SEBI makes unitholders’ consent must to wind up MF schemes. All you need to know

Mutual fund houses will no longer be able to wind up any scheme without the consent of unitholders, the capital markets regulator has ruled. 

When was this decision taken?

The Securities and Exchange Board of India (SEBI) took this decision in its board meeting on December 28. 

Why did the regulator take this decision?

SEBI was prompted to act after Franklin Templeton MF wound up six of its schemes in April 2020. This led to unitholders approaching courts to question the legality of the move. 

What did the courts say?

After a year-long legal battle, the Supreme Court held that the consent of the unitholders was necessary for winding up any mutual fund scheme. 

In its order, the apex court said that after a wind-up notice is sent to unitholders, fresh investments and redemptions in the schemes can be frozen, but unitholders’ consent on winding-up needs to be taken before moving forward.

What does the SEBI order actually say?

SEBI in its board meeting stated that “the trustees shall obtain consent of the unitholders by simple majority of the unitholders present and voting on the basis of one vote per unit”.

However, if unitholders vote against such a wind-up, the scheme will be re-opened for investments and withdrawals from the second business day after the voting results are published.

But what did the regulation say before the SEBI order?

According to a Moneycontrol report, regulation 39 of SEBI’s MF regulations states that the fund house can close or wind-up an open-ended scheme if the trustees feel it is required or if 75% of the unitholders of a scheme pass a resolution to wind up the scheme or if SEBI directs the winding up in unitholders’ best interests.

Franklin Templeton had said that it exercised the first option, when deciding to wind-up six of its debt schemes.

However, certain unitholders of the schemes approached the courts, stating the fund house should have followed regulation 18(15)(c), which says trustees shall obtain consent of the unitholders before winding-up.