Capital Markets and Securities Law

[By Dhairya Jain] The author is a student of Hidayatullah National Law University. Introduction In light of India’s projected 3,000 GW Renewable Energy (RE) potential, the nation plans to increase its RE capacity augmentation goal to 175 GW by 2022. Higher capital investments, projected at roughly USD 200 billion over the next years, would be necessary to achieve the much higher capacity objective, which will increase energy security and access while also creating more jobs. The present project finance sources in the Indian market are exhaustive enough to satisfy the expected capital and investment needs. In order to attract a larger pool of potential investors, such as pension funds, sovereign wealth funds, insurance firms, and the like, new financial instruments and financing methods must be developed. Another pushing reason for the need to introduce new funding sources and mechanisms in India is the high cost and short duration of project finance presently available for RE projects. The need for alternative instruments of finance India must diversify its capital sources in order to accomplish its capacity addition objectives despite the fact that the sector’s demand for capital has been low in the previous two to three years owing to policy changes and the economic recession. In India, the following are the main challenges that are preventing the funding of RE projects: The Environment of high interest rate: It is believed that the unattractive terms of debt and exponentially high interest rates discourage the growth of RE projects. It leads to increasing the upfront cost by a margin of 24-32%, as compared to projects financed in The United States and The Europe. Non-Availability of debts of longer tenure: Due to the short-term nature of the capital that these banks generate, Scheduled Commercial Banks in India are typically comfortable with loan tenures of five to seven years. Nearly 79 percent of bank deposits in 2009-10 had an average maturity of less than three years, according to RBI figures. However, there are a few examples of infrastructure projects, including RE projects, that have been able to get ten-year terms. Due to the banks’ short-term lending, loans in India tend to have variable interest rates rather than fixed ones. An expanding economy means that long-term hedging products are often unavailable. Variable Interestsmake cash flows to equity investors less reliable when borrowing at a variable interest rate. As a result, banks are limited in their ability to invest in a single area or technology. The RE sector falls within the overall power sector restriction, which generally lacks the depth necessary for large-scale finance of RE projects. More banks will approach and breach their sector exposure restrictions for the power industry, leaving RE projects without enough bank funding as a result of a growth in RE. As a result, the financial market will need to provide tools and procedures that fit the special needs of the sector, such as lengthy duration, significant pumping of funds, and active engagement by a range of investors, in order to meet the massive deployment of RE in the nation. What are green bonds? In the world of finance, a green bond is a fixed-income vehicle created expressly to fund environmental and climate change initiatives. Most of the time, these bonds are linked to the issuer’s assets and backed by its balance sheet. This means that they usually have the same creditworthiness as the issuer’s numerous different debt liabilities. The same rules apply to green bonds as they do to any other kind of business or government debt. lenders issue these securities in order to obtain funding for initiatives that have a good effect on the environment, such as ecological reconstruction or emission reduction..  When these bonds reach maturity, investors will be able to cash in on their investment and profit. Investing in green bonds might also result in tax advantages for investors. ​ Investors are increasingly considering green infrastructure investments as part of their social and corporate responsibility efforts in light of the growing emphasis on ecologically friendly practises. As a result, Green Bonds may be used to free up previously locked-up private funds for use in environmentally friendly initiatives. It’s still unclear what counts as “green,” although sectors such as RE, reusing and reusing garbage, water conservation, and afforestation all fall under the umbrella of “green.” If the profits of the bond offering are utilised for green initiatives, investors may make an informed decision about the project’s viability. These instruments are also being defined and governed by standards such as the Green Bond Principles. Benefits of Green Bond to various stake holders The advantages of green bonds have to be viewed from the perspective of its four stake holders which include: Investors, Issuers, Lenders and the state. Benefits to the Investors To guard against the dangers of climate change, some institutional investors promote environment-friendly corporate practises, while others diversify their investment portfolios..Green assets’ long-term competitiveness, the bond market’s better liquidity, and the minimal operational risk they carry make them an appealing investment option for institutional investors. Benefits to the Issuers or project developers For the time being, project developers in India have few alternatives when it comes to contacting financial institutions (FIs)Is that provide short-term loans with high interest rates. Developers will be able to get foreign funding at competitive conditions thanks to Green Bonds. Increasing capacity without corresponding equity injection is possible via the use of longer-term bonds with bullet payment schedules. Increased annual growth rates of 30-50 percent for the same equity base may be achieved by redeploying surplus cash flow. Benefits to the lenders or financial institutions There are self-imposed constraints on FIs in India’s financial industry. By issuing RE portfolios of Green Bonds, FIs may unload holding assets while still using the revenues to fund new projects and stay within the sector restrictions. With short-term deposits, the asset-liability mismatch is a major problem for Indian banks. The absence of long-term liquidity in the system prevents banks from obtaining long-term loans for the industry. Green Bonds are a solution

[By Muhammed Ijaz] The author is a student of Faculty of Law, University of Delhi. Introduction Bearing with success stories of thriving Asset Management Industries across countries like Singapore, Hong Kong, UK and Luxembourg and their role as engines of growth at their respective entrepreneurial promoting economies, the Government of India(“Government”) has keenly emphasized in bringing slew of measures over the time to catalyze and attract the global players into the Indian asset management/Investment fund industry. The ongoing developments and deliberations among the Government stakeholders to possibly permit the Variable Capital Companies(“VCC”), as a new vehicle for pooling of funds, in the India’s first and only International Financial Services Centre (“IFSC”), Gujarat International Finance Tec-city (‘GIFT city’), evidences the above. Pooling Vehicles for Fund formation in India       For the purpose of fund formation and its management, the legal regime emanating from the mandates of Securities and Exchange Board of India (‘SEBI’) applicable to  the Indian mainland and to IFSC through International Financial Services Centers Authority (‘IFSCA’), contemplates three types of corporate structures as permissible fund pooling vehicles. Namely, Trusts governed under the Indian Trusts Act, 1882, Companies governed under the Companies Act, 2013, and Limited Liability Partnerships (LLPs) under the Limited Liability Partnership Act. Of these, trusts are found to be predominantly used to pool funds for a variety of reasons, ranging from historical factors to pragmatic considerations such as lower compliance costs and more confidentiality. Given the benefits of the trust structure, an established legal and commercial practice has developed around its formation and operation of Investment fund industry over the years in India. However, despite being the most sought-after pooling vehicle, Trust route suffers from certain limitations including: The trustee(s), being the legal owner(s) of the trust, has/have unlimited liability; The eligibility of a trust to claim tax treaty benefits in case of overseas investments is always a contentious issue. Variable Capital Companies (“VCC”) To address above discussed limitations which has been similarly prevalent in other jurisdictions across the globe, some jurisdictions like Singapore, Hong Kong, Ireland and UK have set up a legal regime for a fourth type of corporate structure for the Investment Fund formations. A hybrid vehicle which combines the advantages across these three structures of Trust, Company and LLP. These entities are called “Variable Capital Companies” in Singapore, “Investment Company of Variable Capital” (‘ICVC’) and “Open-ended Investment Companies” (‘OEIC’) in the UK , “Open-ended Fund Company” (‘OEFC’)in Hong Kong, and “Irish Collective Asset-management Vehicle” (‘ICAV’) in Ireland. It combines the advantages of limited liability of a company with the flexibility available in a trust structure of exit and entry without alteration to the capital structure. Essentially, VCC is a collective investment scheme or pooling vehicle.  VCC corporate entity structure allows multiple collective investment schemes to be managed under a single corporate entity and allowing each of these to be ring-fenced. This structure is similar to multi-class fund structures such as the Protected Cell Company (‘PCC’) and Segregated Portfolio Company (‘SPC’) prevalent in other offshore fund jurisdictions such as Cayman Islands, the British Virgin Islands and Mauritius. The participants, who are the shareholders of the VCC, invest money [or any other asset / contribution] with the objective of making a return or profit from the investment. They invest in the capital of the VCC, but do not have control over the day-to-day management of the VCC. The constitution documents of a VCC should include a Memorandum of Association setting out the main objective of the VCC and other objectives ancillary to the main objective, and an Article of Association, setting out the rules for the internal management of the VCC. Krishnan Committee – Recommendations In September 2020, The IFSCA, the regulator at the India’s IFSC which contemplates the need for VCCs as a fund formation vehicle set up an Expert Committee under the chairpersonship of Dr. K. P. Krishnan (“Krishnan Committee”) to examine the feasibility of the VCC in India. In its report in May 2021, the Krishnan Committee assessed the features of a VCC or its equivalent, in other jurisdictions such as the UK, Singapore, Ireland and Luxembourg. In the background of Committee’s assessment of various jurisdictions and derived principles, The Committee recommended the introduction of VCCs in the IFSC by way of a separate law containing the substantive provisions governing the VCC structure in IFSCs for this purpose. It delineated the benefits of this structure over the traditional ones. The Committee noted that as a hybrid structure, a VCC carries the benefits of a company, limited liability partnership and trust, while avoiding their limitations. It allows access to various treaty benefits that do not typically extend to unincorporated entities. These would make a VCC a preferred entity to house funds in IFSCs. Additional recommendations of the Committee as follows: The share capital of the VCC should be variable in nature to allow for easy entry, redemption and buy-back of its shares by investors. A VCC can have multiple sub-funds, which are like schemes of a mutual fund. Sub-funds should not be separately incorporated. The VCC should issue a separate class of shares for each sub-fund. The assets and liabilities should be segregated at the sub-fund level. The assets of any one sub-fund should not be used to discharge the liabilities of the VCC or any of its other sub-funds.  VCCs should be allowed to issue, redeem or buy back the securities issued by them, or undertake capital reduction exercises, without restrictions. VCCs should be allowed to pay dividends out of their capital as well as profits. From a tax perspective, each sub-fund should be deemed to be a separate ‘person’ and all the provisions of Indian tax laws should apply to the sub-funds treating it as a separate person. Proposed Legal Framework for VCCs at IFSC    On consideration of the suggestions and recommendation to introduce VCC as an investment fund vehicle in the IFSC by way of a separate law, laid down through the Krishnan Committee report, the IFSCA in May 2022,

[By Anirudh Vats]   The author is a student at the Rajiv Gandhi National University of Law, Patiala. I. Introduction The Securities and Exchange Board of India (“SEBI”), in a pertinent towards the development of the Alternative Investment Fund (“AIF”) regime in India, relaxed the stringent restrictions pertaining to overseas investments made by Indian AIFs, vide SEBI Circular dated 17 August 2022[1] (“SEBI 2022 Circular”). This development comes as a partial relief to investors in the AIF industry who have been long demanding a more flexible and transparent route to overseas investments without tedious regulation and red-tapism. However, the circular does not go far enough in transforming the regulatory framework so as to accommodate the rapidly growing AIF industry. This circular comes as a welcome but sluggish step forward in the right direction, with much scope for further relaxations. II. The Evolved Regime         i.) ‘Indian Connection’ Requirement In accordance with SEBI Circular dated August 09, 2007[2] read with SEBI Circular dated October 01, 2015[3] regulating overseas investments, Indian AIFs investing in foreign portfolio entities were required to ensure that such entities have an Indian connection; they may operate a front office overseas but must have functioning back office operations in India. With the introduction of the SEBI 2022 circular, this requirement has been done away with. While the erstwhile requirement was introduced to expand the local market, it placed an unjust obligation on investors by forcing them to limit the ambit of their overseas portfolio and discourage diversification. This caused the investment managers to have limited choices in the available avenues within his/her area of expertise which could potentially fetch lucrative returns for investors. Moreover, the requirement seemed redundant in light of the restriction requiring AIFs to invest 25% of their investible fund in overseas entities, while the overwhelming majority of the fund is mandatorily allocated for Indian companies. Therefore, such an arbitrary requirement merely functioned as an embargo on the agility of the investment manager to procure sufficient returns for investors and diversify into more dynamic and flexible overseas investment strategies.         ii.) Jurisdiction Specific Requirements In addition to the ‘Indian Connection’ requirement being removed, the SEBI 2022 Circular also prescribes jurisdiction specific guidelines prescribing the permitted jurisdictions which could attract investments from Indian AIFs. AIFs are restricted to investing only in portfolio entities overseas which are incorporated in countries where the securities market regulator is either: a signatory under Appendix A of the International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (such as Luxembourg, Malaysia, and Netherlands); or a signatory to the bilateral Memorandum of Understanding (MOU) with SEBI (such as USA, Mauritius, Singapore, and Indonesia). Moreover, the SEBI 2022 Circular also prohibits investments into the overseas companies in countries which have been identified in the public statement of Financial Action Task Force (FATF) as either having strategic anti-money laundering or lack of effort in combating terror financing. However, certain jurisdictions fall in both the permitted and prohibited categories mentioned above (such as the UAE) and, hence, it is unclear whether overseas investments into these countries would be permitted under the new regime or not.         iii.) Permission for Reinvestment of Principal Amount from Liquidation or Disinvestment The SEBI 2022 Circular has permitted AIFs to reinvest the principal amount of the proceeds procured from the liquidation of overseas investments, without the requirement of a prior approval from SEBI for allocation of investing limits. However, this would be subject to the fund documents providing for such a flexible model of investment. This is a welcome change as it relaxes the tedious process for AIFs which employ a dynamic mode of overseas investment wherein investments can be repurposed to new portfolio entities according to the strategy of the investment manager. This is a significant step forward by SEBI to liberalize the overseas investment regime and provide the AIF industry the support it needs to continue its trajectory of rapid growth in India.         iv.,) Additional Compliances The SEBI 2022 Circular also prescribes certain additional compliances for AIFs. These are, inter alia: – AIFs are mandated to furnish an application to SEBI for allocation of limit for overseas investments in the prescribed format. AIFs are required by SEBI to provide the modalities of sale or disinvestment of the overseas investments to SEBI in accordance with the prescribed format within a period of 3 working days of the disinvestment or sale. Such compliances will ensure that SEBI can effectively monitor and update the allocated limits for overseas investments and ensure the overall limit is not exceeded. Moreover, these compliances will provide SEBI with valuable data that will assist in analysing market trends and updating the law in the future. III. Unaddressed Issues pertaining to Overseas Investments         i.) No enhancement of the USD 1.5 billion overseas investment cap Despite the AIF market size expanding exponentially in the past few years, this circular maintains the status quo regarding the USD 1.5 Billion overall limit for overseas investments by AIFs, despite calls for increasing the limit by investors. However, SEBI 2022 Circular falls short of increasing the aforesaid limit despite purporting to be an exhaustive overhaul of the overseas investments regime under AIFs. The possible rationale behind not increasing the overall limit is possibly to protect the foreign exchange reserves of India in the face of a resurgent US dollar and the fall in the value of the INR. While this concern is valid, periodic review of the overall limit is crucial to ensure that the regulatory regime is in line with the rapidly growing industry, and incremental increase will not have any drastic effects on the foreign exchange reserves. Moreover, if this limit is viewed as a function of the overall industry size of AIFs, it is clear that the 1.5 billion cap is a miniscule percentage of the total industry size. In the status quo, there exists a huge lag between the expanding

[By Aditya Maheshwari and Kaushlendra Pratap Singh] The authors are students at the Gujarat National Law University, Gandhinagar. Introduction The securities market (“market”) is a gravitating concept modulated by various controllable and uncontrollable factors. One of the significant aspects of the flourishment and progression of the market is the role of investors’ confidence in the market and the regulatory body. On various occasions, an accentuation is being made on the part of transparency in economic and regulatory policies for perpetuating the Investors’ Confidence in the market. The term investors’ confidence in its generic sense can be understood as investors’ readiness to capitalize on the investment possibilities and intermediation channels that are accessible to them based on their assessment of risk and reward. To make it possible for investors to access information related to various securities and regulations, the role of the Security Exchange Board of India (“Board”) has become prominent. This article intends to crack wide open the efforts being made by Board to protect investors’ interests, the comparison being made to other foreign legal regimes, and the aperture in the present legal regime related to it. The mutuality between investors’ confidence and transparency in the policies regulating investors The relationship between Investors’ Confidence and Transparency has been impregnable when it comes to the legal or the financial aspect. Investors consider the legal and regulatory environment along with political and economic aspects before making any kind of investment in the market. As per the Global Investment Competitiveness (GIC) survey in the years 2017 and 2019, two-thirds of the investors in the market, study policy uncertainty as a significant factor in their investment decision. When it comes to transparency, systematic publication of the rules and regulations,  clarity and specificity of the legal provisions of the administrative procedure, and the availability of the portals and other mechanisms are some of the criteria to be considered by the regulatory body. There is an inverse relationship between  the regulatory risk and the investment by the foreign investors as the lack of certainty holds the investors back from investing in such market While it has already been discussed the mutuality between the transparency in the regulation and the investors’ confidence, the upcoming sections would discuss the present regulatory framework in India to enhance investors’ confidence and how changes can be made in the present legal regime. For instance, European Union enacted separate legislation to bring transparency to increase investors’ confidence. Investors’ confidence – present legal regime and recent amendments As discussed above, the mutuality between investors’ confidence and transparency in the policies regulating investors in the market, the Board, since its inception in the year 1992, has undertaken specific measures and further made amendments for the protection of the investors’ interest as well as bringing transparency in the process regulating them. Existing legal framework for the protection of investors’ interest in India Since the inception of the Security Exchange Board of India Act, 1992 (“Act”), the legislature’s intention and objective were clear behind enacting this statute which can be determined through the preamble of the statute. The preamble uses the expression “protect the interests of investors in securities” in the preamble which upfront clears the role of the regulatory board. Moreover, to make it an obligation, the same is enshrined under Section 11(1) of the Act. Further, in regarding initiating an investigation as well as passing orders by the Board, one of the significant reasons is to protect the interest of the investors and against transactions that are detrimental to the investors. Initially, the investors’ grievances redressal procedure under this Act was incorporeal, however, with the introduction of the Investor Grievance Redressal Mechanism, the investors’ confidence in the market increased significantly. To add extra cushion to investors’ protection in the market, the penalty is being imposed on the listed company and person acting as an intermediary that fails to address the grievances of the investors. Consolidating the present legal framework for the protection of investors’ interest in India While in the initial legislation, certain statutory remedies were available to the investors in India however, to consolidate the existing legal framework, the Board over the last decade made substantial amendments to the Act as well as issued circulars to further substantiate the position of investors in India. Starting with the introduction of the Investors Protection and Education Fund in the year 2009 which is used to educate the investors about the current market situation as well as provide restitution to eligible and identifiable investors who have suffered losses resulting from a violation of securities laws under regulation 5(1) and 5(3) of the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009. As discussed in detail earlier about the role of transparency in policies regulating investors and investors’ confidence, the Board to provide clarity and transparency regarding revealing the shareholding pattern to the investors amended in the initial circular issued in the year 2015. Moreover, the Board to enhance the investors’ grievances mechanism, put forwarded various measures such as – Arbitration Mechanism at Stock Exchanges To vitalize the investors’ grievance mechanism, the Board introduced the arbitration mechanism to resolve investors’ grievances. The measure was taken regarding the speedy disposal of the grievances. Moreover, to further enhance this mechanism, the Board brought transparency to the process of arbitration by providing public dissemination of profiles of arbitrators. SEBI Complaints Redress System The SEBI Complaints Redress System (“SCORES”) is an online mechanism to assist investors’ to lodge compliant and further track the process of such complaints virtually. Moreover, the Board made it a devoir for the recognized stock exchanges to design and implement an online web-based complaints redressal system of their own. Analysis – shortcomings in the present legal regime Now that it has been discussed in detail the regulatory regime concerning investors’ protection in India, this section aims to compare the grievances redressal mechanism prevailing in India and other countries along with the challenges in the present regime. Comparison of investors’ grievances redressal mechanism in India

[By Ayush Hoonka and Akarsh Singh] The authors are students at the School of Law, Christ (Deemed to be University). Introduction Over the years, the Indian capital market has undergone significant changes and has evolved over a period of time. This is especially true in regards to the equity segment of the capital market, where just the total market capitalization of the Indian equity market stood at 3.21 trillion dollars which makes it the fifth-largest equity market in the world. This has been correlated with the rise of the Indian manufacturing sector, which contributed up to 17.4% to the Indian gross domestic product in the year 2020. This has also been correlated with the massive rise of the Indian technology sector, which has been the engine driver of growth of the Indian economy, contributing 8% to the total gross domestic product in 2021 while reaching a peak of 9.5% in 2015. As a result, there has been a rise of early-stage start-up companies being incorporated in the country and ultimately going public through the traditional initial public offering or the IPO route. As a result,  81 IPOs were offered in the time frame between 2020 and 2022, raising almost 1.52 lakh crore, according to a KMPG study. The performance of most of the new-age start-ups has been less than ideal as shares of stocks such as Paytm, Zomato, Policy Bazar, and Nykaa have plunged 61%,49%,49%, and 46%, respectively, compared to their all-time highs at the time of listing according to data compiled by Bloomberg. Further, this has also correlated with the fact that these companies were primarily “growth stocks” which are yet to achieve maturity in the market regarding their cash flows and business models. This has also led to the Indian capital market regulator, i.e., the Securities and Exchange Board of India (SEBI), floating a consultation paper that proposed that the companies justify their valuation at the time of going public through an IPO, and subsequently, the auditor advising the company to verify the valuation being proposed by the company’s management through key performance indicators. Analysing the Consultation Paper The new proposed rules by the SEBI’s Primary Market Advisory Committee (PMAC) not only want start-ups to reveal their price to earnings multiples (PE ratio) and earning per share (EPS ratio). They also want disclosures and revelations in regards to key performance indicators (KPIs) which venture capital firms use, angel investors as well as private equity firms as a means and a measure to decide whether the newly found start-up is worth investing in. The KPIs are not just supposed to be traditional financial yardsticks to judge a company according to its competitors but also include metrics such as subscriber growth, market penetration since inception, and future expected growth rate. These metrics are further proposed to justify their valuation, which would further be audited by an accountant or an auditor with which the firm registers. Furthermore, SEBI also wants the companies to declare the correspondence between the venture capital firms, angel investors, and private equity firms during their fundraising in regards to these key performance indicators prior to them being listed through an IPO route. The proposal aims to disclose the key performance indicators (KPI) of the preceding three years prior to the company being listed and also wants the listed entity to compare the KPI with other new-age start-up firms across the globe in an effort to get a sense of whether the company’s valuation is justified or not. The objective of the proposed disclosure is that newly formed technological start-ups or growth stocks normally are not profiting in terms of their cash flows, especially when going public. As seen recently in the case of Delhivery being listed, these growth stocks usually prioritize gaining economies of scale, economies of scope, and competitive dominance in the marketplace as a means to achieve growth. This has been true historically for the past 20 years. One prominent example is Amazon, whose founder Jeff Bezos has always prioritized future long-term growth over short-term financial returns. This also requires good capital budgeting and investment decisions, which vary among companies in terms of their business model. Response from the Industry After the SEBI, in its recent consultation paper, has proposed that all the upcoming new-age technology companies have to justify the pricing of their shares at the IPO, the industry has not welcomed this move. The proposal aims to bring transparency so that the investors do not suffer. This idea was proposed due to the meltdown in the four recently listed stocks. However, these proposed rules will make it challenging for the new-age firms to list themselves. Another important thing that the new-age technology companies have to take care of is that the company’s auditors should have audited all the information they are providing to SEBI. The SEBI has also asked the companies to inform about the price-to-earnings ratio, how the valuation of shares is done, and how the price per share is decided. The reason behind this is that SEBI wants to understand how the price of a share is fixed. SEBI, at the moment, asks the companies to disclose their earnings per share, price-to-earnings ratio, return on capital, and return on net worth. However, the new-age technology loss-making companies do not earn any profits; therefore, it would not be possible for them to disclose these as these cannot be applied to the loss-making companies. Therefore, these companies would have to disclose KPIs additionally. These KPIs are valuation based and dependent on the past transactions done by the companies. They are not validated by the companies and are mostly tracked internally. However, if these indicators have to be submitted to SEBI, the act would not be welcomed by the industry as the valuation of these indicators is a lengthy process. If these stringent norms are applied, it will hamper the growth of the companies. Analysis and suggestions: Although the disclosures that the SEBI is discussing are being done in good faith and taking into

[By Neha Koppu] The author is a student at the Symbiosis Law School, Hyderabad.  The COVID-19 pandemic has cast a shadow upon the Indian economy.  The financial sector was in turmoil after the imposition of the first lockdown back in March 2020. The mutual fund industry was no exception to this crisis. There was a negative return on equity-oriented mutual funds of around 25% to the investors in March 2020. The outbreak of COVID-19 led to a decrease in the net asset value of several mutual fund schemes resulting in a decline in income levels of the investors. One of the biggest AMCs, Franklin Templeton Mutual Fund (‘FTMF’) announced the winding up of six mutual funds due to the hit of the COVID-19 pandemic as the debt markets turned volatile and illiquid. This move surprised and disappointed the investors. The Indian mutual fund industry is now recovering from the horrors of the second wave of COVID-19. The present article aims to critically analyse the curious case of FTMF in light of the Supreme Court ruling and the corollary measures undertaken by the Securities Exchange Board of India (‘SEBI’). BACKGROUND In April 2020, the trustee of FTMF decided to wind up six of their debt schemes viz. (i) Franklin India Ultra Short Bond Fund; (ii) Franklin India Low Duration Fund; (iii) Franklin India Short Term Income Plan; (iv) Franklin India Income Opportunities Fund; (v) Franklin India Credit Risk Fund; and (vi) Franklin India Dynamic Accrual Fund. The decision to wind up came due to the illiquid market because of the COVID-19 pandemic. Due to the reduced liquidity in the market, most of the investors were looking to redeem their mutual funds, thereby reducing the value of the funds. Moreover, all credit risk funds earn high interest as the borrowers also pay high-interest charges in order to compensate for their low credit rating, making these schemes riskier than other debt schemes. A forensic audit carried out by Choksi and Choksi revealed that around 2 billion dollars were withdrawn from the six debt schemes of FTMF just a few weeks before the winding-up announcement, terming these activities “unusual”. Several petitions were filed in the High Courts of India by the aggrieved unitholders. The Supreme Court directed the Karnataka High Court to provide a decision in the instant case regarding the requirement of consent of the unitholders for closure of the mutual fund schemes. After a careful analysis of the SEBI (Mutual Fund) Regulations, 1996 (‘Mutual Fund Regulations’) the Karnataka High Court,[i] held that the consent of the unitholders is required to be obtained before winding up the mutual fund schemes. At the outset, the Court adopted a purposive interpretation of all the regulations akin to the winding up of mutual funds and held that the consent of the unitholders is sine qua non to the winding-up procedure. Thus, the Court stayed the process of winding up until the vote of the unitholders is taken. RULING OF THE SUPREME COURT Franklin Templeton approached the Supreme Court of India[ii] against the judgment passed by the Karnataka High Court. One of the main issues dealt with by the Supreme Court was whether the consent of the unitholders is a prerequisite for winding up mutual funds. The challenge before the Court was that the unitholders do not fall under the purview of Regulation 39(2) (a) and 39(2)(c) of the Mutual Fund Regulations, when SEBI and the trustees decide to shut a scheme. The trustee’s contention was as per Regulation 39(2(b), only when the unitholders want to wind up a scheme, a resolution of 75% majority is mandated. While interpreting these Regulations, the Court adopted a harmonious interpretation. In most cases, the courts adopt a three-pronged approach while interpreting statutes, (i) the words are interpreted as per its grammatical meaning in the literal sense, (ii) the context of the words are understood as to whether it is logical and workable, or (iii) applying interpretative tools to understand the provision. Firstly, the Court interpreted the term “consent” under Regulation 18(15)(c) to mean ‘consent of a majority of the unitholders.’ The term ‘consent’ as per the Black’s Law Dictionary means “a voluntary yielding to what another proposes or desires; agreement, approval, or permission regarding some act or purpose, esp. given voluntarily by a competent person; legally effective assent.”[iii] The Court observed that the underlying principle of Regulation 18(15)(c) was to provide the unitholders with information, cause and reason of winding up schemes by giving them an opportunity to accept/reject the proposal. Secondly, the Court analysed Regulation 39 to 42 read with Regulation 18(15)(c) at length, in terms of the responsibility of trustees to seek the consent of the unitholders. In general, the term ‘shall’ must be understood as a command. The expression ‘when the majority of the trustees decide to wind up’ under Regulation 18(15)(c) explicitly refers to Regulation 39(2)(a) as it is the only Regulation, that vests the trustees with the right to close a scheme. Thus, the consent of the unitholders is required to be sought before the trustees decide for a scheme to be wound up as per the interpretation of Regulation 39(2) read with Regulation 18(15)(c) of the Mutual Fund Regulations. This consent shall be sought only after the publication of the notice which discloses the reasons for winding up of the schemes. AFTERMATH The Franklin Templeton Trustees Services Pvt. Ltd. & Anr. v. Amruta Garg & Ors. has set a precedent in the mutual fund industry by emphasising the importance of seeking consent from the unitholders before winding up the schemes for any reason whatsoever. The Supreme Court of India made it abundantly clear that a combined reading of the regulations under the Mutual Fund Regulations is needed which promulgates that the consent of the unitholders is, therefore, necessary before winding up of mutual fund schemes. Pursuant to the FTMF debacle, to protect the interests of the unitholders of the mutual funds’ schemes, SEBI rolled out a circular which mandates all the Key Employees to invest