Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 1 of 9
I. A. NO. 53453 OF 2022
CIVIL APPEAL NOS. 498-501 OF 2021
This Court, vide order dated 03rd August 2022, dismissed the
aforesaid application filed on behalf of the Foundation of
Independent Financial Advisors,
1 while stating that the reasons for
such dismissal would follow. The order further directed that Rs.
684,00,00,000/- (Rupees Six Hundred and Eighty Four Crores) be
distributed to the unitholders. As a corollary, the stay granted by us
vide order dated 12th April 2022, while issuing notice in the
application therein, also stood vacated. By the present order, we
provide the reasons for dismissal of the captioned application.
1 For short, ‘FIFA’
I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 2 of 9
2. FIFA claims that independent financial advisors/mutual fund
distributors are entitled to payment of commission agreed between
them and Franklin Templeton Asset Management (India) Private
Limited, which are in the nature of recurring expenses as per
Regulation 52 of the Security and Exchange Board of India (Mutual
Funds) Regulations, 19962
. Our attention is drawn to sub-clause (i)
of Regulation 52(4)(b), which states that ‘recurring expenses’
encompass marketing and selling expenses, including agents’
commission, if any. The circular issued by Security and Exchange
Board of India3 dated 22
nd October 2018, while referring to
Regulation 52, states that the asset management
companies/mutual funds shall adopt a full trail model of commission
in all schemes, without payment of any upfront commission or
upfronting of any trail commission, directly or indirectly. Upfronting
of trail commission is allowed only in case of inflows through
Systematic Investment Plans.
3. At the outset, we must state that FIFA is claiming commission for
the period from 23rd April 2020 and up to 17
th March 2021. The
commission/service charges payable prior to 23rd April 2020 are not
2 For short, “Regulations”
3 For short, “SEBI”
I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 3 of 9
subject matter of the present application. 23rd April 2020 is relevant
as it is the date of publication of notices under Regulation 39(3)(b).
Accordingly, on and from the said date, the trustees/asset
management company ceased to carry on business in respect of
the six schemes so wound up. In our opinion, Regulation 52, which
relates to and permits deduction of expenses including commission
payable to the distributor, is applicable when the scheme is in
operation, and not post the decision of the trustees in terms of
Regulation 39(2)(a) read with Regulation 39(3), when, upon
publication of notices, the ceasure mandate of Regulation 40 is
triggered. On and from the date of publication of notices under
Regulation 39(3)(b), the trustees/asset management company
cannot carry on business activities, create or cancel units and issue
or redeem units of the scheme. It would be a different matter if the
unitholders do not approve the winding up of the scheme, which is
not a fact in the present case, as the unitholders have consented to
the winding up of the six Schemes in accordance with Regulation
4. If we are to accept the contention of FIFA, the necessary sequitur
is to also acknowledge and accept that the asset management
company, even post the publication of notices under Regulation
39(3)(b), would be entitled to fees and expenses mentioned and
I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 4 of 9
covered by Regulation 52, as per the terms and quantum specified
in sub-regulation 6 to Regulation 52. Sub-clause (c) to Regulation
52(6) specifies the percentage of total expenses of the scheme
which is allowable, varying from 2.5% to 1.75% of the daily net
assets. This, in our opinion, would not be a correct interpretation
and lead to anomalies and tribulation with adverse consequences
for the suffering unitholders, and undo the embargo directing the
ceasure of business. Regulations 40 and 52 need to be read
harmoniously. When read together, Regulation 52, authorising and
specifying the limit of the fees and expenses payable to the asset
management company, would apply only when the scheme is in
operation, and not after publication of the notice under Clause (b)
to sub-regulation 3 to Regulation 39 resulting in ceasure of any
business activities in respect of the scheme to be wound up.
5. Regulation 41, which deals with the procedure and manner of
winding up, applies once the notice under Regulation 39(3)(b) is
published and the unitholders’ approval under Regulation 18(15)(c)
of the Regulations is received. We are not required to interpret subregulation 1 to Regulation 41, as we have already interpreted it in
our earlier order dated 14th July 2021 read with the order dated 12th
February 2021. However, FIFA claims that they would be entitled
I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 5 of 9
to payment of commission under clause (b) to sub-regulation 2 to
Regulation 41 which, for the sake of convenience, is quoted below:
“41. (1) ….
(2)(a) ….
(b) The proceeds of sale realised under clause (a), shall
be first utilised towards discharge of such liabilities as are
due and payable under the scheme and after making
appropriate provision for meeting the expenses
connected with such winding up, the balance shall be
paid to the 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) ….
(4) ….”
We would concede that, in the given case, some of the
recurring expenses mentioned in clause (b) to Regulation 52(4) like
audit fee, insurance premium, cost of statutory advertisements,
etc., would be covered and would satisfy the requirement of clause
(b) to Regulation 41(2). However, if and only when they fall under
and meet the requirement of the expenses connected with the
winding up can they be allowed under Regulation 41(2)(b). Such
expenses are allowed not because of clause (b) to Regulation
52(4), but because the expenses incurred would satisfy the
requirement of being connected with such winding up under
Regulation 41(2)(b). Commission payable to the mutual fund
distributers is certainly not an expense connected with the winding
up of the scheme.
I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 6 of 9
6. In the aforesaid background, FIFA has claimed that the commission
payment due to the mutual fund distributors on and from 23rd April
2020 is an amount ‘due and payable under the scheme’, as it is an
amount or payment that had accrued before the publication of
notices under Regulation 39(2)(b), but was not paid as it was
payable in future. Commission payable to mutual fund distributors
is in the nature of trail, and therefore, is payment due for the
services rendered to the unitholders prior to the winding up. This
argument is farfetched and fallacious.
7. In our order dated 14th July 2021, we have explained that the
expression ‘due and payable’ has to be interpreted with reference
to the context in which the words appear. In the context of the
Regulations in question, we have held that the expression refers to
the present liabilities which may be payable in praesenti or in futuro.
There must be an existing obligation to pay though the appointed
date of payment may not have arrived. Any liability which is not due
and payable, in facts and in law, would not be covered by the
expression ‘due and payable’.
4 Clause (b) to Regulation 52(4)
refers to recurring expenses, that is, expenses which will recur from
time to time. It does not refer to one-time payment which is deferred.
4 See paragraph 78 in the judgment reported as (2021) 9 SCC 606
I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 7 of 9
The recurring liability is not a present liability, but an obligation
which, on satisfaction of certain conditions, may accrue in future.
The right to claim commission may not accrue and become due and
payable. Distributor commission, as a recurring liability, is not
payable if the unitholder(s) redeem the unit. Winding up of the
scheme entails similar effects and consequences.
8. As noticed above, it is the asset management company which is
entitled to charge fees and expenses in terms of sub-regulations (1)
and (2) of Regulation 52. The mutual fund distributors are not
entitled to direct payment from the unitholders. Payment to the
distributors is made by the asset management company, from the
amount that they deduct as a recurring expense in terms of
Regulation 52(4)(b). On and after publication of the winding up
notice in terms of Regulation 39(3)(b), the trustees and the asset
management company cannot claim any payment on account of
recurring expenses under clause (b) to sub- regulation (4) to
Regulation 52. That being the position, as held above, the claim of
FIFA has to be rejected. If the amount cannot be due and payable
to the principal, the claim of the agent or a third party, in view of the
Regulations, must also fail.
I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 8 of 9
9. The claim of FIFA, on the basis of the Circular dated 22nd October
2018, which has been referred to above, is equally misconceived
and untenable. The Circular dated 22
nd October 2018 bars the
asset management company from making upfront payment or
upfronting of any trail commission, except in case of inflows through
Systematic Investment Plans. It is also stipulated that, when the
Systematic Investment Plan is discontinued for a period for which
commission is paid, the commission amount has to be recovered
on pro rata basis from the distributor. As a deduction, it follows that
on publication of notices in terms of Regulation 39(3)(b), the
business of the mutual fund comes to a stop and therefore, on and
from that date the trail commission is not payable, as the scheme
is to be wound up and the money is to be collected and paid to the
unitholders, in terms of and as per the mandate of Regulation 41.
Even if a distributor renders some services to the unitholders after
publication of the notice under Regulation 39(3)(b), it would not
entitle him to claim an amount from the asset management
company. The Circular dated 22nd October 2018 cannot override
the Regulations. The Circular does not intend to do so. It has been
issued to bring about transparency in expenses, reduce portfolio
churning and mis-selling in mutual fund schemes. The intent behind
specifying total expense ratio and the performance disclosure for
I.A. No.53453/2022 in C.A. Nos.498-501/2021 Page 9 of 9
mutual funds is to bring greater transparency in expenses and to
not confer any right on the mutual fund distributors to claim
expenses under clause (b) to Regulation 41(2), which pertains to
the procedure and manner of winding up.
10. Franklin Templeton Trustee Services Private Limited and Franklin
Templeton Asset Management (India) Private Limited have filed an
affidavit before us stating that they have borne liquidation expenses
amounting to approximately Rs. 40,00,00,000/- (Rupees Forty
Crores) towards various services such as liquidator’s fee,
disbursement expenses, fees for the e-voting platform and the
scrutinizer for voting results, etc. It is stated by them that this
amount is not intended to be charged to the six Schemes in the
interest of the unitholders of the Schemes. We have taken the said
statement on record.
11. For the aforesaid reasons, the application IA No. 53453/2022 filed
by FIFA is dismissed, without any orders as to costs.
AUGUST 12, 2022.


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