Gujarat High Court
Areez Phirozsha Khambatta vs Securities And Exchange Board Of India on 8 June, 2020
Author: Gita Gopi
Bench: Gita Gopi
C/SCA/7201/2020 IA ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
CIVIL APPLICATION (FOR VACATING INTERIM RELIEF) NO. 1 of 2020
In
R/SPECIAL CIVIL APPLICATION NO. 7201 of 2020
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FRANKLIN TEMPLETON TRUSTEE SERVICES PVT LTD Versus AREEZ PHIROZSHA KHAMBATTA ========================================================== Appearance:
MR SN SOPARKAR, SR. ADVOCATE WITH MR KEYUR GANDHI AND KUNAL SHAH FOR NANAVATI ASSOCIATES for the PETITIONER(s) No. MR MIHIR THAKORE, SR. ADVOCATE WITH MR. PARITOSH GUPTA for the RESPONDENT(s) No. MR MIHIR JOSHI, SR. ADVOCATE WITH MS. DHARMISHTA RAVAL for Respondent No. ========================================================== CORAM: HONOURABLE MS. JUSTICE GITA GOPI Date : 08/06/2020 IA ORDER
1. This civil application has been filed for vacating the interim relief granted by this Court vide order dated 03.06.2020 passed in the captioned Special Civil Application No.7201 of 2020 by which the operation and implementation of the Notice dated 28.05.2020 regarding E-
voting and Unit-holder's Meeting send through E-mail by applicant No.2 (hereinafter referred to as the "Asset Management Company") was ordered to be stayed.
2. Mr. S.N. Soparkar, learned Senior Advocate appearing with Mr. Keyur Gandh, learned advocate for Nanavaty Associates for the applicants, raised the preliminary objection that the captioned writ petition is not Page 1 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER maintainable since the applicants herein are not "State" within the meaning of Article 12 of the Constitution of India. It was contended that this Court would not have any territorial jurisdiction to entertain the writ petition and the transactions between the parties on facts are contractual in nature. It was submitted that the original petitioners have already approached respondent-SEBI and therefore, they cannot agitate before two forums at the same time. Referring to the facts of the case, it was submitted that around 3,00,000 unit holders involving around Rs.20,000/- Crores would be affected if the voting rights are not allowed to be exercised in the Meeting scheduled tomorrow. It was further submitted that it is a question of only six schemes, which have been decided to be wound up and the original petitioners had entered into the contractual investment after going through the risk profiles of the schemes, which were available in the memorandum of the schemes. It was submitted that the risk profile covers all the factors, which includes, even the investment risks, credit risks, etc. After being fully conversant with the risk factors, the original petitioners have made investments, which clarifies the fact that the scheme is completely contractual in nature. It was submitted that till the first quarter of March 2020, there was no default in the scheme and decision to wind-up six schemes was taken and thereafter, a public notice was issued as per the SEBI (Mutual Funds) Regulations, 1996 (hereinafter referred to as "the Regulations"). The reason for the decision to wind-up the schemes is the dramatic and Page 2 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER sustained fall in liquidity in certain segments of the corporate bonds market on account of the Covid-19 crisis and the resultant lock-down of the Indian economy. It was noted in the public advertisement that the Mutual Funds, especially in the fixed income segment, are facing continuous and heightened redemptions and the Trustees of the Asset Management Company in India, after careful analysis and review of the recommendations submitted by the Asset Management Company and in close consultation with the Investment Team are of the considered opinion that an event has occurred, which requires these schemes to be wound up and that this is the only viable option to preserve value for unit-holders and to enable an orderly and equitable exit for all investors in these unprecedented circumstances. The Asset Management Company issued a Notice for E-voting and unit-holder's Meeting and pursuant to Regulation 41(1) of the Regulations, unit-holders were given the option to cast their votes authorising the Trustees or Deloitte Touche Tohmatsu India LLP (Deloitee) to take further steps for winding up the six schemes. It was also stated in the notice that Kotak Mahindra Bank (Kotak) shall be assisting the Trustees (under option 1) and / or the Asset Management Company (under option 2) and providing independent advice, wherever required, in liquidation of assets. It was further contended that the Covid-19 pandemic and the economic uncertainty reduced the market liquidity and heightened redemption volumes and reduced the volumes to unsustainable levels and therefore, there Page 3 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER was risk of liquidation resulting in significant loss of value for investors. It was contended that in spite of the present economic situation, the Asset Management Company carefully considered all the available options, including temporary suspension of the redemption until the market conditions stabilize without winding up of the schemes, but, thereafter, it was decided that other available options were either inadequate to meet the scheme on account of the pandemic or would lead to loss in investors value and carry the risk of disorderly liquidation. It was further submitted that it was in consultation with the respondent-SEBI, the only possible recourse available to wind-up the scheme so as to protect the interest of the unit-holders was adopted and if the stay granted by this Court is not vacated, then that would cause grave harm and prejudice to more than 3 Lacs unit-holders of the scheme, including small / retail investors as the process of returning money to the numerous investors would be delayed and the investors would be deprived of expeditious return of their investments.
2.1 Learned Senior Advocate further submitted that there is gross delay on the part of the original petitioners in approaching this Court inasmuch as the public notice was issued on 23.04.2020. It was contended that on the next day, i.e. on 24.04.2020, the Association of National Exchanges Members of India (ANMI) addressed a communication dated 24.04.2020 to the Joint Secretary, Page 4 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER Ministry of Finance and Corporate Affairs, Government of India, New Delhi and the Chairman of respondent-SEBI raising their grievances against the steps taken by the Asset Management Company and on 07.05.2020, the respondent- SEBI advised the Asset Management Company to return the money of investors in the context of the winding-up of the six mutual fund schemes as soon as possible.
2.2 Referring to the provisions of Regulation 41 of the Regulations, it was submitted that on and from the date of publication of notice under clause (b) of Regulation 39(3) of the Regulations, the Asset Management Company or the Trustee, as the case may be, shall cease to carry on any business activity in respect of the scheme so wound up. Elaborating on the provision, learned senior advocate stated that the decision to wind-up the six schemes automatically takes effect without any further action or confirmation by any person on the date of publication of notice under Regulation 39(3)(b) of the Regulations. Thus, from 24.04.2020, no redemption of the units in the schemes is permitted and in that scenario, the money is to be returned to the unit-holders in terms of Regulation 41 of the Regulations. It was submitted that the authorization from the unit-holder is needed for the Trustees or any other person to liquidate the assets of the scheme and to pay the proceeds to the unit-holders after meeting the liabilities of the scheme. The Notice was issued on 28.05.2020 to the respective unit-holders for seeking approval by simple Page 5 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER majority of votes cast to authorize a person to take steps for implementing the winding-up of the schemes vis-a-vis liquidation of the assets of the scheme and distribution of the proceeds to the unit-holders. It was submitted that the notice, in very clear terms, lays down that the unit-holders are not bound to authorize the Trustee or the Deloitee under Regulation 41(1) of the Regulations and have every right to reject both. It was submitted that the unit-holders are first required to make a choice whether they wish to authorize either the Trustee or Deloitte for this purpose. If the simple majority rejects both the options, then the Trustees have to undertake the proposed other option to unit-holders to seek their authorization by way of subsequent voting exercise. It was submitted that authorization under Regulation 41 is a necessary precondition to the monetization of the assets of the scheme and the distribution of proceeds to the unit- holders under Regulation 41(2)(b) of the Regulations. Referring to Regulations 39, 40, 41 and 42 of the Regulations, it was submitted that initiation of winding-up process is as per the decision of the Trustees and the schemes of Mutual Fund would be finally wound-up after repaying the amount due to the unit-holders. Referring specifically to Regulation 39(2)(a) of the Regulations , it was submitted that the public were put to notice of the happening of the event, in which case, the Trustees came to the opinion that the schemes were required to be wound up and public notice came to be issued disclosing the circumstances leading to winding-up of the schemes in Page 6 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER accordance with Regulation 39(3) of the Regulations. Regulation 40 provides for the effect of winding-up and Regulation 41 is the procedure and manner of winding-up. As per Regulation 41(3), on the completion of the winding- up, the Trustees have to forward to the Board and to the unit-holders, a report as provided in sub-regulation (3) of Regulation 41 of the Regulations. On receipt of the report, if the Board is satisfied that all the measures for winding-up have been complied with, the scheme shall cease to exist.
2.3 While referring to the decision in the case of Federal Bank Ltd. v. Sagar Thomas and Others reported in (2003) 10 SCC 733, the learned Senior Advocate submitted that mere regulatory provisions to ensure that business or commercial activity carried on by private bodies remains within a discipline, do not confer any status upon the company nor put any obligation upon it which may be enforced through issue of a writ under Article 226 of the Constitution. By relying upon the said judgment, it was submitted that if the private property is acquired in public interest, it does not mean that the party whose property is acquired is performing any function or duty of a public character. Thus, when the Asset Management Company is a private entity, no writ under Article 226 of the Constitution would lie against it and hence, would not be maintainable. It was submitted that the Asset Management Company is not a 'State' and it does not discharge any public functions. It is only regulated and governed by the SEBI Act and Page 7 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER though it is controlled by the Regulations, it would not give the Asset Management Company the status of being a 'State'.
2.4 Learned Senior Advocate Mr. Soparkar placed reliance upon the decision in the case of Morgan Stanley Mutual Fund v. Kartick Das reported in (1994) 4 SCC 225 to contend that the territorial jurisdiction of the functioning of the capital market and the public issues of the corporate sectors was considered on the concept of "venue restriction clauses" to consider the guiding principles in relation to the grant of ad-interim injunction. Thus, it was stated that it was a good practice to consider the jurisdiction of the Court at the place where the Registered Office of the Company is situated and no other Court should entertain such application in an area other than where the Registered Office is incorporated.
2.5 Referring to the judgment of this Court passed in Special Civil Application No.18466 of 2019 and allied matter dated 05.03.2020 in the case of KKR India Financial Services Llimited v. Axis Bank Limited, the learned Senior Advocate submitted that the guiding rules are formulated to consider the case of granting of interlocutory injunction to ensure smooth running of the capital market and for the protection of the interest of the unit-holders. Referring to a decision of the Delhi High Court in the case of Ravinder Sabharwal and others v. Xad Inc. and others reported in Page 8 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER 2018 (172) DRJ 645, it was submitted that no injunction can be granted to restrain the holding of the General Meeting.
2.6 It was further submitted that the entire process undertaken by the applicants is in accordance with Regulations 39 to 42 of the Regulations and when all the steps are as per the Regulations and under the knowledge and directions of respondent-SEBI, then there could not be any presumption of any foul play and hence, the present application may be granted.
3. Mr. Mihir Joshi, learned Senior Advocate appearing with Ms. Dharmishta Raval, learned advocate for respondent-SEBI, adopted the arguments made by learned Senior Advocate Mr. S.N. Soparkar appearing for the applicants. It was submitted that the three stake-holders -
(i) unit-holders (ii) Trustees, who act on behalf of the investors and (iii) the Asset Management Company; have to follow the Regulations. Referring to sub-regulation 15(c) of Regulation 18 of the Regulations, it was submitted that in the winding-up decision, no consent of the unit-holder is necessary and Regulation 39(2)(a) does not provide for any prior consent of the unit-holders. It was submitted that the stay of this Court would put the scheme in suspension and there would be delay in winding-up process and it would be contrary to the interest of the investors and for expeditious process, the stay may be vacated. Reference was made to Page 9 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER Regulations 61, 66 and 68 of the Regulations to contend about the liability for action in case of default. It was submitted that if the Trustees would not proceed as per the Regulations, then the consequences as per the provisions made in the Regulations would follow.
4. Mr. Mihir Thakore, learned Senior Advocate appearing for the original petitioners, submitted that unless and until the forensic audit report is not made public and the unit- holders are not made aware of the status of the Asset Management Company, they would not be in a position to cast informed vote to the option given in selecting the authority for the winding-up process. It was submitted that on 24.04.2020, a representation was made to the Government of India in the Ministry of Finance and Corporate Affairs and also to the Chairman, SEBI regarding the misrepresentation of funds and fraud committed by the Asset Management Company. The present applicants had also made a complaint in the form of communication dated 12.05.2020 to respondent-SEBI. A copy of such complaint was forwarded to the Asset Management Company and the Grievance Redressal Cell of the Asset Management Company. The Asset Management Company gave a reply to said communication on 21.05.2020 and thereafter, on 22.05.2020, the present petition came to be filed. Thus, it cannot be said that there was delay, which would be considered as fatal.
Page 10 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020C/SCA/7201/2020 IA ORDER 4.1 It was further submitted that the winding-up decision is not legal and if the present stay stands vacated, then relief as prayed for in paras 9(A), (G) and (I) of the captioned petition would become infructuous. Reiterating the provisions of Regulation 39(2)(a) of the Regulations, it was submitted that if at all any decision is taken of winding-up, then prior approval by way of consent of 50% of the unit- holders is necessary. By specifically relying on sub- regulation 15(c) of Regulation 18 and Regulation 39(2)(a) of the Regulations, it was submitted that without any consent of the unit-holders, no winding-up can take up.
4.2 In the scheme document, the Asset Management Company is referred to as a Trust set up under the provisions of the Indian Trusts Act, 1882. It was submitted that section 77 and 78 of the Indian Trusts Act is akin to the provisions of Regulation 18, which also re-affirms that consent of the unit-holders is necessary prior to winding-up process.
4.3 It was contended that there would not be any scope for delay since the forensic audit report, after being made public, the unit-holders would have the option to make an informed choice. Thus, till then, it was submitted that there would not be any reason or ground to vacate the interim relief.
4.4 Referring to the recent announcement made by the Page 11 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER Reserve Bank of India regarding Rs.50,000 Crores Special Liquidity Package for Mutual Funds, it was submitted that the applicant-Asset Management Company may attempt to take advantage of the said package. It was submitted that during such period, there would be no irreparable loss to any unit-holder and if there would be any default, then the respondent-SEBI would be entitled to take consequential action against the Asset Management Company.
4.5 Referring to the judgment in the case of Anandi Mukta Sadguru Shree Muktajee Vandas Swami Suvarna Jayanti Mahotsav Smarak Trust and ors. v. V.R. Rudani and others reported in AIR 1989 SC 1607, it was submitted that the High Court shall have the power throughout the territories in relation to which it exercises jurisdiction, to issue to any person or authority, including in appropriate cases, any Government, within those territories, directions, orders or writs, for the enforcement of any rights conferred in Part-III and for any other purpose. Referring to paragraphs 20 to 22 of the said judgment, it was submitted that the term "authority" used in Article 226, in the context, must receive a liberal meaning and that the words "any person or authority" used in Article 226 are not to be confined only to statutory authorities and instrumentalities of the State. They may cover any other person or body performing public duty. What is relevant is the nature of duty imposed on the body. The duty must be judged in the light of positive obligation owed by the person or authority to the affected Page 12 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER party and when positive obligation exists, mandamus cannot be denied. It was submitted that mandamus would also lie against the Asset Management Company constituted by a statute for fulfilling public responsibilities.
4.6 Learned Senior Advocate Mr. Thakore placed reliance upon the judgment in the case of Marwari Balika Vidyalaya v. Asha Srivastava and others reported in 2019 (4) SCALE 600 to submit that the principle laid down in the case of Anandi Mukta Sadguru Shree Muktajee Vandas Swami Suvarna Jayanti Mahotsav Smarak Trust (supra) has been followed in the judgment and thus, submitted that the captioned petition filed against the applicants herein would be maintainable.
5. Countering the submissions made by Mr. Mihir Joshi, learned Senior Advocate appearing for the original petitioners, learned Senior Advocate Mr. Mihir Joshi submitted that the forensic audit report is for internal information of SEBI and it cannot be made a ground for continuation of interim relief. It was, therefore, prayed that the interim relief granted in favour of the original petitioners may be vacated.
6. By referring to Regulation 41(3) of the Regulations, it was submitted by Mr. S.N. Soparkar, learned Senior Advocate, that the Trustess would be accountable till the process laid down by Regulation 41(3) is followed and the Page 13 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER provisions do not make the decision of the Trustee to initiate the winding-up process subject to the approval of the unit-holders.
7. This Court has heard learned advocates for the respective parties and has perused the material on record. There is no dispute about the fact that the applicant-Asset Management Company has decided to wind-up six schemes and that the decision as per the public notice is under Regulation 39(2)(a) of the Regulations. The notice for E- voting and unit-holders Meeting is pursuant to Regulation 41(1) of the Regulations. It is alleged by the applicants that the Trustees proposed to dispose of the assets of the scheme without any approval from the unit-holders. In this case, the applicants under Regulation 41(1) has asked for the approval of the unit-holders by simple majority for the purpose of authorizing the Asset Management Company itself or Deloitte to take further steps for winding-up the six schemes. It is put to the notice that if the unit-holders approve voting to the authorization, then they were requested to make their selection between "option 1" and "option 2" and it was also clarified that if the unit-holders vote "No" to the authorization, then such unit-holders will not be required to chose between the "options" and consequently, the selection will get deactivated. It has been noted that if a simple majority of unit-holders voting rejects the authorization by voting "Yes" exercising the option and if the Asset Management Company receives a simple majority Page 14 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER of "yes" votes as compared to the "yes" votes cast for the other option, it will be considered as a resolution passed by the unit-holders but, if the simple majority of unit-holders voting rejects the authorization by voting "No" to the authorization, then the Trustee will be required to propose other option to the unit-holders seeking their authorization by way of subsequent voting exercise which may result in delay in monetising the scheme assets and distribution of the proceeds to the unit-holders. Stating with clarification as to how to vote vests with the unit-holders, the unit- holders were advised by the Trustee to vote "yes" to the authorization, as rejection may result in delay. At the same time, it is stated that voting "No" to the authorization will not change the winding-up status of the scheme.
8. The Trustees believe that both Deloitte and Kotak have strong capabilities to discharge their respective roles. The voting option has been given to the unit-holders to cast their votes authorizing the Trustee or the Deloitte. The fact on record is that the representative of ANMI had addressed a communication to the Government of India and also to SEBI regarding misrepresentation of funds and has also alleged fraud. The original petitioners had also sent a complaint in the form of communication to respondent-SEBI and on such complaint, the respondent-SEBI has directed the applicant- Asset Management Company to focus on returning the money of investors as soon as possible but at the same time, had asked for forensic audit report.
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9. In the case of Anandi Mukta Sadguru Shree Muktajee Vandas Swami Suvarna Jayanti Mahotsav Smarak Trust (supra), the Apex Court observed in Paras-20 to 22 thus:
"20. The term "authority" used in Article 226, in the con-text, must receive a liberal meaning unlike the term in Article 12. Article 12 is relevant only for the purpose of enforcement of fundamental rights under Art. 32. Article 226 confers power on the High Courts to issue writs for enforcement of the fundamental rights as well as non-fundamental rights. The words "Any person or authority" used in Article 226 are, therefore, not to be confined only to statutory authorities and instrumentalities of the State. They may cover any other person or body performing public duty. The form of the body concerned is not very much relevant. What is relevant is the nature of the duty imposed on the body. The duty must be judged in the light of positive obligation owed by the person or authority to the affected party. No matter by what means the duty is imposed. If a positive obligation exists mandamus cannot be denied.
21. In Praga Tools Corporation v. Shri C.A. Imanual & Ors., [1969] 3 SCR 773, this Court said that a mandamus can issue against a person or body to carry out the duties placed on them by the Statutes even though they are not public officials or statutory body. It was observed (at 778):
"It is, however, not necessary that the person or the authority on whom the statutory duty is imposed need be a public official or an official body. A mandamus can issue, for instance, to an official or a society to compel him to carry out the terms of the statute under or by which the society is constituted or governed and also to companies or corporations to carry out duties placed on Page 16 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER them by the statutes authorising their undertakings. A mandamus would also lie against a company constituted by a statute for the purpose of fulfilling public responsibilities. (See Halsbury's Laws of England (3rd Ed. Vol. II p. 52 and onwards)."
22. Here again we may point out that mandamus cannot be denied on the ground that the duty to be enforced is not imposed by the statute. Commenting on the development of this law, Professor De Smith states: "To be enforceable by mandamus a public duty does not necessarily have to be one imposed by statute. It may be sufficient for the duty to have been imposed by charter, common law, custom or even contract." (Judicial Review of Administrative 'Act 4th Ed. p. 540). We share this view. The judicial control over the fast expanding maze of bodies effecting the rights of the people should not be put into water-tight compartment. It should remain flexible to meet the requirements of variable circumstances. Mandamus is a very wide remedy which must be easily available 'to reach injustice wherever it is found'. Technicalities should not come in the way of granting that relief under Article 226. We, therefore, reject the contention urged for the appellants on the maintainability of the writ petition."
10. In view of the observations made in the aforesaid judgment, the objection regarding the maintainability of the captioned writ petition under Article 226 of the Constitution stands rejected.
11. It has been rightly submitted by learned Senior Advocate Mr. Thakore that amidst the allegation of mismanagement of funds and fraud, the unit-holders would not be having the opportunity of informed decision making Page 17 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020 C/SCA/7201/2020 IA ORDER while casting the E-votes for the option given by the applicants. No winding-up process could be concluded without the consent of the unit-holders, as has been laid down in sub-regulation 15(c) of Regulation 18 of the Regulation. The Trustee shall have to obtain the prior consent of the unit-holders when a majority decide to wind- up or prematurely redeem the units. Thus, in view of the above provision of law, the interim injunction granted is confirmed till the forensic audit report comes in public domain.
12. In the result, the present civil application is dismissed.
(GITA GOPI, J) PRAVIN / MARY VADAKKAN Page 18 of 18 Downloaded on : Tue Jun 09 21:36:16 IST 2020