Team 38 Insolvency Resolution Services

31/05/2022

05/01/2022

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 powers with respect to the regulation of mutual funds including the trustees decision to wind up a scheme of the mutual fund. Section 11 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 11B of the SEBI Act SEBI has broad powers to issue appropriate directions if it is satisfied after inquiry that such directions are necessary in the interest of investors or CONTD //

05/01/2022

CONTD //The Securities Appellate Tribunal in Sterlite Industries. SEBI17 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 Section 11B is subject to the provisions of the SEBI Act and well within 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 objectives of the SEBI Act.

05/01/2022

CONTD //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 the provision as a result of making or causing to be made an enquiry which necessarily implies a pre decisional hearing. Similar view was subsequently expressed. Union of India16 wherein the same High Court was of the view that Section 11B, being an enabling provision must be so construed as to subserve the purpose for which it has been enacted. As the term is not defined in the SEBI Act the High Court gave it a meaning prescribed in general parlance as incorporating anything 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 proposed or adopted by a Government. CONTD //

05/01/2022

The view we have taken is in consonance with the earlier decision of the Gujarat High Court. SEBI 15 wherein it was observed that power 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 necessity of issuing such direction for the purposes mentioned in clauses 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 Section 11B operates in the field of prescribing a specified code of conduct in relation to specified persons or classes of persons. CONTD //

05/01/2022

CONTD //No doubt clause a to Regulation 39 gives primacy to the opinion of the trustees 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 trustees have acted in accordance with their fiduciary duty and also for reasons which would fall within the four corners of clause a to Regulation 39. If the trustees have acted for extraneous and irrelevant reasons and considerations the action would be in violation of clause a to Regulation 39and therefore amenable to action under the SEBI Act including directions under Section 11B.

05/01/2022

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 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 therefore incorrect to state that the decision of the trustees under clause a to Regulation 39cannot 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. CONTD //

05/01/2022

CONTD //After invoking the provisions of Regulation 39 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 Regulation 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 carry on business activities of the Schemes even after action under clause 3 of Regulation 39 is taken a direction under Section 11 B can be issued by SEBI to stop all business activities.

05/01/2022

CONTD //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 SEBI has power to adjudicate upon the correctness of the decision taken by the Trustees to wind up a Scheme.When SEBI finds that the Trustees or AMC are not abiding by the specific provisions of the Mutual Funds Regulations the power to issue directions can be exercised by SEBI. By way of illustration we refer to hypothetical cases. CONTD //

05/01/2022

CONTD // If SEBI is to test the correctness or validity of such decision of the Trustees an adjudication is required. The Trustees 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 penalty 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 before issuing the direction. No adjudication is contemplated before issuing the directions. CONTD //