably be accepted by the unitholders. 37. ‘Consent’ for the purpose of Regulation 18(15)(c) refers to the consent of the majority of the unitholders present and voting, and in case of a poll, the computation would b e with reference to the Page 42 of 77 number of units held by the unitholder. I n f act, in the course of hearing, it was conceded that majority of the unitholders belong to provident fund trusts or pension funds. The voting pattern referred to in our earlier order reflec ts that voting under Regulation 18(15)(c) is possible and can wor k s moothly without much difficulty. The apprehensions expressed, therefore, do not carry much weight. It is obvious that where the unitholders vote against winding up, consequences would foll ow and accordingly the scheme would not be wound up. This is a na tur al and normal consequence which will have to be given effect to. It would, as stated above, happen rarely and that too would not happen without any genuine and good reason. 38. SEBI is a Memb er of International Organisation of Securities Commissions (IOSCO ). IOSCO in a consultation report published in August, 2016 on good practices for the termination of investment funds , states that the termination plan should identify rationale for terminati ng the investment fund. Key steps to be taken as part of the term ina tion process should be identified. Clauses (28), (29) and (30) of the good practices under the heading ‘Decision to terminate’ read as follows : “28. In the majority of cases, the decision to terminate is that of the responsible entity. However, in some jur isdictions national law or regulatory requirements will Page 43 of 77 mandate that the decision of the responsible entity is approved by investors, or the custodian in some cases. The first step in prep aring for the voluntary termination of an investment fund is to d ete rmine whether investor approval is required. This may depend on the legal structure of the investment fund and whether voting rights are attributed to shares / units. 29. Investment in a n investment fund usually carries with it the right to vote on ce rta in matters and the voting requirements for the approval of investors on, inter alia, liquidations and terminations are generally prescribed in the constitutional documents and the prospect us / offering document of the investment fund, or legal and regul ato ry regime of the national regulator, or both. The termination plan should set out the process for obtaining investor approval, where required. 30. Where investor approval is required and investors are asked to vote on the decision to terminate with th e outcome achieving the minimum voting requirements for approval, the decision is binding on all, including those who do not vote. Where investor approval is required, the rights of investors should be clear from the termination plan. In particular, the te rmi nation plan should document how the interests of dissenting investors will be treated. ” Good practices , as recommended by IOSCO, commend the unitholders’ right to vote/approve on matters of terminat ion and liquidation. 39. On and from the date of publicat ion of notices under Regulation 39(3), the cease and freeze effect of Regulation 40 applies. The words used in sub -regulation (3) to Regulation 39 are ‘where a scheme is to be wound up in sub -regulation (2)’, that is, a scheme is Page 44 of 77 to be wound up in terms of cl auses (a), (b) or (c) to Regulation 39(2). Sub -regulation (3) to Regulation 39 also mandates the trustees to disclose in the public notice the circumstances leading to winding up of the scheme. This obviously means that where the trustees form an opini on to wind up a scheme, they must disclose the reasons, and thereupon, the unitholders exercise their right to vote and give or deny consent. This is the true legal effect on harmonious reading of Regul ation 18(15)(c) and Regulation 39(2)(a). 40. The l anguag e o f clauses (a) and (c) to sub -regulation (2) , and sub - regulation (3) to Regulation 39 does not envisage involvement of the unitholders till the publication of notices in case of clauses (b) and (c) to sub -regulation (2) to Regulation 39. Therefore, when cla uses (a) or (c) of Regulation 39 (2) apply, the unitholders are to be informed about the winding up by the trustees or SEBI by way of public notice. Publication in terms of Regulation 39(3) is even re quired when the unitholders vote for winding up of a s che me under clause (b) of Regulation 39(2). 41. It is manifest that publication of notices under Regulation 39 (3) should be instantaneous without any interstice between the decision of winding up by the tr ustees under clause (a) , by the unitholders Page 45 of 77 under clau se (b) or by SEBI under clause (c). D elay would hold up the cease -and -freeze effect of Regulation 40 and consequently nullify the salutary purpose and object behind it. 42. In view of the above discussion and harmoniously interpreting Regulations 39 to 42 , w e h old that the consent of the unitholders, as envisaged under clause (c) to Regulation 18(15), is not required before publication of the notices under Regulation 39 (3) . Consent of the unitholders should be sought post publication of the notice and disclos ure of the reasons for winding up under Regulation 39(3). 43. Read in this manner, we can interpret clause (c) to Regulation 18(15) and Regulations 39 to 42 without the disarray as suggested, while not displacing th e legal effect of either Regulation 40 or R egu lation 18(15)(c). This interpretation takes care of the apprehension expressed by SEBI, the trustees and AMC that delay or time gap between a decision of the trustees under clause (a) to sub -regulation (2) to R egulation 39 and publication of notice unde r sub -regulation (3) to Regulation 39 would postpone the cease -and - freeze effect of Regulation 40. 44. We have referred to Regulation 41(1) and that it requires calling of a meeting of the unitholders for authoris ing the trustees or any other person to take s tep s for winding up of the scheme. In case where Page 46 of 77 the scheme is being wound up under Regulation 39 (2)(a) , it is possible to hold a meeting of the unitholders under the said provision where if the resolution for w inding up is passed , the unitholders can also de cide by simple majority of the unitholders present and voting whether the trustees or any other person should take steps for winding up of the said scheme. One meeting in man y a cases would suf fice. 45. To complete interpretation of Regulation 18(15), we h ave to record that clause (a) applies and requires the trustees to obtain consent of the unitholders whenever required by SEBI in the interest of the unitholders. Clause (b ) states that the truste es would obtain consent of the unitholders whenever required to do so on the requisition made by three -fourth s of the unitholders of any scheme. Accordingly, clause (a) would apply whenever SEBI mandates and clause (b) applies whenever three -fourth s of the u nitholders of the scheme make a requisition. 46. The impugned ju dgment, from paragraph 211 onwards, specifically refers to the responsibilities and duties of the trustees incorporated in the statement of additional information published by the mutual fund, wh ich reads: “(b) The Trustees shall obtain consent of the u nit holders of the Scheme(s): Page 47 of 77 i) When the Trustee is required to do so by SEBI in the interests of the unit -holders; or ii) Upon the request of three -fourths of the unit holders of any Scheme(s) u nder the Mutual Fund; or iii) If a majority of the direct ors of the Trustee company decide to wind up the Scheme(s) or prematurely redeem the units.” Clause (iii) of the aforesaid quotation dealing with responsibilities and duties of the trustees, requi res the trustees to obtain consent of the unitholders of t he scheme if the majority of the directors of the trustee company decide to wind up the scheme or prematurely redeem the units. The language of clause (iii) of the aforesaid quotation is identical t o clause (c) of sub -regulation (15) to Regulation 18. The Hi gh Court was, therefore, right in observing that the trustees and the AMC have understood and accepted that the consent of unitholders of the scheme would be necessary if the majority of the direc tors of the trustee company decide to wind up a scheme. 47. The impugned judgment, in paragraph 221, observes that no material was placed on record to show compliance with sub - regulation (3) to Regulation 39. The trustees and AMC have disputed the said positi on by relying upo n notice dated 23 rd April Page 48 of 77 2020 enclosed a t page 1262 and the newspaper publications in both English and vernacular languages made on 24 th April 2020 enclosed at pages 3304 -3313 . In view of the aforesaid factual position, which was not seri ously disputed by most of the unitholders, we would accept that there was compliance with clause (b) of sub -regulation (3) to Regulation 39 and accordingly the cease and freeze effect of Regulation 40 had become effective. 48. Ou r attention was drawn to the C ircular dated 31 st May 2016 issued by SEBI as per which th e trustees have the option to suspend redemption of units for a period of 10 days in a period of 90 days. The relevant portion of the said circular reads as under: “b. Restriction on redemption may be imposed for a specified period of time not exceeding 10 working days in any 90 days period ” SEBI has taken the stand that the benefit of this circular should not be taken when the question of winding up is pending consideration before the trustees . The position n ot being ironclad , SEBI may re - examine whether the trustees /AMC can be permitted to take similar benefit pending the decision on the question of winding up , when they face frightful redemption pressure. Page 49 of 77 Challenge to the constitutional val idity of the Securities and Exchange Board of India (Mutual Fun ds) Regulations, 1996 49. This challenge has been raised by one of the appellants, namely, Amruta Garg. The contentions forwarded can be summarised as under: (a) The expression ‘happening of any event ’ in Regulation 39(2)(a) is unspecified and suffers from the vi ce of excessive delegation as it does not give any indication of the type of events which would be relevant for winding up of the scheme. It gives unbridled power to the trustees to wind up a s cheme which, in the opinion of the trustees, should be wound up . (b) In comparison, vide clause (c) to Regulation 39(2), SEBI has been invested with the power to issue directions for winding up a mutual fund scheme only when it is in the interest of the unitho lders. (c) Further, SEBI has not prescribed/issued guidelines or p olicy regarding formation of opinion by the trustees to wind up the scheme. (d) The opinion of the trustees is given paramountcy and is supreme. E ven SEBI accepts that it has no role and cannot exa mine and set aside the decision of the trustees. Thus , SEBI, as per its own contention and submission, being bound by the Page 50 of 77 opinion of the trustees , cannot interfere even when it is necessary to do so in the interest of unitholders or when the trustees have acted in their own vested interest. This is contrary to the sch eme of the SEBI Act whereunder SEBI has been constituted primarily to act as a watchdog and to protect interests of the investors in the capital market, including the unitholders. (e) There is no p rovision for appeal or internal challenge against the decision of the trustees who may in a given case form a wrong opinion regarding winding up of the scheme. (f) For the above reasons, clause (a) to Regulation 39(2) suffers from manifest arbitrariness in the absence of any prescription regulating the exercise of the pow er by the trustees. Reliance is placed upon State of Tamil Nadu and Another v. T. Krishnamurth y and Others ;10 Shayara Bano v . Union of India and Others ;11 Senior Superintendent of Post Offices, A llahabad and Others v. Izhar Hussain ;12 Director General, Centra l Reserve Police Force and Others v. Janardan Singh and Others. 13 10 (2006) 4 SCC 517 11 (2017) 9 SCC 1 12 (1989) 4 SCC 318 13 (2018) 7 SCC 656 Page 51 of 77 (g) Regulation 39(3) equally suffers from the vice of manifest arbitrariness as SEBI merely acts as a drop -box . Though the trustees are required to give notice disclosing circumstances leading to winding up of the scheme to SEBI , this requirement is meaningless and superficial as SEBI cannot go into the question and circumstances to be satisfied as to existence of an event warranting the extreme action of winding up . (h) Regulation 41(2)(b) is manifes tly arbitrary as it states that the sale proceeds under clause (a) shall be first discharged for such liabilities as are due and payable under the scheme and only the balance amount shall be pa id to the unitholders in proportion to the ir respective interes ts in the assets of the scheme as on the date of the decision for winding up was taken. Regulation 41 does not prescribe any mechanism or manner in which the authorised person or the AMC can as certain the liabilities which are due and payable under the sch eme. Secondly, the unitholders have been placed below the creditors of the scheme and would therefore receive only the leftover. This undermines the paramount place and position of the unithold ers. Further, the SEBI has failed to protect the interest of th e unitholders who are not only financial creditors but , as explicitly provided in Regulation 18(12) , their money is Page 52 of 77 held in the mutual fund in trust and for their benefit. Reliance is placed up on Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others 14 where the home buyers have been held to be financial creditors under the Indian Bankruptcy Code . Principle of pari passu should be made applicable. (i) Regulation 42 is also manifestly arbitrary as SEBI is to perform only ministeria l functions, much less than the functions of a regulator. Conspicuously , during the winding up process , SEBI has been given a minimalistic role which is contrary to the paramount object of the Act. 50. We would begin by referring to the provisions of the SEB I Act and by elucidating the powers of SEBI. Section 11 of the SEBI Act prescribes the functions of SEBI. Sub -section (1) , in general terms , states that it will be the duty of SEBI to protect t he interests of investors in securities and to promote the deve lopment of, and to regulate, the securities market. SEBI is empowered to take measures in this regard as it thinks fit. Sub -section (2), without prejudice to the generality of sub -section (1), lists out as many as 17 specific clauses and states that SEBI i s entitled to provide for measures relating to those clauses . Thereunder, Clause (e) relates 14 (2019) 8 SCC 416 Page 53 of 77 to prohibiting fraudulent and unfair trade practices relating to securities markets. Clause (g) conc erns prohibition of insider trading in securities. Clauses (b), (i), (ia), (ib) and (la) relate to registering and working of the trustees or trust deeds, investment advisors and such other intermediaries who may be associated with the securities market in any manner and permit s SEBI to call for information from, unde rtaking inspection, conducting inquiries and audits of mutual funds and other persons associated with the securities market, intermediaries and self -regulatory organisations. They can also as k for records from any persons, including any bank, any other aut hority or board or corporation established or constituted by or under a central or state Act relevant for investigation or inquiry by SEBI. It is also authorised to call for and require any a gency to furnish information as may be considered necessary by SE BI for discharge of its functions. Clause (m) is a residuary clause which states that SEBI can perform such other functions as may be prescribed. Sub -section (2A) to Section 11 is a non -obsta nte provision which authorises SEBI to take measures to undertake inspection of any book or register or other document or record of any listed public company or a public company, etc. which intends to get its securities listed on a recognised stock exchang e. Sub -section (3) , again , is a non -obstante provision and states that SEBI shall Page 54 of 77 exercise the same powers as are vested in a civil court under the Code of Civil Procedure while trying a suit in respect of discovery and production of books of account and o ther documents, summoning and enforcing attendance of persons and examining them on oath, inspection of any books, registers and documents of any person referred to in Section 12, inspection of any book, or register, or document, or record of a company , and issuing commissions for examination of witnesses or documents. Sub - section (4) states that without prejudice to the provisions contained in sub -section (1), (2), (2A) and (3) and Section 11B, SEBI may, by an order in writing in the interest of the in vestors or securities market, take the measures stipulated thereunder either pending investigation or inquiry or upon completion of investigation or inquiry. These include suspension of trading of any security; restraining any person from accessing security mar kets; attaching, for a period not exceeding 90 days subject to c onditions and for a further period beyond 90 days subject to confirmation by the special court, bank accounts and other properties of any intermediary or any person associated with the securit ies market in any manner involved in violation of the provisions of the SEBI Act, or Rules or Regulations made thereunder; direct any intermediary associated with securities market in any manner not to dispose of or alienate Page 55 of 77 any asset forming part of any t ransaction under investigation subject to the condition that bef ore or after passing such orders an opportunity of hearing shall be given to such intermediaries or persons concerned. Sub -section (4A) authorises SEBI to conduct an inquiry in the prescribed manner notwithstanding the provisions of sub -sections (1), (2), (2A), (3) and (4), Section 11B and Section 15 -I by an order and for reasons to be recorded in writing levy penalty under Sections 15A, 15B, etc. Under sub -section (5), the amount disgorged pur suant to the directions issued under Section 11B of the Act or 1 2A of the Securities Contracts (Regulation) Act, 1956 etc. is to be credited to the Investor Protection and Education Fund established by SEBI and to be utilised in accordance with the regulat ions framed under the Act. 51. Section 11B of the Act reads as und er: “Power to issue directions and levy penalty. – (1) Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary – (i) In the interest of investors, or orderly development of securiti es market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market; or Page 56 of 77 (iii) to secure the proper management of any such intermediary or person, it may issue such directions, – (a) to any person or class of persons referred to in section 12, or associated with the securities market; or (b) to any company in respect of matters speci fied in section 11 A, as may be appropriate in the interests of investors in securities and the securities market. (2) Without prejudice to the provisions contained in sub -section (1), subsection (4A) of section 11 and section 15 -I, the Board may, by an order, for reasons to be recorded in writing, levy penalty under sections 15A, 15B, 15C, 15D, 15E, 15EA, 15F, 15G, 15H, 15HA and 15HB after holding an inquiry in the prescribed manner. Explanation. – For the removal of doubts, it is hereby declared that th e power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this A ct or regulations made thereunder, to disgorge an amount equival ent to the wrongful gain made or loss averted by such contravention.” 52. As the heading of Section 11B states, the provision empowers SEBI to issue directions and levy penalty . It stipulates th at such powers can be exercised if and after making or causing a ny inquiry SEBI is satisfied that it is necessary – (i) in the interest of the investors or orderly development of the securities market, (ii) to prevent affairs of Page 57 of 77 any intermediary or other p ersons referred to in Section 12 being conducted in a manner det rimental to the interest of the investors or securities market; or (iii) to secure proper management of such intermediary or person. SEBI may issue directions to – (a) any person or class of p ersons referred to in Section 12 or associated with the securiti es market, or (b) to a company in respect of the matters specified in Section 11A as may be appropriate, in the interest of the investors in securities and in the securities market. The explan ation to the Section is important for it clarifies, by way of re moval of doubt, that the directions under this Section shall include and shall always deem to include power to direct any person, who has made profit or averted loss by indulging in any transa ction or activity in contravention of the provisions of the Act, or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention. The provisions of Section 11B have been held to be procedural in nature and include not only an individual but also a company . Therefore, any person associated with the securities market who commits breach of the SEBI Act, Rules and Regulations, can be subjected to such directions and measures as may be imposed and issued by SEBI. Sub -section (2) to Section 11B states that SEBI may after holding an inquiry pass an order in writing, and , without prejudice to the Page 58 of 77 provisions of Section (11), levy penalty under Sections 15A, 15B, etc. 53. Referring to the provisions, the Di vision Bench of the High Court in the impugned judgement has hel d as under: “291. Another question is about the powers of SEBI under Section 11B of the SEBI Act. We have already held that the power to issue directions under Section 11B(1) can be exercised to issue directions to AMC and the Trustees. The said direction can be issued when SEBI, after making or causing to be made an enquiry, is satisfied that (a) it is necessary to issue directions in the interest of investors or orderly development of securit ies market; (b) to prevent the affairs of any intermediary or ot her persons referred to in Section 12 being conducted in a manner detrimental to the interests of investors of securities market; or (c) to secure the proper management of any such intermediar y or person. The first question is whether SEBI has power to int erfere with the decision taken by the Trustees under Regulation 39(2)(a). If SEBI is to test the correctness or validity of such decision of the Trustees, an adjudication is required. The Trus tees and AMG will have to be heard in the adjudication process. Section 11B does not contemplate any such adjudication. If an entity to whom a direction under Section 11B has been issued commits any breach thereof or disobeys the same, it will attract pena lty under Section 15HB. Before imposing penalty, adjudication as contemplated by Section 15 -I is required to be made. There is no provision made in SEBI Act for issuing a notice of the proposed direction under Section 11B and hearing the Trustees or AMC be fore issuing the direction. No adjudication is contemplated befo re issuing the directions. Therefore, it is not possible for this Court to accept the contention of the petitioners, AMC as well as the Trustees that by exercising power under Section 11B, SEB I has power Page 59 of 77 to adjudicate upon the correctness of the decision taken by the Trustees to wind up a Scheme. However, when SEBI finds that the Trustees or AMC are not abiding by the specific provisions of the Mutual Funds Regulations, the power to issue direc tions can be exercised by SEBI. By way of illustration, we refer to hypothetical cases. After invoking the provisions of Regulation 39(2)(a), if the Trustees stop redemption the units by taking recourse to Regulation 40 without complying with the mandatory requirements of sub - clause (a) and (b) of clause (3) of Regulat ion 39, SEBI can always issue a direction under Section 11B not to stop redemptions, unless compliance is made with clause (3) of Regulation 39. If it is found that the Trustees continue to ca rry on business activities of the Schemes even after action unde r clause (3) of Regulation 39 is taken, a direction under Section 11 -B can be issued by SEBI to stop all business activities. ” 54. We have reservations on the said observations for the simple reason that if there is a violation of the regulations, i.e. clause (a) to Regulation 39(2), 39(3), 40, 41 or 42 by the trustees or the AMC, it is open to SEBI to proceed in accordance with law and in terms of Section 11 and 11B of the Act. It would be , there fore , incorrect to state that the decision of the trustees under clause (a) to Regulation 39(2) cannot be made subject matter of inquiry or investigation and therefore no directions or orders under Section 11 or 11B of the Act can be passed. No doubt, clau se (a) to Regulation 39(2) gives primacy to the opinion of the t rustees and does not require prior approval of SEBI, yet SEBI is entitled to conduct an inquiry and investigation when justified and necessary to ascertain whether the Page 60 of 77 trustees have acted in a ccordance with their fiduciary duty and also for reasons which w ould fall within the four corners of clause (a) to Regulation 39(2). If the trustees have acted for extraneous and irrelevant reasons and considerations, the action would be in violation of cl ause (a) to Regulation 39(2) and therefore amenable to action un der the SEBI Act, including directions under Section 11B. 55. The view we have taken is in consonance with the earlier decision of the Gujarat High Court in Alka Synthetics and Trading v. SEBI ,15 wherein it was observed that p ower under Section 11B is in the nature of issuing a command to persons referred to in the provision to do a certain act or to forbear from doing a certain act, if as a result of an enquiry, SEBI is satisfied about the necess ity of issuing such direction for the purposes mentioned in clau ses (a), (b) and (c). The Gujarat High Court , in our opinion, rightly observed that while Section 11 operates in the field of laying down general regulatory measures as a matter of policy, Sec tion 11B operates in the field of prescribing a specified code o f conduct in relation to specified persons or classes of persons. On the issue of application of principles of natural justice, it was noted that Section 11B empowers SEBI to issue directions only after it is satisfied about the conditions referred to in t he provision, as a result of making or causing to be 15 (199 9) 95 Comp Cas 663 Page 61 of 77 made an enquiry – which necessarily implies a pre -decisional hearing. Similar view was subsequently expressed in Nikhil T. Par ikh v. Union of India 16 , wherein the same High Court was of the view that Sect ion 11B, being an enabling provision , must be so construed as to subserve the purpose for which it has been enacted. As the term ‘measure’ is not defined in the SEBI Act, the High Court gave i t a meaning prescribed in general parlance , as incorporat ing any thing desired or done with a view to the accomplishment of a purpose, a plan or course of action intended to obtain some object, any course of action prop osed or adopted by a Government . The Securities Appellate Tribunal in Sterlite Industries (India) Ltd. v. SEBI ,17 has given an expansive interpretation to Section 11 and Section 11B of the SEBI Act, observing that they give enormous authority to SEBI. As long as the power exercised under Sectio n 11B is subject to the provisions of the SEBI Act and well with in the legal and constitutional frame work, intended to achieve the purposes of the SEBI Act and subjecting the persons specified in the section, the power will sustain. The Appellate Tribunal called it a wholesome provision designed to achieve the objecti ves of the SEBI Act. 16 (2014) 2 GLH 582 17 2001 SCC OnLine SAT 28. Page 62 of 77 56. The Trustees and the AMC in their written submissions filed before the High Court interpreting the SEBI Act and the Regulations had conceded that SEBI has extensive power s with respect to the regulation of mutual fund s including the t rustee’s decision to wind up a scheme of the mutual fund. Section 11(1) of the SEBI Act states that it is the duty of SEBI to protect the interest of investors in securities and to promote the development of, and to regulate the securities market, by “ such measures as it thinks fit”. Under Section 11 B of the SEBI Act , SEBI ha s broad powers to issue appropriate directions if it is satisfied after inquiry that such directions are necessary in th e interest of investors or for orderly development of securities market or to prevent the affairs of any intermediary being conducted in a manner detrimental to the interest of investors or the securities market or to secure proper management of any interm ediary or other person . The power of SEBI extends to regulating and monitoring the functioning and decisions taken by mutual funds, the trustees and the AMC . SEBI has the power to pass any direction if it deems fit in the interest of unitholders. The trust ees and the AMC have specifically stated : “It is evident form t he aforesaid provisions that the SEBI has extensive powers to regulate, supervise, issue directions with respect to and inspect and investigate into the affairs of a mutual fund, including wit h respect to the decision of the trustee to wind up a mutual fun d scheme Page 63 of 77 under Regulation 39(2)(a) of the Mutual Funds Regulations, including to even stop the winding up of a mutual fund scheme, if deemed necessary. The existence of such powers of the SEBI is further reinforced by Section 11D of the SEBI Act, which emp owers the SEBI to pass an order requiring any person who, ‘has violated, or is likely to violate, any provisions of this Act, or any rules or regulations made thereunder” to ‘cease and desist’ from committing such violation. It is submitted that whether SE BI would choose to exercise this power is a matter, which may be determined by SEBI in its wisdom and there may be numerous reasons why SEBI may not wish to interfere in a winding up decision by a trustee under Regulation 39(2)( a) including the reasons sub mitted by SEBI in its affidavit such as the fact that reversal of a decision to wind up a mutual fund scheme would likely cause a run on the scheme as well as severe market contagion (Referenc e is made to Paras 18,19 at Pg. 6 and 7 of the Delhi Reply; Para s 34 and 35 at Pg. 11 and 12 of the Gujrat Reply; and Paras 11 and 12 at Pgs. 5 and 6 of the Madras Reply ); however, on a reading of the scheme of the SEBI Act and regulations as a whol e, it i s submitted that it is clear that such a power does exist. ” 57. Ho w ever , we agree with the High Court that the Regulations have been framed in exercise of power conferred by Section 30 of the SEBI Act which authorises them to make regulations consistent with the provisions of the SEBI Act to carry out the purpose of the SEBI Act. The very object of the SEBI Act is to preserve confidence of the investors and to regulate the capital market, including mutual funds. In the first portion of this order, we have ela borately referred to the Regulations which thereby create a thre e-tier system of the sponsor, the AMC and the trustees. The re are stipulations regulating the Page 64 of 77 activities of the trustees and the AMC whose powers, obligations and rights have been expressly la id down. The power to regulate mutual funds, once accepted, woul d 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. 58. It cannot be accepted tha t the trustees under clause (a) to Regulation 39 (2) have been given absolute and unbridled power to wind up a scheme. Language of clause (a) to Regulation 39(2) states that the trustees must f orm an opinion on the happening of any event which requires the scheme to be wound up. Further, as per Regulation 39(3) , the trustees are bound to give notice disclosing the circumstances leading to the winding up of the scheme. These notices along with th e reasons have to be communicated to SEBI and ma de known to the unitholders by publication in two daily newspapers having circulation all over India and a vernacular newspaper having circulation at the place where the mutual fund is formed. The trustees ar e, therefore, required to come to a conclusion that due to speci fic circumstances articulated in writing , the scheme is required to be wound up. Two -thirds of the trustees are independent persons who are not associated with the Page 65 of 77 sponsor ,18 and no director, officer or employee of the AMC can be appointed as a trustee .19 Th e trustees hold the assets of the scheme in fiduciary capacity on behalf of the investors. They are experts in the field and, therefore, conferred the power under Regulation 39(2) (a) to decide whether or not a scheme should be wound up. The words used in t he statute including delegated legislation are to be understood in the light of that particular statute and not in isolation. A duly enacted law cannot be struck down on the mere ground of vagueness unless such vagueness transcends into the realm of arbitr ariness ( See Nisha Priya Bhatia v. Union of India and Another 20 ). In the context of the present case, the expression ‘occurrence of any event’ is not to be read in isolation b ut with the words ‘requires the scheme to be wound up’. The expression ‘a ny event ’ is therefore qualified with the said requirement. Read in this manner, there is no vagueness which can be described as transcending into realm of arbitrariness, on the other hand, the pre - requisite statutory mandate is clear. This is not a case of excessi ve delegation wherein the legislative function has been abdicated and passed on to the trustees who can act as per their whims and fancies. The essential legislative function is the determination of legislative policy and its formulation as a rule of condu ct. In 18 Regulation 16(5) 19 Regulation 16(3) 20 (2020) 13 SCC 56 Page 66 of 77 commercial matters varied and different situations can arise which may warrant winding up. Complexities in matters of business and commerce can be bafflingly intricate and riddled with urgencies and difficulties. Therefore, there is need for flexibi lity. Otherwise, the trustees would be compelled to first take the approval of SEBI, which may have its own consequences. 59. The Statement of Additional Information da ted 30 th June, 2019 issued by Franklin Templeton Mutual Fund, under Heading VI – ‘D uration of the Scheme and W inding U p’, provides a general indication as to when a scheme can be wound up under the Regulations , the relevant portion of which is extracted be low: “VI. DURATION OF THE SCHEME AND WINDING UP xx xx xx However, in terms of the SEBI Reg ulations, the Scheme may be wound up if: i. There are changes in the capital markets, fiscal laws or legal system, or any event or series of events occurs, which , in the opinion of the Trustee, requires the Scheme to be wound up; or xx xx xx ” 60. We h ave agreed with the High Court that the opinion of the trustees under clause (a) to Regulation 39(2), therefore, must be consented to by the unitholders in terms of the mandate of Regulation Page 67 of 77 18(15)(c). In view of th is interpretation, the argument challengi ng constitutional validity of the Regulations on the ground that they give unbridled and absolute power to the trustees loses much of its sting and force. There are, therefore, sufficient guidance and safeguards in the Regulations itself on the power of th e trustees to decide on winding up of the fund. 61. The Regulations, in our opinion, rightly draw the distinction between creditors and the unitholders. The unit holder s are investors who take the risk and, therefore, entitled to profits and gains . Havin g tak en th e calculated risk, they must also bear the losses, if any . Unitholders are not entitled to fixed return or even protection of the principal amount (See Regulations 38 and 38A). 21 Creditors, on the other hand, are entitled to fixed return as per mutuall y 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 unitholders. In this sense, unith olders are somewhat at par with the 21 Guaranteed Returns 38. No guaranteed return shall be provided in a scheme, - (a) unless such returns are fully guaranteed by the spo nsor or the asset management company; (b) unless a statement indicating the name of the person who will guarantee the return, is made in the offe r document; (c) the manner in which the guarantee is to be met has been stated in the offer document. Capi tal Protection oriented schemes 38A. A capital protection oriented scheme may be launched, subject to the following: (a) the units of the scheme are rated by a registered credit rating agency from the viewpoint of the ability of its portfolio structure to atta in protection of the capital invested therein; (b) the scheme is close ended; and (c) there is compliance with such other requirements as may be specified by the Board in this behalf. Page 68 of 77 shareholders of a company. The waterfal l mechanism under the Companies Act, or the Indian Bankruptcy Code, gives p rimacy to the dues of the creditors over the shareholders . Identical is the position of the unitholders. I n fact, the argument that the unitholders should be treated pari passu with the creditors is farfetched. Similarly, t he contention that unitholders are iden tically placed as home buyers under the Indian Bankruptcy Code is equally frail and a weak argument. Home buyers pay money to the builder and enter into a contract for purchas e of immovable property . Home buyers are not risk or partakers in gains or losses like investors in a mutual fund. Home buyers under the Bankruptcy Code are treated as creditors till the ownersh ip rights in the immovable property are transferred to them , b ut they do not take the risks and are not entitled to benefit of profits or suffer losses , as are taken by the unitholders who invest in the mutual funds without any guarantee of return s and kno w that the investment , including the principal, are subject to market risks. To equate the unitholders with either the creditors or the home buyers will be unsound and incongruous. 62. The expression ‘due and payable’ with reference to the liabilities is sig nificant. The words ‘due and payable ’ have to be interpreted w ith Page 69 of 77 reference to the context in which the words appear. 22 In the context in question they refer to the present liabilities which may be in praesenti or in futuro . There must be an existing obliga tion though the appointed date of payment may not have arrived . ‘Payable ’, in th is context , means capable of being paid, suitable to be paid and legally enforceable. It would exclude labilities that are time barred or those not payable in facts or in law. 23 In case of any dispute a summary but thorough inquiry may be m ade to ascertain whether the liability is due and payable. 24 Obviously, the liabilities which are not due and payable would not get preferential treatment , thereby reducing the amounts payable t o the unitholders. 63. Since t he Regulations are in the nature of economic regulations , while exercising the power of judicial review, we would exercise restraint unless clear grounds justify interference . We would not supplant our views for that of the expe rts as this can put the marketplace into serious jeopardy and cause unintended complications. Policy decisions can only be faulted on the grounds of mala fides , unreasonableness, arbitrariness and unfairness, in addition to violation of fundamental rights or exercise of power beyond the legal limits. The principle of manifest arbitrariness 22 B.K. Educational Services Private Limited v. Parag Gupta and Ass ocia tes , (2019) 11 SCC 633. 23 Union of India v. Raman Iron Foundry , (1974) 2 SCC 231 24 Regulations do not bar civil remedy. Page 70 of 77 requires something to be done in exercise in the form of delegated legislation which is capricious, irrational or without adequate determining principle. Delegated legisl ations that are forbiddingly excessive or disproportionate can also be manifestly arbitrary. In view of the interpretation placed by us and the discussion above , the Regulations under challenge do not suffer from the vice of manifest arbitrariness . 64. However , we must now refer to a grey area, which we would, at this stage, not like to decide till we have full facts and decision in the adjudication proceedings . The issue relates to interpretation of Regulation 53, which reads: “53. Every mutual fund and asset management company shall, (a) despatch to the unitholders t he dividend warrants within 189 [30] days of the declaration of the dividend; (b) despatch the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase; (c) in the event of failure to despatch the redemption or repurchase proceeds within the period specified in sub - clause ( b), the asset management company shall be liable to pay interest to the unitholders at such rate as may be specified by SEBI for th e period of such delay; (d) notwithstanding payment of such interest to the unit - holders under sub -clause ( c), the asset management company may be liable for penalty for failure to Page 71 of 77 despatch the redemption or repurchase proceeds within the stipulated time . Clause (b) to Regulation 53 requires that the AMC shall de spatch the redemption or repurchase proceeds within 10 working days from the date of redemption or re purchase . Regulation 40, as noticed above, states that on or from the date of publication of notice under Regulation 39 (3)(b) , the trustees of the AMC, a s the case may be, shall cease to cancel or create units of the scheme; cease to issue or redeem units of the scheme; and cease to carry on any business activity in respect of the scheme so wound up. 65. Issue in question would, therefore, arise whether the A MC or the trustees are bound to honour and pay the redemption or repurchase proceeds for requests received before the date of publication of notice in terms of Regulation 39 (3) . Interpreting the word ‘business’ in clause (a) of Regulation 40, the Division Be nch of the High Court has held that this expression refers to business activity and, therefore, would include payment of redemption proceeds to the unitholders, which would include the request for redemption received prior to the date of publication unde r Regulation 59 (3) . The High court has, accordingly, held: “228. As regards redemption requests received prior to compliance with clause (3) of Regulation 39, the argument of AMC and the Trustees was that in view of Page 72 of 77 clause (d) of Regulation 53, the redempt io n or repurchase proceeds are required to be dispatched within ten working days from the date of redemption notwithstanding the decision of winding up. As held earlier, the dispatch of redemptio n proceeds or repayment of redemption proceeds is also a part of business activity of a Scheme which is completely prohibited once the Regulation 40 triggers in. Therefore, the argument that the redemption requests made by the unit -holders on 23 rd April, 2 020 were required to be honoured even after Regulation 40 had triggered in cannot be accepted. Once there is a compliance with clause (3) of Regulation 39, the mandatory provisions of Regulation 40 forthwith operate. There is no exception carved out to any of the clauses in Regulation 40. It is obvious that such a fai lure to dispatch the redemption or repurchase proceeds due to applicability of provision of Regulation 40 cannot be termed as a failure within the meaning of sub -clause (c) of Regulation 53. Th erefore, the consequences such as payment of interests and pe na lty as provided in clause (c) of Regulation 53 may not follow.” 66. On the aspect of borrowings etc. by the AMC to make payment towards redemption, the High Court has held: “225. But, in the cont ext of the Scheme of the Mutual Funds Regulations, this Court wi ll have to consider the meaning of ‘business activities’. As stated in the earlier part of our discussion, a Scheme is launched by AMC with the approval of the Trustees. There are different ca tegories of Schemes in which the investments are made by the mem bers of the public. From plain reading of the provisions of Regulation 43, it is clear that the money received from the unit -holders and investors is required to be invested by AMC strictly in accordance with Regulation 43. The investments are to be mad e subject to investment restrictions specified in the seventh schedule. As far as borrowings are concerned, Page 73 of 77 clause (2) of Regulation 44 provides that the Mutual Fund shall not borrow except to me et temporary liquidity needs of the Mutual Fund for the purpo se of repurchase, redemption of units or payment of interest or dividend to the unit -holders. The proviso to clause (2) of Regulation 44 clearly provides that a Mutual Fund shall not borrow more than twenty percent (20%) of the net assets of the Scheme and th e duration of such borrowing shall not exceed a period of six months. Thus, in short, the business of a Mutual Fund consists of (i) launching Schemes, (ii) receiving the investments from the u nit -holders/investors, (iii) investing the money so collected from the unit -holders/investors in accordance with Regulation 43 and other relevant Regulations and (iv) paying the returns in various modes to the unit -holders/investors. The returns can be in the form of repurchase of the units, redemption of units, pay men t of interest or dividend to the unit - holders, as the case may be, depending upon the nature of the Scheme. Making such returns is certainly a business activity of a Scheme. The income so gene rated by investments made in accordance with Regulation 43, c an also be invested by AMC. Clause (3) Regulation 44 provides that save as otherwise expressly provided, a Mutual Fund shall not advance any loans for any purposes. However, clause (4) of Regulat ion 44 provides that a Mutual Fund may lend and borrow securi tie s in accordance with the framework relating to short selling and securities lending and borrowing specified by SEBI. The provisions of Mutual Funds Regulations are intended to regulate activit ies of Mutual Funds for promoting its healthy growth and for pro tecting interest of unit - holders. In a case of Taxation law , the rules of interpretation applicable provide that if there are two interpretations possible, the one in favour of assessee will h ave to be preferred. In case of Mutual Funds Regulations , a c ons truction needs to be adopted which will subserve the object of SEBI Act. Page 74 of 77 226 . It is pertinent to note here that clause (a) of Regulation 40 uses the words “business activities in respect of t he Scheme” and not merely business of the Scheme. As siated e arl ier, the activities of repurchase of units, redemption of units or payment of interest or dividend are also a part of business of a Scheme. In view of clause (2) of Regulation 44, a Mutual Fun d can borrow only for the purposes of meeting temporary liqui dit y needs for the purpose of repurchase, redemption of units, payment of interests or dividend to the unit -holders. For example, if there are large number of requests for redemption of units by the unit -holders in respect of ‘open ended Scheme’, a Mutual Fun d may face temporary liquidity crunch. In such a situation, it is permissible for a Mutual Fund to make borrowings only for payment of redemption amount. Therefore, borrowings made as specifie d in clause (2) of Regulation 44 will certainly amount to ‘bu sin ess activities’ of a Mutual Fund or a Scheme, inasmuch as, such borrowings are made for the purpose of meeting demand for redemption which is a part of business of the Scheme. 227 . Regulation 40 is interlinked with Regulation 41. In view of Regulation 40, the moment compliance is made with clause (3) of Regulation 39, the ‘business activities’ of the Scheme of a Mutual Fund must stop. The creation or cancellation of units and issue or redempti on of the units of the said Scheme must also cease. The reaso ns is, as required by sub -clause (a) of clause (2) of Regulation 41, all the assets of the Scheme under winding up are required to be disposed of in the best interest of unit -holders and thereaft er, as per sub -clause (b) of clause (2) of Regulation 41, the pr oceeds of the sale are required to be applied firstly towards discharge of liabilities of the Scheme. Secondly, the expenses in connection with the winding up are required to be set apart and thirdly, the balance amount remaining after clearing the liab ilities has to be distributed to the unit -holders in proportion to their respective interest in the assets of the Scheme. The Page 75 of 77 object of Regulation 40 of the Mutual Funds Regulation is to ensure t hat the moment compliance is made with clause (3) of Regulati on 39, the assets available at that point of time should be made available for sale. The assets cannot be allowed to be depleied by creating more liability. That is the reason why the redemption must immediately cease. Therefore, it must be held that the b orr owings made by AMC, in terms of clause (2) of Regulation 44, are business activities' of a Scheme within the meaning of clause (a) of Regulation 40. If borrowings are made in accordance with c lause (2) of Regulation 44, the act of replacement of the bor row er, as done by the AMC and the Trustees in the present case, will have to be also held to be a part of business activities in respect of the Scheme. ” 67. The case set up by some parties is at var iance with the dictum pronounced by the High Court. They have su bmitted that the mutual fund must honour the request for redemptions received on or before the date of publication of notice under Regulation 39 (3) . In other words, Regulation 53(b) must be ho noured and complied with even if the time of payment of redem pti on, the 10 days period stipulated therein, would fall after the date of publication of the notice under Regulation 39 (3) . They are of the opinion that it would be illegal not to honour the val id redemption requests. They are also of the opinion that the AM C should be allowed and permitted to borrow money within the prescribed limits to honour such valid redemption requests as long as the valid redemption requests are received prior to the cut -off date for winding up. Page 76 of 77 68. Before we answer this aspect , we wou ld like to have greater clarity on the factual matrix, which would be possible once the proceedings in pursuance of show -cause notices etc. are concluded . Notably, many of the appellants have not addressed us on this aspect, their grievance being that the For ensic Audit Report has not been made available to them . A t the same time , they did refer to news reports or articles to suggest irregularities and illegalities of different kinds, including pre ferential payments, breach of trust and mis - management in dep lo yment of funds of the scheme, violation of investment objectives stated in the offer document or scheme information document and breach of trust by withholding price sensitive information etc. Once the facts are clear and ascertained , we would be able to appreciate and understand the practical impact of the respective interpretations, i.e. the interpretation placed by the High Court and the interpretation sought to be placed and preferred by SEB I, the appellants, the trustees and the AMC. This is also the reason why we have refrained from referring and commenting on facts and left the several issues open at this stage. Nevertheless , we clarify that o ur observations in this Order and the earlier O rder should not be read as binding factual findings or conclu si ons on any disputed facts , which could be a subject matter of a show -cause notice and consequent decision. Of course, the legal interpretation Page 77 of 77 of Reg ulation 18(15)(c) and Regulations 39 to 42 to the extent indicated above are conclusive and binding . For clarity, we would also observe that any finding given by the High Court on facts or even on legal issues not subject mat ter of this O rder or our earlier O rder dated 12 th February, 2021 would not be treated as conclusive and binding as the findings are sub -judice and pending before this Court on interpretation as well as merits . ......................................J. (S. ABDUL NAZEER) ......................................J. (SANJIV KHANNA) NEW DELHI; JU LY 14 , 20 21 .