By the order dated 12th February 2021, interpreting Regulation 18(15)(c) of the Securities and Exchange Board of India (Mutual Page 2 of 77 Funds) Regulations, 1996 (hereafter referred to as ‘Regulations’) and accepting the poll results, we have directed winding up of six mutual fund schemes: (i) Franklin India Low Duration Fund (Number of Segregated portfolios – 2), (ii) Franklin India Ultra Short Bond Fund (Number of Segregated portfolios – 1), (iii) Franklin India Short Term Income Plan (Number of Segregated portfolios – 3), (iv) Franklin India Credit Risk Fund (Number of Segregated portfolios – 3), (v) Franklin India Dynamic Accrual Fund (Number of Segregated portfolios – 3), and (vi) Franklin India Income Opportunities Fund (Number of Segregated portfolios – 2).

Page 1 of 77

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 498-501 OF 2021

FRANKLIN TEMPLETON TRUSTEE SERVICES

PRIVATE LIMITED AND ANOTHER ..... APPELLANT(S)

VERSUS

AMRUTA GARG AND OTHERS ETC. ..... RESPONDENT(S)

W I T H

CIVIL APPEAL NO. 502 OF 2021

CIVIL APPEAL NO. 503 OF 2021

CIVIL APPEAL NOS. 504-507 OF 2021

CIVIL APPEAL NO. 508 OF 2021

CIVIL APPEAL NO. 509 OF 2021

SPECIAL LEAVE PETITION (CIVIL) NO. 1486 OF 2021

A N D

SPECIAL LEAVE PETITION (CIVIL) NO. ______ OF 2021)

(ARISING OUT OF DIARY NO. 1563 OF 2021)

O R D E R

SANJIV KHANNA, J.

By the order dated 12th February 2021, interpreting Regulation

18(15)(c) of the Securities and Exchange Board of India (Mutual 

Page 2 of 77

Funds) Regulations, 1996 (hereafter referred to as ‘Regulations’)

and accepting the poll results, we have directed winding up of six

mutual fund schemes:

(i) Franklin India Low Duration Fund (Number of Segregated

portfolios – 2),

(ii) Franklin India Ultra Short Bond Fund (Number of Segregated

portfolios – 1),

(iii) Franklin India Short Term Income Plan (Number of

Segregated portfolios – 3),

(iv) Franklin India Credit Risk Fund (Number of Segregated

portfolios – 3),

(v) Franklin India Dynamic Accrual Fund (Number of Segregated

portfolios – 3), and

(vi) Franklin India Income Opportunities Fund (Number of

Segregated portfolios – 2).

2. We would now proceed to interpret Regulations 39 to 42 and their

interrelation with Regulation 18(15)(c). We shall also examine and

decide the challenge to the constitutional validity of Regulations 39

to 42. As elucidated in the course of hearings and reflected in the

order dated 12th February 2021, it would be inopportune to decide

and dispose of these appeals, as facts remain disputed and are subjudice along with other substantive issues in the adjudication

Page 3 of 77

proceedings under the Securities and Exchange Board of India Act,

1992 (hereafter referred to as the ‘SEBI Act’). The forensic report of

the auditors, possibly the foundation of the show cause notice(s), is

a subject matter of consideration before the statutory authorities that

are bestowed with wide powers. It is not anyone’s case that the

statutory adjudication proceedings should be eschewed or nullified.

At the same time, we are not inclined to dispose of these appeals as

this would not be in the interest of the unitholders, who are hopeful,

yet concerned and apprehensive. Final and conclusive adjudication,

on contested factual and related issues, post the statutory

adjudication would be in the interest of the parties. No prejudice

should be caused. Directions to await the orders in the adjudication

proceeding have been incorporated in the order dated 12th February

2021. We hope and trust that the proceedings under the SEBI Act

would conclude expeditiously.

General overview of the Regulations

3. We shall begin with an overview of the Regulations as they would

aid us in deciding the two issues; though, to avoid prolixity, we are

not reproducing the Regulations. We would subsequently selectively

quote the Regulations requiring interpretation.

4. The Regulations envisage a three-tier structure for mutual funds in

the form of the sponsor, the board of trustees or the trustee 

Page 4 of 77

company, and the asset management company (the AMC). The

sponsor, as defined by Regulation 2(x), means a person who, acting

alone or in combination with another body corporate, establishes a

mutual fund. For this purpose, the sponsor is required to make an

application to the Securities and Exchange Board of India

(hereinafter referred to as the ‘SEBI’) in the prescribed form for

registration of the mutual fund. Chapter II of the Regulations spells

out the eligibility criteria and requirements for registration of a

mutual fund.

5. The term ‘trustees’ has been defined in Regulation 2(y) to mean the

board of trustees or the trustee company who hold the property of

the mutual fund in trust for the benefit of the unitholders. The

expression ‘unit’ has been defined in Regulation 2(z) to mean the

interest of the unitholders in the scheme, which consists of each unit

representing one undivided share in the assets of the scheme, and

the term ‘unitholder’ has been defined in Regulation 2(z)(i) to mean

a person holding a unit in the scheme of a mutual fund.

6. The AMC is a company, approved by SEBI under Regulation 21(2),

which undertakes business activities in the nature of management

and advisory services provided to the pooled assets. The services 

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may be specified by SEBI from time to time. The AMC is forbidden

by the Regulations from acting as a trustee of any mutual fund.

7. Chapter III relates to the constitution and management of mutual

funds and operation of trustees etc. Regulation 14 stipulates that a

mutual fund shall be constituted in the form of a trust and the

instrument of the trust shall be in the form of a deed, registered

under the provisions of the Indian Registration Act, 1908, executed

by the sponsor in favour of the trustees. Regulation 15(1) requires

that the trust deed shall incorporate such clauses as are mentioned

in the Third Schedule of the Regulations, and such other clauses as

are necessary for safeguarding the interests of the unitholders.

Regulation 15(2) mandates that no trust deed shall contain a clause

which has the effect of – (a) limiting or extinguishing the obligations

and liabilities of the trust in relation to any mutual fund or the

unitholders; or (b) indemnifying the trustees or the AMC for loss or

damage caused to the unitholders by acts of negligence or acts of

commission or omission on part of the trustees or the AMC.

Regulation 16 itemises the criteria for disqualification from

appointment as a trustee. In effect, it stipulates the eligibility

requirements for appointment of the trustees. In particular, it states

that two-thirds of the trustees shall be independent persons, not

associated with the sponsors in any manner. Further, a person 

Page 6 of 77

appointed as a trustee of a mutual fund is not eligible to be

appointed as a trustee of another mutual fund. An AMC and its

directors (including independent director), officers or employees are

ineligible to be appointed as a trustee of any mutual fund.

Regulation 17 requires prior approval of SEBI before a person is

appointed as a trustee. In the case of existing trustees of any mutual

fund, they may form a trustee company to act as a trustee, albeit

with prior approval of SEBI. The trustees are bound by the Code of

Conduct specified in the Fifth Schedule, as well as general and

specific due diligence mandates.

8. Regulation 18 is critical as it elaborately enlists the rights and

obligations of the trustees, in as many as 29 sub-regulations. The

trustees and the AMC, as per Regulation 18(1), can enter into an

investment management agreement with the prior approval of SEBI.

Such an agreement must contain clauses mentioned in the Fourth

Schedule and other clauses as are necessary for the purpose of

making investments. The sub-regulations enumerate the

requirements to be satisfied before a scheme is launched by the

AMC. They obligate that the trustee shall ensure that the AMC has

been diligent in empanelling the brokers, and in monitoring

securities transactions with the brokers and in avoiding undue

concentration of business with any broker. The trustees have to also 

Page 7 of 77

ensure and check that the AMC has not given any undue or unfair

advantage to any associates or dealt with any of its associates in

any manner detrimental to the interest of the unitholders and that

the transactions entered into by the AMC are in accordance with the

regulations and the scheme. The trustees are entitled to call for

details of transactions in securities by the key personnel of the AMC

in their own name or on behalf of the AMC and report the same to

SEBI, as and when required. The sub-regulations require the

trustees to carry out quarterly reviews of all transactions between

the mutual funds, the AMC and its associates. The trustees are to

also review the net worth of the AMC on a quarterly basis. In case of

any shortfall in net worth, the trustees were to ensure that the AMC

makes up for the shortfall in terms of Regulation 21(1)(f).1 The

trustees are to furnish to SEBI, on a half-yearly basis, a report on

the activities of the mutual fund with certificates that there have

been no instances of self-dealing or front running by any of the

trustees, directors or key personnel of the AMC, and that the AMC

has been managing the schemes independently of any other

activities, and in case any activities of the nature referred to in

Regulation 24(b) have been undertaken by the AMC, that it has

1 The position post the SEBI (Mutual Funds) (Amendment) Regulations, 2021 with effect from 5th

Marcch 2021 has not been examined.

Page 8 of 77

taken adequate steps to ensure that the interests of the unitholders

are protected.2

9. Chapter IV of the Regulations relates to the constitution and

management of the AMC and the custodian. The AMC is appointed

by the sponsor, or by the trustee, if so authorised by the trust deed.

However, the appointment needs approval by SEBI under

Regulation 21(2). As per Regulation 20(2), the appointment of the

AMC can be terminated by majority of the trustees or by 75% of the

unitholders of the scheme. Regulation 20(3) states that any change

in the appointment of the AMC is subject to the approval of SEBI

and the unitholders. Regulation 21 enumerates the eligibility criteria

for appointment as an AMC. The directors of the AMC should be

persons having adequate professional experience in finance and

financial services related fields and should not be found guilty of

moral turpitude or convicted of any economic offence or violation of

any securities laws. The key personnel of the AMC should not have

been found to be guilty of the above, nor should they have worked

for any AMC/mutual fund/intermediary during the period when its

registration was suspended or cancelled by SEBI. The board of

directors of the AMC must have at least 50% of directors who are

not associates, or associated in any manner with the sponsor or any

2 Legal effect of Regulation 24 has not been examined.

Page 9 of 77

of its subsidiaries or the trustee. The net worth of the AMC should

not be less than Rs.50 crores. Regulation 24 specifies the

restrictions on the business activities of the AMC. Regulation 25

specifies the obligations and the responsibilities of the AMC, which

include taking reasonable steps and exercising due diligence to

ensure that the investment of funds pertaining to any scheme is not

contrary to the provisions of the regulations and the trust deed. The

AMC is responsible for the acts of commission or omission by its

employees, or persons whose services have been procured by the

AMC. Sub-regulation (6) states that the AMC and its directors,

notwithstanding any contract or agreement, shall not be absolved of

the liability to the mutual fund for their acts of omission and

commission, while holding such position or office.

10. There are a number of stipulations and restrictions to ensure

objectivity, fidelity and transparency in business transactions by the

AMC and compliance with the Regulations. A system of regulation

involving checks, responsibility and power of free decision is

envisaged. The Chief Executive Officer, by whatever name called, is

mandated by sub-regulation (6A)3

to Regulation 25 to ensure that

the mutual fund complies with all the provisions of the Regulations,

guidelines and circulars issued in relation thereto from time to time

3 SEBI (Mutual Funds) (Second Amendment) Regulations, 2020, w.e.f. 29.10.2020

Page 10 of 77

and that the investments made by the fund managers are in the

interest of the unitholders. This officer is responsible for the overall

risk management function of the mutual fund. Sub-regulation (6B)

4

to Regulation 25 states that the fund managers, whatever be the

designation, shall ensure that the funds are invested to achieve the

objectives of the scheme and in the interest of the unitholders.

11. Chapter V deals with schemes of mutual funds and Regulation 28(1)

thereunder states that no scheme shall be launched by the AMC

unless it is approved by the trustees and a copy of the offer

document has been filed with SEBI. Regulations 32 and 33 pertain

to the listing and repurchase respectively of units in close-ended

schemes, while Regulation 35 deals with the allotment of units and

refunds of moneys. In terms of Regulation 38, guaranteed return is

not to be provided in a scheme, unless such returns are fully

guaranteed by the sponsor or the AMC, and a statement to that

effect is made in the offer document, indicating the name of the

person who will guarantee the return and the manner in which the

guarantee is to be met. Regulation 38A permits launching of a

capital protection-oriented scheme subject to: (a) the units of the

scheme being rated by a registered credit rating agency from the

viewpoint of the ability of its portfolio structure to attain the

4

Ibid. 

Page 11 of 77

protection of the capital invested therein; (b) the scheme being

close-ended; and (c) compliance with other requirements as may be

specified by SEBI. Regulation 48 requires that every mutual fund

shall compute the Net Asset Value of each scheme as specified and

the same shall be calculated on daily basis and disclosed in the

manner as stated by SEBI.

12. Regulation 49 is titled ‘pricing of units’ and states that the price at

which the units may be subscribed / sold / repurchased by the

mutual fund shall be made available to the investors in the manner

specified by SEBI. The methodology for calculating the sale and

repurchase price of the units is to be provided by the mutual fund in

the manner specified by SEBI. Sub-regulation (3) states that in

determining the price of the units, the mutual fund shall ensure that

the repurchase price is not lower than 93% of the Net Asset Value

and the sale price is not higher than 107% of the Net Asset Value.

As per the second proviso to sub-regulation (3), difference between

the repurchase price and the sale price of the unit shall not exceed

7% calculated on the sale price.5

13. Regulations 54 and 55 relate to the annual report and the auditor’s

report respectively. Regulation 56 requires providing a copy of the

5 Post amendment w.e.f. 5.3.2021 Regulation 49(3) states that the repurchase price of units of an openended scheme shall not be lower than 95 % of the NAV. There is no stipulation in the Regulations

regarding the sale price. 

Page 12 of 77

annual report and the summary thereof to the unitholders.

Regulation 58 mandates periodic and continual disclosures by the

AMC, the trustee, the sponsors, and the custodians, requiring them

to make such disclosures and submit such documents as may be

provided by SEBI and comply with sub-regulations (2) and (3).

Regulation 59 deals with half-yearly disclosures. Regulation 60

imposes a general obligation to disclose information and, being of

some importance, is reproduced below:

“Disclosures to the investors

60. The trustee shall be bound to make such

disclosures as are essential in order to keep them

informed about any information which may have an

adverse bearing on their investments.”

The trustees are mandated and bound to make such

disclosures to the unitholders as are essential to keep them

informed about any information that may have adverse bearing on

their investments.

14. Chapter VIII relates to and empowers SEBI to authorise and

conduct inspection and audit. SEBI, under Regulation 61(1), may

appoint one or more persons as the inspecting officers to undertake

inspection of the books of accounts, records, documents, and

infrastructure, systems, and procedures or to investigate the affairs

of the mutual fund, the trustees, and the AMC for the purposes 

Page 13 of 77

stipulated therein. Regulation 62 requires that SEBI shall issue not

less than ten days’ notice to the mutual fund, trustees, or AMC, as

the case may be, before ordering an inspection or investigation.

However, under sub-regulation (2), notwithstanding sub-regulation

(1), SEBI can direct such inspection or investigation without any

notice when it is satisfied that in the interest of the investors no such

notice should be given. Regulation 63 prescribes the duties and

obligations of the mutual fund/ trustees/ AMC whose affairs are

being inspected or investigated. The investigating officer can, during

the course of the investigation, examine or record the statements of

any director, officer, or employee of the mutual fund/ trustee/ AMC

and every such mutual fund/ trustee/ AMC is duty-bound to give to

the investigating officer all assistance in connection with the

inspection or investigation. The inspecting officer is to submit, as

soon as possible, a report to SEBI on completion of the

investigation. Regulation 65 states that SEBI or the Chairman shall

after consideration of inspection or investigation report take such

action as SEBI or the Chairman may deem fit and appropriate under

Chapter V of the Securities and Exchange Board (Intermediaries)

Regulations, 2008.

Page 14 of 77

Regulations 39 to 42 and 18(15) of the Securities and Exchange

Board of India (Mutual Funds) Regulations, 1996.

15. Regulations 39 to 42 read as under:

“Winding Up

39. (1) A close-ended scheme shall be wound up on

the expiry of duration fixed in the scheme on the

redemption of the units unless it is rolled over for a

further period under sub-regulation (4) of regulation 33.

(2) A scheme of a mutual fund may be wound up, after

repaying the amount due to the unit holders, —

“(a) on the happening of any event which, in the

opinion of the trustees, requires the scheme to

be wound up; or

(b) if seventy-five per cent of the unit holders of a

scheme pass a resolution that the scheme be

wound up; or

(c) if the Board so directs in the interest of the

unitholders.

(3) Where a scheme is to be wound up under subregulation (2), the trustees shall give notice disclosing

the circumstances leading to the winding up of the

scheme:

“(a) to the Board; and

(b) in two daily newspapers having circulation all

over India, a vernacular newspaper circulating at

the place where the mutual fund is formed.

Effect of winding up

40. On and from the date of the publication of notice

under clause (b) of sub-regulation (3) of regulation 39,

the trustee or the asset management company as the

case may be, shall—

Page 15 of 77

“(a) cease to carry on any business activities in

respect of the scheme so wound up;

(b) cease to create or cancel units in the scheme;

(c) cease to issue or redeem units in the scheme.

Procedure and manner of winding up

41. (1) The trustee shall call a meeting of the

unitholders to approve by simple majority of the

unitholders present and voting at the meeting resolution

for authorising the trustees or any other person to take

steps for winding up of the scheme:

Provided that a meeting of the unitholders shall not be

necessary if the scheme is wound up at the end of

maturity period of the scheme.

(2)(a) The trustee or the person authorised under subregulation (1) shall dispose of the assets of the scheme

concerned in the best interest of the unitholders of that

scheme.

(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) On the completion of the winding up, the trustee

shall forward to the Board and the unitholders a report

on the winding up containing particulars such as

circumstances leading to the winding up, the steps

taken for disposal of assets of the fund before winding

up, expenses of the fund for winding up, net assets

available for distribution to the unit holders and a

certificate from the auditors of the fund. 

Page 16 of 77

(4) Notwithstanding anything contained in this

regulation, the provisions of these regulations in

respect of disclosures of half-yearly reports and annual

reports shall continue to be applicable until winding up

is completed or the scheme ceases to exist.

Winding up of the scheme

42. After the receipt of the report under sub-regulation

(3) of regulation 41, if the Board is satisfied that all

measures for winding up of the scheme have been

complied with, the scheme shall cease to exist.”

16. Regulation 18(15)(c) reads as under:

“Rights and obligations of the trustees.

18.

xx xx xx

(15) The trustees shall obtain the consent of the

unitholders –

(a) whenever required to do so by the Board in the

interest of the unitholders; or

(b) whenever required to do so on the requisition made

by three-fourths of the unitholders of any scheme; or

(c) when the majority of the trustees decide to wind up

or prematurely redeem the units.”

Interpretation of Regulations 39 to 42, their interplay and

harmonious construction with Regulation 18(15) (c) of the Securities

and Exchange Board of India (Mutual Funds) Regulations, 1996.

17. Regulation 39, as the heading states, relates to ‘winding up’ of a

scheme of a mutual fund. Sub-regulation (1) to Regulation 39 

Page 17 of 77

applies to close-ended schemes and is accordingly not relevant as

the six schemes in question are open-ended schemes.

6

18. Sub-regulation (2) to Regulation 39 uses the expression ‘a scheme

of a mutual fund,’ and accordingly applies to both open-ended and

close-ended schemes.7

It is an undisputed position that subregulation (2) to Regulation 39 applies to the six schemes. In terms

of sub-regulation (2) to Regulation 39, a scheme of a mutual fund

can be wound up: (a) on the happening of any event, which, in the

opinion of the trustees, requires the scheme to be wound up; (b) if

75% of its unitholders8 pass a resolution for winding up of the

scheme; or (c) SEBI directs winding up of the scheme in the interest

of the unitholders. Under each clause the initiator is different, and

the condition to be satisfied is stipulated. Clause (a) empowers the

trustees, while clauses (b) and (c) empower the unitholders and

SEBI respectively.

19. When a scheme “is to be wound up” under sub-regulation (2), the

trustees are required by sub-regulation (3) of Regulation 39 to issue

a public notice in two daily newspapers having all India circulation

6 Regulation 2(f) – “close-ended scheme” means any scheme of a mutual fund in which the period of

maturity of the scheme is specified.

7 Regulation 2(s) – “open-ended scheme” means a scheme of a mutual fund which offers units for sale

without specifying any duration for redemption.

8 2(z)(i) of SEBI (Mutual Fund) Regulation 1996, “unit holder” means a person holding unit in a scheme

of mutual fund.

Page 18 of 77

and in a vernacular paper having circulation where the mutual fund

is located. The public notice should state the circumstances leading

to winding up of the scheme. The trustees are also required to write

to SEBI and disclose the circumstances leading to winding up of the

scheme.

20. On and from the date of publication, the cease and freeze mandate

of Regulation 40 triggers. Regulation 40, which is in the nature of

statutory injunction, states that on and from the date of publication of

notice under Regulation 39(3), the trustees and the AMC shall

cease to (a) carry on any business in respect of the scheme to be

wound up; (b) create or cancel units of the scheme; and (c) issue or

redeem units of the scheme.

21. Regulation 41, as per the heading, relates to the procedure and

manner of winding up. The trustees, in terms of sub-regulation (1) to

Regulation 41, are required to call a meeting of the unitholders for

authorising either the trustees or any other person to take steps for

winding up of the scheme. Voting at the meeting is by simple

majority of the unitholders present and voting. In this meeting the

unitholders do not examine, affirm or reject the decision to wind up

the scheme. The voting is restricted to selection of the person –

Page 19 of 77

either the trustee or a third person – who would take ‘steps for

winding up of the scheme’.

22. Regulation 41(2)(a), requires that the person or the trustee

authorised under Regulation 41(1) must dispose of the assets of the

scheme in the best interest of the unitholders. Clause (b) to subregulation (2) to Regulation 41, states that the sale proceeds shall

be first utilised towards discharge of liabilities due and payable

under the scheme. Secondly, appropriate provision is to be made for

meeting the expenses connected with the winding up. The balance

amount shall be paid to the unitholders in proportion to their

respective interests in the scheme as on the date when the decision

for winding up was taken. The clause differentiates between the

creditors whose liability is due and payable, and the unitholders.

Payment of the amount due and payable to the creditors is

prioritised and takes precedent. Thereafter, appropriate provision is

required to be made for expenses connected with the winding up.

The balance amount is payable to the unitholders.

23. In terms of Regulation 42(2), the unitholders are to be paid in

proportion to their respective interest in the assets of the scheme.

The interest of the unitholders in the assets of the scheme as

mentioned in Regulation 42(2) is computed on the basis of the date 

Page 20 of 77

when the decision for winding up of the scheme was taken. As per

Regulation 41(3), on completion of winding up, the trustees have to

forward to SEBI and to the unitholders a report on the winding up

containing particulars such as circumstances leading to the winding

up, the steps taken for disposal of the assets for winding up,

expenses for winding up, net assets available for distribution to the

unitholders and a certificate from the auditors. Sub-regulation (4), a

non-obstante provision, states that the requirement in respect of

disclosures in the form of half-yearly report and annual report shall

continue until winding up is completed or the scheme ceases to

exist. Regulation 42 states that after receipt of the report under

Regulation 41(3), if SEBI is satisfied that all measures relating to

winding up have been complied with, the scheme would cease to

exist.

24. Regulation 42A stipulates that the units of the mutual funds scheme

shall be delisted from the recognised stock exchange in accordance

with the guidelines as may be specified by SEBI.

25. Regulation 18(15)(c), which relates to rights and obligations of the

trustees, in simple words requires the trustees to take consent of the

unitholders, when they, by majority, decide to wind up or

prematurely redeem the units. Words “winding up” in Regulation 

Page 21 of 77

18(15)(c), ex-facie refers to the winding up of the open-ended

scheme and the expression “prematurely redeem the units” refers to

premature redemption of units under the close-ended scheme.

Decision of the High Court and contentions of SEBI, the trustees and

the AMC.

26. The judgment under challenge, interpreting Regulation 18(15)(c)

and Regulation 39(2)(a) holds that the decision of the trustees to

wind up a scheme under clause (a) to Regulation 39(2) must muster

the consent of the majority of the unitholders as per Regulation

18(15)(c).

27. Contesting this finding and interpretation, the argument of SEBI, the

trustees and the AMC is that Regulations 39 to 42 are a complete

code dealing with winding up of a scheme of mutual funds. Initiators

and conditions to be satisfied under clauses (a), (b), and (c) to

Regulation 39(2) are different. It is argued that prior consent of the

unitholders is not envisaged when the trustees, on the happening of

any event in terms of clause (a), form an opinion that a scheme is

required to be wound up, or when SEBI under clause (c) directs

winding up of a scheme in the interest of the unitholders. Only when

the unitholders want to windup a scheme, in terms of clause (b), a

resolution by 75% of the unitholders is mandated. The need to

obtain the consent of the unitholders vide Regulation 18(15)(c) 

Page 22 of 77

refers to the procedure and the manner for winding up as mandated

by Regulation 41(1). To put it differently, the unitholders do not

come into the picture when the trustees and SEBI, under clauses (a)

and (c) respectively of Regulation 39(2), decide to wind up a

scheme. Their decision is final and binding on the unitholders. It is

submitted:

“a) Regulation 18(15)(c) requires Trustees to obtain

consent of Unit holders “when the majority of the

Trustees decide to wind up”. It is thus very clear that

consent is required when Trustees decide to wind up

the scheme(s) and when read together with Regulation

41, makes it amply clear that the consent is for the

purpose of Regulation 41 i.e. to authorize the Trustee

or any other person to dispose of the asset of

scheme(s), in the interest of the unit holders.

(b) The consent envisaged under Regulation 18(15)(c)

is a general “rights and obligations” of the Trustees and

that the said consent shall be read as approval required

under Regulation 41(1).

(c) It is submitted that in the event consent under

Regulation 18(15)(c) is interpreted to mean that prior

consent of unitholders is required before a scheme is

wound up pursuant to a decision taken by the Trustees,

the provisions of Regulation 39(2)(b) to be rendered

otiose as under the said Regulation, a scheme may be

wound up at the instance of Unit holders (upon 75% of

the Unit holders of a scheme passing a Resolution for

winding up).

(d) Regulation 40 comes into effect “on and from the

date of publication of notice” by Trustees under

Regulation 39(3)(b) and not from the date of “consent

of Unit holders”, which makes it abundantly clear that

consent of Unit holders is not contemplated qua

decision of Trustees to wind up a scheme(s).

(e) Further, Regulation 40 (a) provides that on and from

the date of publication of notice under 39(3)(b), the

Trustees or Asset Management Company, as the case 

Page 23 of 77

may be, shall cease to carry on any business activities

in respect of the scheme so wound up. Therefore, when

a decision by Trustee to wind up scheme is taken, in

terms of 39(2)(a), the notice is issued and Regulation

40 comes into operation and the requirement of

obtaining consent of Unit holders at this stage cannot

arise.

(f) It is submitted that Regulation 41(1) casts an

obligation on the Trustees to call a meeting of the unit

holders to approve a resolution authorising the

Trustees or any other person to take steps for winding

up of the scheme. Regulation 18(15)(c) of the MF

Regulations cannot be erroneously interpreted so as to

conclude that before implementing Regulation 41, prior

approval of the unit holders has to be taken.”

The submission accentuates, what is submitted would be the

impractical and calamitous effect of reading Regulation 18(15)(c)

into Regulations 39 to 42. Prior-consent from the unitholders if

necessary even when the trustees ‘decide to wind up’ a scheme

under Regulation 39(2)(a), would inevitably delay the publication of

public notices as envisaged by Regulation 39(3). Therefore the

cease and freeze legal effect of Regulation 40 would get postponed

resulting in chaos and confusion, as business activities such as

buying and redemption of units etc., would continue despite the

trustees having taken the decision to wind up the scheme. In panic,

most unitholders would rush for redemptions, which achingly would

be the reason for winding up. The result would be fire-sale of sound

assets in a hasty and disorganised manner at discounted valuations

in adverse market conditions. The trustees who stand in a fiduciary 

Page 24 of 77

capacity as domain experts, as mandated by clause (a) to

Regulation 39(2), act for and in the interest of the unitholders. The

unitholders, a large and disparate body of lay persons without

domain expertise, have been erroneously conferred the right to veto

and overrule the decision of the domain experts. Given the grave

consequences for the sponsor, trustees and AMC, a decision to

wind up a scheme is taken after in-depth analysis with great care

and caution. Thus, the findings of the High Court to the contrary

should be reversed.

Interpretation of the term ‘consent’ in Regulation 18(15)(c) vide order

dated 12th February, 2021

28. In our order dated 12th February 2021, we have interpreted

Regulation 18(15)(c) and the word ‘consent’ therein in the following

manner:

“8. However, we begin by rejecting the argument raised by

some of the objecting unitholders that consent would be

binding only on those who have consented to winding up

of the mutual fund schemes and cannot be imposed on

others. The word ‘consent’, in the context of the clause,

clearly refers to ‘consent of the majority of the unitholders’,

and not consent given by individual unitholders who alone

would be bound by their consent, that is, it excludes

unitholders who are not agreeable. To accept the second

or contra view, as pleaded by some of the objecting

unitholders, would be to negate the very object and

purpose of clause (c) to sub-regulation (15) of Regulation

18. In fact, the submission, if accepted, will make the

Mutual Fund schemes and the winding up provisions in

the Mutual Fund Regulations unworkable as there would 

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be two different classes of unitholders – one bound by the

consent, and others who are not bound by consent.

Consequently, the scheme would not wind up. The intent

behind the provision is to bind even those who do not

consent.

9. Black’s Law Dictionary (10th Edition) defines the word

‘consent’ as “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.” The dictionary

also defines ‘general consent’ to mean “adoption without

objection, regardless of whether every voter affirmatively

approves.” Shackleton on the Law and Practice of

Meetings, 14th Edn., while defining majority, and the

binding effect of majority, has opined:

“Definition

7-30. Majority is a term signifying the greater

number. In legislative and deliberative

assemblies, it is usual to decide questions by a

majority of those present and voting. This is

sometimes expressed as a “simple” majority,

which means that a motion is carried by the mere

fact that more votes are cast for than against, as

distinct from a “special” majority where the size of

the majority is critical.

The principle has long been established that the

will of a corporation or body can only be

expressed by the whole or a majority of its

members, and the act of a majority is regarded

as the act of the whole.

A majority vote binds the minority

7-31. Unless there is some provision to the

contrary in the instrument by which a corporation

is formed, the resolution of the majority, upon any

question, is binding on the majority and the

corporation, but the rules must be followed.” 

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The word/expression ‘consent’ in sub-regulation

(15) to Regulation 18 refers to affirmative

consent to winding up by ‘the majority of the

unitholders’. Conversely, consent is denied when

‘majority of the unitholders’ do not approve the

proposal to wind up the scheme.

10. However, the question which still remains to be

answered is whether ‘consent’ would mean majority of the

unitholders who exercise their right in the poll, or majority

of all the unitholders of the scheme. Connected with the

question is the concern of quorum, which means the

minimum number of members of the entire body of

members required to be present to legally transact

business.

11. Shackleton in the above quotation has referred to

distinction between simple and special majority. More

appropriate for our discussion is William Paul White’s

thesis ‘History and Philosophy of the Quorum as a Device

of Parliamentary Procedure’ published in 1967, in which

he elucidates:

“Much of the controversy that has been

historically associated with the quorum can be

traced to the problem of simply determining just

what is meant by a quorum. “From the very

earliest times it has been recognised as a

general rule that a majority of a group is

necessary to act for the entire group.” In the case

of a public body, the power or authority which

establishes the body may also determine what

constitutes a quorum. Sturgis states that

common parliamentary law fixes the quorum as a

“majority of the members”. The constitution of the

United States sets the quorum requirement in the

House of Representatives at a majority of the

membership. But to state that a quorum is a

majority of the membership opens the way to

potential conflict; which is precisely what has

happened on numerous occasions.” 

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After examining the various definitions of the

term quorum, the author observes that the

definitions by themselves give no key as to how

to determine what is minimum number or what

constitutes majority. The expression ‘majority’

can mean - (i) majority of total membership list;

(ii) exclude or include delinquent members; (iii)

members present and voting; or (iv) those

present, voting and not voting. Different

meanings, he observed, have added to the

confusion around the concept of the quorum.

Albeit referring to the position in 1967, the author

observed:

“As we have emerged into the modern era, it is

not surprising that by now the method, which has

been legally agreed upon by the courts, to

determine minimum and majority, is well

established.”

12. Clause (c) to sub-regulation (15) of Regulation 18 per

se does not prescribe any quorum or specify the criterion

for computing majority or ratio of unitholders required for

valid consent for winding up. Clause (b) of Regulation

39(2), on the other hand, specifies that seventy-five per

cent of the unitholders of a scheme can pass a resolution

that the scheme be wound up. Similarly, Regulation 41(1)

requires the trustees to call a meeting to approve, by

simple majority of the unitholders present and voting, a

resolution for authorising the trustees or any other person

to take steps for winding up of the scheme. Section 48 of

the Companies Act, 2013 states that where share capital

of a company is divided into different classes of shares,

the rights attached to the shares of any class may be

varied with the consent in writing of the shareholders of

not less than three-fourths of the issued shares of that

class. Sub-section (3) to Section 55 of the Companies Act,

2013 in case of failure to redeem or pay dividend refers to

consent of holders of three-fourths in value of the

preference shares. Section 103 of the Companies Act,

2013 prescribes minimum quorum for shareholder

meetings. 

Page 28 of 77

13. In Shri Ishwar Chandra v. Shri Satyanarain Sinha

and Others, this Court on the question of quorum has

held:

“If for one reason or the other one of them could

not attend, that does not make the meeting of

others illegal. In such circumstances, where there

is no rule or regulation or any other provision for

fixing the quorum, the presence of the majority of

the members would constitute it a valid meeting

and matters considered there at cannot be held

to be invalid.”

This decision had also relied on the exposition on the

subject of quorum in the Halsbury’s Laws of England,

Third Edition (Vol. IX, page 48, para 95), which reads:

“95. Presence of quorum necessary. The acts of

a corporation, other than a trading corporation,

are those of the major part of the corporators,

corporately assembled. In other words, in the

absence of special custom or of special provision

of the constitution, the major part must be

present at the meeting, and of that major part

there must be a majority in favour of the act or

resolution contemplated. Where, therefore, a

corporation consists of thirteen members, there

ought to be at least seven present to form a valid

meeting, and the act of the majority of these

seven or greater number will bind the

corporation. In considering whether the requisite

number is present, only those members must be

included who are competent to take part in the

particular business before the meeting. The

power of doing a corporate act may, however, be

specially delegated to a particular number of

members, in which case, in the absence of any

other provision, the method of procedure

applicable to the body at large will be applied to

the select body. 

Page 29 of 77

If a corporate act is to be done by a definite body

along, or by definite body coupled with an

indefinite body, a majority of the definite body

must be present.

Where a corporation is composed of several

select bodies, the general rule is that a majority

of each select body must be present at a

corporate meeting; but this rule will not be

applied in the absence of express direction in the

constitution, if its application would lead to an

absurdity or an impossibility. ...” (emphasis

supplied)

14. The concept of ‘absurdity’ in the context of

interpretation of statutes is construed to include any result

which is unworkable, impracticable, illogical, futile or

pointless, artificial, or productive of a disproportionate

counter mischief. Logic referred to herein is not formal or

syllogistic logic, but acceptance that enacted law would

not set a standard which is palpably unjust, unfair,

unreasonable or does not make any sense. When an

interpretation is beset with practical difficulties, the courts

have not shied from turning sides to accept an

interpretation that offers a pragmatic solution that will

serve the needs of society. Therefore, when there is

choice between two interpretations, we would avoid a

‘construction’ which would reduce the legislation to futility,

and should rather accept the ‘construction’ based on the

view that draftsmen would legislate only for the purpose of

bringing about an effective result. We must strive as far as

possible to give meaningful life to enactment or rule and

avoid cadaveric consequences.

15. We would neither hesitate in stating the obvious, that

modern regulatory enactments bear heavily on

commercial matters and, therefore, must be precisely and

clearly legislated as to avoid inconvenience, friction and

confusion, which may, in addition, have adverse economic

consequences. The legislator in the present case must,

therefore, reflect and take remedial steps to bring about

clarity and certainty in the Mutual Fund Regulations. 

Page 30 of 77

16. Reading prescription of a quorum as majority of the

unitholders or ‘consent’ as implying ‘consent by the

majority of all unitholders’ in Regulation 18(15)(c) of the

Mutual Fund Regulations will not only lead to an absurdity

but also an impossibility given the fact that mutual funds

have thousands or lakhs of unitholders. Many unitholders

due to lack of expertise, commercial understanding,

relatively small holding etc. may not like to participate.

Consent of majority of all unitholders of the scheme with

further prescription that ‘fifty percent of all unitholders’

shall constitute a quorum is clearly a practical impossibility

and therefore would be a futile and foreclosed exercise.

17. Conscious of the problem of quorum and majority in

indefinite electorate, 1st Edition of Halsbury’s Laws of

England on the question of quorum and meetings, had

referred to the following principles:

“791. Where a corporation consists of a definite

number of corporate electors, a majority of that

number must be present in order to constitute a

valid election. But where a corporation consists

of an indefinite number of corporate electors, a

majority only of those existing at the time of the

election need be present.

When an election is to be made by a definite

body only, or the electoral assembly is to consist

of a definite and an indefinite body, the majority

of the definite body must, as a general rule, be

present in order to render the election legal. It is

not necessary that a majority of the indefinite

body should be present so long as there is

majority of the definite body. If a constituent part

of a corporation refuses to be present at an

election, it cannot be held, and an election by the

remaining parts will be void. But electors present

at an election and abstaining from voting are

deemed to acquiesce in the election made by

those who vote.” 

Page 31 of 77

The aforesaid exposition, for the purpose of

majority and quorum, draws distinction between

an electorate consisting of definite number and

an electorate composed of indefinite number.

Justice Seshagiri Ayyar of the Madras High Court

in his concurring judgment in Syed Hasan Raza

Sahib Shamsul Ulama and two others v. Mir

Hasan Ali Sahib and two others had drawn

distinction between definite and indefinite

numbers in the following manner:

“…In the first class of cases, the number of the

select body is fixed. In the second class of cases,

the number is subject to variation every year or at

stated periods. For example, the number of

electors of a Temple Committee or the number

for a Municipality is liable to fluctuation.

Residence for a particular period, or the attaining

of age of minors can bring in new electors.

Whereas in the case of a Select Committee, the

number is fixed…”

In the case of unitholders, the number is

fluctuating and ever changing and, therefore,

indefinite. Numbers of unitholders can increase,

decrease and change with purchase or

redemption. Therefore, in the context of clause

(c) of Regulation 18(15), we would not, in the

absence of any express stipulation, prescribe a

minimum quorum and read the requirement of

‘consent by the majority of the unitholders’ as

consent by majority of all the unitholders. On the

other hand, it would mean majority of unitholders

who exercise their right and vote in support or to

reject the proposal to wind up the mutual fund

scheme. The unitholders who did not exercise

their choice/option cannot be counted as either

negative or positive votes as either denying or

giving consent to the proposal for winding up.

18. Investment in share market, though beneficial and

attractive, requires expertise in portfolio construction,

stock selection and market timing. In view of attendant

risks, diversification of portfolio is preferred but this

Page 32 of 77

consequentially requires a larger investment. Mutual funds

managed by professional fund managers with advantages

of pooling of funds and operational efficiency are the

preferred mode of investment for ordinary and common

persons. It would be wrong to expect that many amongst

these unitholders would have definitive opinion required

and necessary voting in a poll on winding up of a mutual

fund scheme. Such unitholders, for varied reasons, like

lack of understanding and expertise, small holding etc.,

would prefer to abstain, leaving it to others to decide. Such

abstention or refusal to express opinion cannot be

construed as either accepting or rejecting the proposals.

Keeping in view the object and purpose of the Regulation

with the language used therein, we would not accept a

‘construction’ which would lead to commercial chaos and

deadlock. Therefore, silence on the part of absentee

unitholders can neither be taken as an acceptance nor

rejection of the proposal. Regulation 18(15)(c), upon

application in ground reality, must not be interpreted in a

manner to frustrate the very law and objective/purpose for

which it was enacted. We would rather accept a

reasonable and pragmatic ‘construction’ which furthers the

legislative purpose and objective. The underlying thrust

behind Regulation 18(15)(c) is to inform the unitholders of

the reason and cause for the winding up of the scheme

and to give them an opportunity to accept and give their

consent or reject the proposal. It is not to frustrate and

make winding up an impossibility. Way back in 1943,

Sutherland in Statutes and Statutory Construction, Volume

2, Third Edition at page no. 523, in Note 5109, had stated:

“Where a statue has received a contemporaneous

and practical interpretation and the statute as

interpreted is re-enacted, the practical interpretation

is accorded greater weight than it ordinarily

receives, and is regarded presumptively the correct

interpretation of the law. The rule is based upon the

theory that the legislature is acquainted with the

contemporaneous interpretation of a statue,

especially, when made by an administrative body or

executive officers charged with the duty of

administering or enforcing the law, and therefore 

Page 33 of 77

impliedly adopts the interpretation upon reenactment.”

With some modifications, the principle can be applied in

the present case. Practical interpretation should be

accorded greater weight than it ordinarily receives, and

can be regarded as presumptively correct interpretation as

the draftsmen legislate to bring about a functional and

working result.

19. We would not read into Regulation 18(15)(c) a need to

have affirmative consent of majority of all or entire pool of

unitholders. The words ‘all’ or ‘entire’ are not incorporated

and found in the said Regulation. Thus, consent of the

unitholders for the purpose of clause (c) to sub-regulation

(15) of Regulation 18 would mean simple majority of the

unitholders present and voting.”

The above interpretation resolves several grey areas and

would underpin the construction of Regulations 39 to 42 and their

interplay with Regulation 18(15)(c).

29. The quotation highlights that interpretation is sometimes a threestage process. At first, the words being interpreted should be

understood according to their grammatical meaning in their literal

and popular sense. In the second stage, we consider whether in the

given context the plain meaning is obscure as the text gives rise to

choice of more than one interpretation, or the propositional

interpretation fails to achieve the manifest purpose of the legislation,

reduces it to futility, is practically unworkable or even illogical. In

such cases at the third stage, the court applying interpretative tools 

Page 34 of 77

selects or blue-pencils an interpretation advancing the legislative

intent without rewriting the provision. The legislative intent is

gathered not by restricting it to the language of the provision, rather

in the light of the object and purpose of the provision and the

legislation. The courts do lean towards a pragmatic and purposive

interpretation as there is an assumption that the draftsmen legislate

to bring about a functional and working result.

Harmonious interpretation of Regulation 18(15)(c) with Regulations

39 to 42

30. Regulation 39(2) under clause (a) vests the power of winding up of a

scheme with the trustees, and with the unitholders under clause (b)

and with the SEBI under clause (c), but under Regulation 18(15)(c),

the trustees are required to seek consent of the unit holders, when

they by majority decide to wind up a scheme. Regulation 18(15)(c)

mirrored by use of the word ‘shall’ is couched as a command.

Further, the expression ‘when the majority of the trustees decide to

wind up’ in Regulation 18(15)(c) manifestly refers to clause (a) to

Regulation 39(2) as this is the only Regulation which entitles the

trustees to wind up the scheme. Regulation 18(15)(c), when it refers

to trustees’ decision to wind up, it implies the trustees’ opinion to

wind up the scheme. Rather than making the decision of the

trustees otiose, as suggested by SEBI, the trustees and the AMC,

Page 35 of 77

Regulation 18(15)(c) itself would become otiose in case their

interpretation is accepted. Principle of harmonious construction

should be applied which, in the context of the Regulations in

question, would mean that the opinion of the trustees would stand,

but the consent of the unitholders is a pre-requisite for winding up.

31. We do not think that this interpretation in any way dilutes or renders

clause (b) to Regulation 39(2) meaningless or redundant. This

clause applies where the winding up process is initiated at the

instance of the unitholders, i.e. upon 75% of unitholders of the

scheme passing a resolution for winding up. Clause (b) does not in

any manner reflect that clause (c) to Regulation 18(15) should not

be read as it ordains in simple words.

32. Regulation 41, as explained above, refers to and relates to the

procedure and manner of winding up which cannot be equated with

the requirement of consent as postulated by Regulation 18(15)(c).

Argument to the contrary, equating Regulation 18(15) (c) with

Regulation 41(1) overlooks the difference in language, and the

object and purpose behind the two regulations. Regulation 41(1)

applies even in cases where 75% unitholders have passed the

resolution for winding up of the scheme under Regulation 39(2)(b) or

where SEBI directs the scheme to be wound up in the interest of the 

Page 36 of 77

unitholders under Regulation 39(2)(c). On the other hand Regulation

18(15)(c) applies only when majority of the trustees form an opinion

and decide to wind up or prematurely redeem the units in entirety, a

situation covered by Regulation 39(2)(a). To ignore the mandate of

Regulation 18(15)(c) would nullify the legislative intent by resorting

to a rather disordered and knotted argument that Regulations

18(15)(c) and 41(1) are identical and serve the same purpose.

Clause (c) to Regulation 18(15) does not duplicate sub-regulation

(1) to Regulation 41.

33. Similarly, omission of clause (d) to Regulation 18(15) and insertion

of 18(15A) with effect from 22

nd May 2000 by SEBI (Mutual Funds)

(Second Amendment) Regulations, 2000 is inconsequential. Prior to

its omission, clause (d) to Regulation 18(15) read:

“(d) when any change in the fundamental attributes of

any scheme or the trust or fees and expenses payable

or any other change which would modify the scheme or

affect the interest of the unitholders is proposed to be

carried out unless the consent of not less than threefourths of the unit holders is obtained: Provided that no

such change shall be carried out unless three fourths

of the unit holders have given their consent and the

unit holders who do not give their consent are allowed

to redeem their holdings in the scheme.

Provided further that in case of an open ended scheme,

the consent of the unitholders shall not be necessary if:

(i) the change in fundamental attribute is carried out

after one year from the date of allotment of units. 

Page 37 of 77

(ii) the unitholders are informed about the proposed

change in fundamental attribute by sending individual

communication and an advertisement is given in

English daily newspaper having nationwide circulation

and in a newspaper published in the language of the

region where the head office of the mutual fund is

situated.

(iii) the unitholders are given an option to exit at the

prevailing Net Asset Value without any exit load.

Explanation: For the purposes of this clause

"fundamental attributes" means the investment

objective and terms of a scheme."

By the same amendment9

, sub-regulation (15A) has been

inserted and reads:

“(15A) The trustees shall ensure that no change in the

fundamental attributes of any scheme or the trust or

fees and expenses payable or any other change which

would modify the scheme and affects the interest of

unitholders, shall be carried out, unless –

(i) a written communication about the proposed

change Is sent to each unitholder and an

advertisement is given in one English daily

newspaper having nationwide circulation as well

as in a newspaper published in the language of

region where the Head Office of the mutual fund

is situated; and

(ii) the unitholders are given an option to exit at

the prevailing Net Asset Value without any exit

load.”

The distinction between Regulation 18(15A) and Regulation

18(15)(c) is evident. The words ‘winding up or premature

9 SEBI (Mutual Funds) (Second Amendment) Regulations, 2000.

Page 38 of 77

redemption of units’ in Regulation 18(15)(c) refers to a situation

covered by Regulation 39(2)(a), that is, when the scheme is being

wound up pursuant to a decision of the trustees. On the other hand,

Regulation 18(15A) does not apply when the scheme is being

wound up, rather it applies when there is a proposal to change the

fundamental attributes of the scheme, fee or expense or any other

change that would modify the scheme and affect the interests of the

unitholders. The effect should be not to wind up the scheme thereby

bringing it to an end, but to continue with the scheme as modified.

Therefore, for Regulation 18(15A) to apply, the scheme should not

cease to exist.

34. In cases under clause (a) to Regulation 39(2) the unitholders have

no right or option to exit or not exit the scheme and are paid in terms

of Regulation 41. Regulation 18(15A) gives the option to the

unitholders to exit at the prevailing ‘Net Asset Value’ without any exit

load or continue with the altered/modified scheme. Under the

omitted clause (d) to Regulation 18(15), consent of three-fourths of

the unitholders for fundamental changes to the scheme was

sometimes necessary. This is not necessary under Regulation

18(15A). Omission of clause (d) to sub-regulation 18(15) and

insertion of sub-regulation (15A) to Regulation 18, as observed

above is inconsequential and not relevant to the present dispute. If 

Page 39 of 77

anything, the draftsmen having retained clause (c) to 18(15), reenforces its link with clause (a) to Regulation 39(2). Accordingly, the

need to obtain consent of the unitholders is mandated under clause

(c) to sub-regulation 15 to Regulation 18 when the trustees under

clause (a) to Regulation 39(2) decide to wind up a scheme.

35. The argument that the unitholders are lay persons and not wellversed with the market conditions is to be rejected in light of the

order dated 12th February 2021. Relevant portion of this order, at the

risk of repetition, is being reproduced below:

“18. Investment in share market, though beneficial and

attractive, requires expertise in portfolio construction,

stock selection and market timing. In view of attendant

risks, diversification of portfolio is preferred but this

consequentially requires a larger investment. Mutual

funds managed by professional fund managers with

advantages of pooling of funds and operational

efficiency are the preferred mode of investment for

ordinary and common persons. It would be wrong to

expect that many amongst these unitholders would

have definitive opinion required and necessary voting

in a poll on winding up of a mutual fund scheme. Such

unitholders, for varied reasons, like lack of

understanding and expertise, small holding etc., would

prefer to abstain, leaving it to others to decide. Such

abstention or refusal to express opinion cannot be

construed as either accepting or rejecting the

proposals. Keeping in view the object and purpose of

the Regulation with the language used therein, we

would not accept a ‘construction’ which would lead to

commercial chaos and deadlock. Therefore, silence on

the part of absentee unitholders can neither be taken

as an acceptance nor rejection of the proposal. 

Page 40 of 77

Regulation 18(15)(c), upon application in ground

reality, must not be interpreted in a manner to frustrate

the very law and objective/purpose for which it was

enacted. We would rather accept a reasonable and

pragmatic ‘construction’ which furthers the legislative

purpose and objective. The underlying thrust behind

Regulation 18(15)(c) is to inform the unitholders of the

reason and cause for the winding up of the scheme

and to give them an opportunity to accept and give

their consent or reject the proposal. It is not to frustrate

and make winding up an impossibility….”

Investments by the unitholders constitute the corpus of the

scheme. To deny the unitholders a say, when Regulation 18(15)(c)

requires their consent, debilitates their role and right to participate. It

is an in-contestable position that the unitholders exercise informed

choice and discretion when they invest or redeem the units.

Regulations envision the unitholders not as domain experts, albeit

as discerning investors who are perceptive and prudent. The

trustees are therefore commanded to inform and be transparent.

Summary reports, periodic and continual statements, annual

reports, audit reports, etc., mentioned in paragraph 11 above are

intended to reveal the current status of the investments, future

prospects, risks and factors that may have bearing on the returns to

enable the unitholders to take deliberative decisions, be it purchase,

redemption or exercise of the right to vote. The unitholders, when in

doubt, as prudent investors may be advised to abstain, but they are

not placid onlookers, impuissant and helpless when the trustees 

Page 41 of 77

decide to wind up the scheme in which they have invested. The

stature and rights of the unitholders can co-exist with the expertise

of the trustees and should not be diluted because the trustees owe a

fiduciary duty to them. Thus, the contention that the trustees being

specialists and experts in the field, their decision should be treated

as binding and fait accompli has to be rejected not only in view of

the specific language of Regulation 18(15)(c), but to be in concinnity

with the objective and purpose of the Regulations.

36. A hypothetical submission that the unitholders may reject a valid

and well-considered opinion of the trustees for winding up, and

therefore Regulation 18(15)(c) is directory, should be rejected.

Assumptions cannot be a ground to wrongly interpret Regulation

18(15)(c). Situations could arise when the trustees may err in their

opinion, in which event the unitholders may correct them. Money

and investment of the unitholders being at stake, a wrong decision

would obviously have inimical impact on the unitholders themselves.

We would brace the argument that a good and intelligible decision of

winding up would invariably be accepted by the unitholders.

37. ‘Consent’ for the purpose of Regulation 18(15)(c) refers to the

consent of the majority of the unitholders present and voting, and in

case of a poll, the computation would be with reference to the 

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number of units held by the unitholder. In fact, in the course of

hearing, it was conceded that majority of the unitholders belong to

provident fund trusts or pension funds. The voting pattern referred to

in our earlier order reflects that voting under Regulation 18(15)(c) is

possible and can work smoothly without much difficulty. The

apprehensions expressed, therefore, do not carry much weight. It is

obvious that where the unitholders vote against winding up,

consequences would follow and accordingly the scheme would not

be wound up. This is a natural and normal consequence which will

have to be given effect to. It would, as stated above, happen rarely

and that too would not happen without any genuine and good

reason.

38. SEBI is a Member of International Organisation of Securities

Commissions (IOSCO). IOSCO in a consultation report published in

August, 2016 on good practices for the termination of investment

funds, states that the termination plan should identify rationale for

terminating the investment fund. Key steps to be taken as part of the

termination process should be identified. Clauses (28), (29) and (30)

of the good practices under the heading ‘Decision to terminate’ read

as follows:

“28. In the majority of cases, the decision to terminate

is that of the responsible entity. However, in some

jurisdictions national law or regulatory requirements will 

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mandate that the decision of the responsible entity is

approved by investors, or the custodian in some cases.

The first step in preparing for the voluntary termination

of an investment fund is to determine whether investor

approval is required. This may depend on the legal

structure of the investment fund and whether voting

rights are attributed to shares / units.

29. Investment in an investment fund usually carries

with it the right to vote on certain matters and the voting

requirements for the approval of investors on, inter alia,

liquidations and terminations are generally prescribed

in the constitutional documents and the prospectus /

offering document of the investment fund, or legal and

regulatory regime of the national regulator, or both. The

termination plan should set out the process for

obtaining investor approval, where required.

30. Where investor approval is required and investors

are asked to vote on the decision to terminate with the

outcome achieving the minimum voting requirements

for approval, the decision is binding on all, including

those who do not vote. Where investor approval is

required, the rights of investors should be clear from

the termination plan. In particular, the termination plan

should document how the interests of dissenting

investors will be treated.”

Good practices, as recommended by IOSCO, commend the

unitholders’ right to vote/approve on matters of termination and

liquidation.

39. On and from the date of publication of notices under Regulation

39(3), the cease and freeze effect of Regulation 40 applies. The

words used in sub-regulation (3) to Regulation 39 are ‘where a

scheme is to be wound up in sub-regulation (2)’, that is, a scheme is 

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to be wound up in terms of clauses (a), (b) or (c) to Regulation

39(2). Sub-regulation (3) to Regulation 39 also mandates the

trustees to disclose in the public notice the circumstances leading to

winding up of the scheme. This obviously means that where the

trustees form an opinion to wind up a scheme, they must disclose

the reasons, and thereupon, the unitholders exercise their right to

vote and give or deny consent. This is the true legal effect on

harmonious reading of Regulation 18(15)(c) and Regulation

39(2)(a).

40. The language of clauses (a) and (c) to sub-regulation (2), and subregulation (3) to Regulation 39 does not envisage involvement of the

unitholders till the publication of notices in case of clauses (b) and

(c) to sub-regulation (2) to Regulation 39. Therefore, when clauses

(a) or (c) of Regulation 39(2) apply, the unitholders are to be

informed about the winding up by the trustees or SEBI by way of

public notice. Publication in terms of Regulation 39(3) is even

required when the unitholders vote for winding up of a scheme

under clause (b) of Regulation 39(2).

41. It is manifest that publication of notices under Regulation 39(3)

should be instantaneous without any interstice between the decision

of winding up by the trustees under clause (a), by the unitholders 

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under clause (b) or by SEBI under clause (c). Delay would hold up

the cease-and-freeze effect of Regulation 40 and consequently

nullify the salutary purpose and object behind it.

42. In view of the above discussion and harmoniously interpreting

Regulations 39 to 42, we hold that the consent of the unitholders, as

envisaged under clause (c) to Regulation 18(15), is not required

before publication of the notices under Regulation 39(3). Consent of

the unitholders should be sought post publication of the notice and

disclosure of the reasons for winding up under Regulation 39(3).

43. Read in this manner, we can interpret clause (c) to Regulation

18(15) and Regulations 39 to 42 without the disarray as suggested,

while not displacing the legal effect of either Regulation 40 or

Regulation 18(15)(c). This interpretation takes care of the

apprehension expressed by SEBI, the trustees and AMC that delay

or time gap between a decision of the trustees under clause (a) to

sub-regulation (2) to Regulation 39 and publication of notice under

sub-regulation (3) to Regulation 39 would postpone the cease-andfreeze effect of Regulation 40.

44. We have referred to Regulation 41(1) and that it requires calling of a

meeting of the unitholders for authorising the trustees or any other

person to take steps for winding up of the scheme. In case where 

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the scheme is being wound up under Regulation 39(2)(a), it is

possible to hold a meeting of the unitholders under the said

provision where if the resolution for winding up is passed, the

unitholders can also decide by simple majority of the unitholders

present and voting whether the trustees or any other person should

take steps for winding up of the said scheme. One meeting in many

a cases would suffice.

45. To complete interpretation of Regulation 18(15), we have to record

that clause (a) applies and requires the trustees to obtain consent of

the unitholders whenever required by SEBI in the interest of the

unitholders. Clause (b) states that the trustees would obtain consent

of the unitholders whenever required to do so on the requisition

made by three-fourths of the unitholders of any scheme.

Accordingly, clause (a) would apply whenever SEBI mandates and

clause (b) applies whenever three-fourths of the unitholders of the

scheme make a requisition.

46. The impugned judgment, from paragraph 211 onwards, specifically

refers to the responsibilities and duties of the trustees incorporated

in the statement of additional information published by the mutual

fund, which reads:

“(b) The Trustees shall obtain consent of the unit

holders of the Scheme(s):

Page 47 of 77

i) When the Trustee is required to do so by SEBI in the

interests of the unit-holders; or

ii) Upon the request of three-fourths of the unit holders

of any Scheme(s) under the Mutual Fund; or

iii) If a majority of the directors of the Trustee company

decide to wind up the Scheme(s) or prematurely

redeem the units.”

Clause (iii) of the aforesaid quotation dealing with

responsibilities and duties of the trustees, requires the trustees to

obtain consent of the unitholders of the scheme if the majority of the

directors of the trustee company decide to wind up the scheme or

prematurely redeem the units. The language of clause (iii) of the

aforesaid quotation is identical to clause (c) of sub-regulation (15) to

Regulation 18. The High Court was, therefore, right in observing that

the trustees and the AMC have understood and accepted that the

consent of unitholders of the scheme would be necessary if the

majority of the directors of the trustee company decide to wind up a

scheme.

47. The impugned judgment, in paragraph 221, observes that no

material was placed on record to show compliance with subregulation (3) to Regulation 39. The trustees and AMC have

disputed the said position by relying upon notice dated 23rd April

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2020 enclosed at page 1262 and the newspaper publications in both

English and vernacular languages made on 24th April 2020 enclosed

at pages 3304-3313. In view of the aforesaid factual position, which

was not seriously disputed by most of the unitholders, we would

accept that there was compliance with clause (b) of sub-regulation

(3) to Regulation 39 and accordingly the cease and freeze effect of

Regulation 40 had become effective.

48. Our attention was drawn to the Circular dated 31st May 2016 issued

by SEBI as per which the trustees have the option to suspend

redemption of units for a period of 10 days in a period of 90 days.

The relevant portion of the said circular reads as under:

“b. Restriction on redemption may be imposed for a

specified period of time not exceeding 10 working days

in any 90 days period”

SEBI has taken the stand that the benefit of this circular should not

be taken when the question of winding up is pending consideration

before the trustees. The position not being ironclad, SEBI may reexamine whether the trustees/AMC can be permitted to take similar

benefit pending the decision on the question of winding up, when

they face frightful redemption pressure.

Page 49 of 77

Challenge to the constitutional validity of the Securities and

Exchange Board of India (Mutual Funds) Regulations, 1996

49. This challenge has been raised by one of the appellants, namely,

Amruta Garg. The contentions forwarded can be summarised as

under:

(a) The expression ‘happening of any event’ in Regulation 39(2)(a)

is unspecified and suffers from the vice of excessive delegation

as it does not give any indication of the type of events which

would be relevant for winding up of the scheme. It gives

unbridled power to the trustees to wind up a scheme which, in

the opinion of the trustees, should be wound up.

(b) In comparison, vide clause (c) to Regulation 39(2), SEBI has

been invested with the power to issue directions for winding up

a mutual fund scheme only when it is in the interest of the

unitholders.

(c) Further, SEBI has not prescribed/issued guidelines or policy

regarding formation of opinion by the trustees to wind up the

scheme.

(d) The opinion of the trustees is given paramountcy and is

supreme. Even SEBI accepts that it has no role and cannot

examine and set aside the decision of the trustees. Thus, SEBI,

as per its own contention and submission, being bound by the 

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opinion of the trustees, cannot interfere even when it is

necessary to do so in the interest of unitholders or when the

trustees have acted in their own vested interest. This is contrary

to the scheme of the SEBI Act whereunder SEBI has been

constituted primarily to act as a watchdog and to protect

interests of the investors in the capital market, including the

unitholders.

(e) There is no provision for appeal or internal challenge against

the decision of the trustees who may in a given case form a

wrong opinion regarding winding up of the scheme.

(f) For the above reasons, clause (a) to Regulation 39(2) suffers

from manifest arbitrariness in the absence of any prescription

regulating the exercise of the power by the trustees. Reliance is

placed upon State of Tamil Nadu and Another v. T.

Krishnamurthy and Others;

10 Shayara Bano v. Union of

India and Others;

11 Senior Superintendent of Post Offices,

Allahabad and Others v. Izhar Hussain;

12 Director General,

Central Reserve Police Force and Others v. Janardan Singh

and Others.13

10 (2006) 4 SCC 517

11 (2017) 9 SCC 1

12 (1989) 4 SCC 318

13 (2018) 7 SCC 656

Page 51 of 77

(g) Regulation 39(3) equally suffers from the vice of manifest

arbitrariness as SEBI merely acts as a drop-box. Though the

trustees are required to give notice disclosing circumstances

leading to winding up of the scheme to SEBI, this requirement is

meaningless and superficial as SEBI cannot go into the

question and circumstances to be satisfied as to existence of an

event warranting the extreme action of winding up.

(h) Regulation 41(2)(b) is manifestly arbitrary as it states that the

sale proceeds under clause (a) shall be first discharged for such

liabilities as are due and payable under the scheme and only

the balance amount shall be paid to the unitholders in

proportion to their respective interests in the assets of the

scheme as on the date of the decision for winding up was

taken. Regulation 41 does not prescribe any mechanism or

manner in which the authorised person or the AMC can

ascertain the liabilities which are due and payable under the

scheme. Secondly, the unitholders have been placed below the

creditors of the scheme and would therefore receive only the

leftover. This undermines the paramount place and position of

the unitholders. Further, the SEBI has failed to protect the

interest of the unitholders who are not only financial creditors

but, as explicitly provided in Regulation 18(12), their money is 

Page 52 of 77

held in the mutual fund in trust and for their benefit. Reliance is

placed upon Pioneer Urban Land and Infrastructure Limited

and Another v. Union of India and Others14 where the home

buyers have been held to be financial creditors under the Indian

Bankruptcy Code. Principle of pari passu should be made

applicable.

(i) Regulation 42 is also manifestly arbitrary as SEBI is to perform

only ministerial functions, much less than the functions of a

regulator. Conspicuously, during the winding up process, SEBI

has been given a minimalistic role which is contrary to the

paramount object of the Act.

50. We would begin by referring to the provisions of the SEBI Act and

by elucidating the powers of SEBI. Section 11 of the SEBI Act

prescribes the functions of SEBI. Sub-section (1), in general terms,

states that it will be the duty of SEBI to protect the interests of

investors in securities and to promote the development of, and to

regulate, the securities market. SEBI is empowered to take

measures in this regard as it thinks fit. Sub-section (2), without

prejudice to the generality of sub-section (1), lists out as many as 17

specific clauses and states that SEBI is entitled to provide for

measures relating to those clauses. Thereunder, Clause (e) relates

14 (2019) 8 SCC 416

Page 53 of 77

to prohibiting fraudulent and unfair trade practices relating to

securities markets. Clause (g) concerns prohibition of insider trading

in securities. Clauses (b), (i), (ia), (ib) and (la) relate to registering

and working of the trustees or trust deeds, investment advisors and

such other intermediaries who may be associated with the securities

market in any manner and permits SEBI to call for information from,

undertaking inspection, conducting inquiries and audits of mutual

funds and other persons associated with the securities market,

intermediaries and self-regulatory organisations. They can also ask

for records from any persons, including any bank, any other

authority or board or corporation established or constituted by or

under a central or state Act relevant for investigation or inquiry by

SEBI. It is also authorised to call for and require any agency to

furnish information as may be considered necessary by SEBI for

discharge of its functions. Clause (m) is a residuary clause which

states that SEBI can perform such other functions as may be

prescribed. Sub-section (2A) to Section 11 is a non-obstante

provision which authorises SEBI to take measures to undertake

inspection of any book or register or other document or record of

any listed public company or a public company, etc. which intends to

get its securities listed on a recognised stock exchange. Sub-section

(3), again, is a non-obstante provision and states that SEBI shall 

Page 54 of 77

exercise the same powers as are vested in a civil court under the

Code of Civil Procedure while trying a suit in respect of discovery

and production of books of account and other documents,

summoning and enforcing attendance of persons and examining

them on oath, inspection of any books, registers and documents of

any person referred to in Section 12, inspection of any book, or

register, or document, or record of a company, and issuing

commissions for examination of witnesses or documents. Subsection (4) states that without prejudice to the provisions contained

in sub-section (1), (2), (2A) and (3) and Section 11B, SEBI may, by

an order in writing in the interest of the investors or securities

market, take the measures stipulated thereunder either pending

investigation or inquiry or upon completion of investigation or

inquiry. These include suspension of trading of any security;

restraining any person from accessing security markets; attaching,

for a period not exceeding 90 days subject to conditions and for a

further period beyond 90 days subject to confirmation by the special

court, bank accounts and other properties of any intermediary or any

person associated with the securities market in any manner involved

in violation of the provisions of the SEBI Act, or Rules or

Regulations made thereunder; direct any intermediary associated

with securities market in any manner not to dispose of or alienate 

Page 55 of 77

any asset forming part of any transaction under investigation subject

to the condition that before or after passing such orders an

opportunity of hearing shall be given to such intermediaries or

persons concerned. Sub-section (4A) authorises SEBI to conduct an

inquiry in the prescribed manner notwithstanding the provisions of

sub-sections (1), (2), (2A), (3) and (4), Section 11B and Section 15-I

by an order and for reasons to be recorded in writing levy penalty

under Sections 15A, 15B, etc. Under sub-section (5), the amount

disgorged pursuant to the directions issued under Section 11B of

the Act or 12A of the Securities Contracts (Regulation) Act, 1956

etc. is to be credited to the Investor Protection and Education Fund

established by SEBI and to be utilised in accordance with the

regulations framed under the Act.

51. Section 11B of the Act reads as under:

“Power to issue directions and levy penalty.– (1)

Save as otherwise provided in section 11, if after

making or causing to be made an enquiry, the Board is

satisfied that it is necessary–

(i) In the interest of investors, or orderly development

of securities market; or

(ii) to prevent the affairs of any intermediary or other

persons referred to in section 12 being conducted in a

manner detrimental to the interests of investors or

securities market; or

Page 56 of 77

(iii) to secure the proper management of any such

intermediary or person,

it may issue such directions, –

(a) to any person or class of persons referred to in

section 12, or associated with the securities market;

or

(b) to any company in respect of matters specified in

section 11 A,

as may be appropriate in the interests of investors in

securities and the securities market.

(2) Without prejudice to the provisions contained in

sub-section (1), subsection (4A) of section 11 and

section 15-I, the Board may, by an order, for reasons to

be recorded in writing, levy penalty under sections 15A,

15B, 15C, 15D, 15E, 15EA, 15F, 15G, 15H, 15HA and

15HB after holding an inquiry in the prescribed manner.

Explanation.– For the removal of doubts, it is hereby

declared that the power to issue directions under this

section shall include and always be deemed to have

been included the power to direct any person, who

made profit or averted loss by indulging in any

transaction or activity in contravention of the provisions

of this Act or regulations made thereunder, to disgorge

an amount equivalent to the wrongful gain made or loss

averted by such contravention.”

52. As the heading of Section 11B states, the provision empowers SEBI

to issue directions and levy penalty. It stipulates that such powers

can be exercised if and after making or causing any inquiry SEBI is

satisfied that it is necessary – (i) in the interest of the investors or

orderly development of the securities market, (ii) to prevent affairs of 

Page 57 of 77

any intermediary or other persons referred to in Section 12 being

conducted in a manner detrimental to the interest of the investors or

securities market; or (iii) to secure proper management of such

intermediary or person. SEBI may issue directions to – (a) any

person or class of persons referred to in Section 12 or associated

with the securities market, or (b) to a company in respect of the

matters specified in Section 11A as may be appropriate, in the

interest of the investors in securities and in the securities market.

The explanation to the Section is important for it clarifies, by way of

removal of doubt, that the directions under this Section shall include

and shall always deem to include power to direct any person, who

has made profit or averted loss by indulging in any transaction or

activity in contravention of the provisions of the Act, or regulations

made thereunder, to disgorge an amount equivalent to the wrongful

gain made or loss averted by such contravention. The provisions of

Section 11B have been held to be procedural in nature and include

not only an individual but also a company. Therefore, any person

associated with the securities market who commits breach of the

SEBI Act, Rules and Regulations, can be subjected to such

directions and measures as may be imposed and issued by SEBI.

Sub-section (2) to Section 11B states that SEBI may after holding

an inquiry pass an order in writing, and, without prejudice to the 

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provisions of Section (11), levy penalty under Sections 15A, 15B,

etc.

53. Referring to the provisions, the Division Bench of the High Court in

the impugned judgement has held as under:

“291. Another question is about the powers of SEBI

under Section 11B of the SEBI Act. We have already

held that the power to issue directions under Section

11B(1) can be exercised to issue directions to AMC

and the Trustees. The said direction can be issued

when SEBI, after making or causing to be made an

enquiry, is satisfied that (a) it is necessary to issue

directions in the interest of investors or orderly

development of securities market; (b) to prevent the

affairs of any intermediary or other persons referred to

in Section 12 being conducted in a manner detrimental

to the interests of investors of securities market; or (c)

to secure the proper management of any such

intermediary or person. The first question is whether

SEBI has power to interfere with the decision taken by

the Trustees under Regulation 39(2)(a). 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. 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 

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to adjudicate upon the correctness of the decision

taken by the Trustees to wind up a Scheme. However,

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. After invoking the provisions of

Regulation 39(2)(a), if the Trustees stop redemption the

units by taking recourse to Regulation 40 without

complying with the mandatory requirements of subclause (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.”

54. 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), 39(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

39(2) cannot 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. No doubt, clause (a) to Regulation 39(2) 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 

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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(2). If the trustees have acted for extraneous and

irrelevant reasons and considerations, the action would be in

violation of clause (a) to Regulation 39(2) and therefore amenable to

action under the SEBI Act, including directions under Section 11B.

55. The view we have taken is in consonance with the earlier decision of

the Gujarat High Court in Alka Synthetics and Trading v. 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. 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

15 (1999) 95 Comp Cas 663

Page 61 of 77

made an enquiry – which necessarily implies a pre-decisional

hearing. Similar view was subsequently expressed in Nikhil T.

Parikh v. 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 ‘measure’ 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. The

Securities Appellate Tribunal in Sterlite Industries (India) Ltd. v.

SEBI,

17 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.

16 (2014) 2 GLH 582

17 2001 SCC OnLine SAT 28.

Page 62 of 77

56. 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 trustee’s decision to wind up

a scheme of the mutual fund. Section 11(1) 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 for orderly development of

securities market or to prevent the affairs of any intermediary being

conducted in a manner detrimental to the interest of investors or the

securities market or to secure proper management of any

intermediary or other person. The power of SEBI extends to

regulating and monitoring the functioning and decisions taken by

mutual funds, the trustees and the AMC. SEBI has the power to

pass any direction if it deems fit in the interest of unitholders. The

trustees and the AMC have specifically stated:

“It is evident form the aforesaid provisions that the SEBI

has extensive powers to regulate, supervise, issue

directions with respect to and inspect and investigate into

the affairs of a mutual fund, including with respect to the

decision of the trustee to wind up a mutual fund scheme 

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under Regulation 39(2)(a) of the Mutual Funds

Regulations, including to even stop the winding up of a

mutual fund scheme, if deemed necessary. The

existence of such powers of the SEBI is further

reinforced by Section 11D of the SEBI Act, which

empowers the SEBI to pass an order requiring any

person who, ‘has violated, or is likely to violate, any

provisions of this Act, or any rules or regulations made

thereunder” to ‘cease and desist’ from committing such

violation. It is submitted that whether SEBI would choose

to exercise this power is a matter, which may be

determined by SEBI in its wisdom and there may be

numerous reasons why SEBI may not wish to interfere in

a winding up decision by a trustee under Regulation

39(2)(a) including the reasons submitted by SEBI in its

affidavit such as the fact that reversal of a decision to

wind up a mutual fund scheme would likely cause a run

on the scheme as well as severe market contagion

(Reference is made to Paras 18,19 at Pg. 6 and 7 of

the Delhi Reply; Paras 34 and 35 at Pg. 11 and 12 of

the Gujrat Reply; and Paras 11 and 12 at Pgs. 5 and 6

of the Madras Reply); however, on a reading of the

scheme of the SEBI Act and regulations as a whole, it is

submitted that it is clear that such a power does exist.”

57. However, we agree with the High Court that the Regulations have

been framed in exercise of power conferred by Section 30 of the

SEBI Act which authorises them to make regulations consistent with

the provisions of the SEBI Act to carry out the purpose of the SEBI

Act. The very object of the SEBI Act is to preserve confidence of the

investors and to regulate the capital market, including mutual funds.

In the first portion of this order, we have elaborately referred to the

Regulations which thereby create a three-tier system of the sponsor,

the AMC and the trustees. There are stipulations regulating the 

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activities of the trustees and the AMC whose powers, obligations

and rights have been expressly laid down. The power to regulate

mutual funds, once accepted, would include the power to make

regulations for winding up of a scheme of the mutual fund. Not

framing any regulation in this regard would have amounted to

dereliction of duty on the part of SEBI and subjected it to adverse

comments.

58. It cannot be accepted that the trustees under clause (a) to

Regulation 39(2) have been given absolute and unbridled power to

wind up a scheme. Language of clause (a) to Regulation 39(2)

states that the trustees must form an opinion on the happening of

any event which requires the scheme to be wound up. Further, as

per Regulation 39(3), the trustees are bound to give notice

disclosing the circumstances leading to the winding up of the

scheme. These notices along with the reasons have to be

communicated to SEBI and made known to the unitholders by

publication in two daily newspapers having circulation all over India

and a vernacular newspaper having circulation at the place where

the mutual fund is formed. The trustees are, therefore, required to

come to a conclusion that due to specific circumstances articulated

in writing, the scheme is required to be wound up. Two-thirds of the

trustees are independent persons who are not associated with the 

Page 65 of 77

sponsor,

18 and no director, officer or employee of the AMC can be

appointed as a trustee.

19 The trustees hold the assets of the scheme

in fiduciary capacity on behalf of the investors. They are experts in

the field and, therefore, conferred the power under Regulation

39(2)(a) to decide whether or not a scheme should be wound up.

The words used in the statute including delegated legislation are to

be understood in the light of that particular statute and not in

isolation. A duly enacted law cannot be struck down on the mere

ground of vagueness unless such vagueness transcends into the

realm of arbitrariness (See Nisha Priya Bhatia v. Union of India

and Another20). In the context of the present case, the expression

‘occurrence of any event’ is not to be read in isolation but with the

words ‘requires the scheme to be wound up’. The expression ‘any

event’ is therefore qualified with the said requirement. Read in this

manner, there is no vagueness which can be described as

transcending into realm of arbitrariness, on the other hand, the prerequisite statutory mandate is clear. This is not a case of excessive

delegation wherein the legislative function has been abdicated and

passed on to the trustees who can act as per their whims and

fancies. The essential legislative function is the determination of

legislative policy and its formulation as a rule of conduct. In

18 Regulation 16(5)

19 Regulation 16(3)

20 (2020) 13 SCC 56

Page 66 of 77

commercial matters varied and different situations can arise which

may warrant winding up. Complexities in matters of business and

commerce can be bafflingly intricate and riddled with urgencies and

difficulties. Therefore, there is need for flexibility. Otherwise, the

trustees would be compelled to first take the approval of SEBI,

which may have its own consequences.

59. The Statement of Additional Information dated 30th June, 2019

issued by Franklin Templeton Mutual Fund, under Heading VI –

‘Duration of the Scheme and Winding Up’, provides a general

indication as to when a scheme can be wound up under the

Regulations, the relevant portion of which is extracted below:

“VI. DURATION OF THE SCHEME AND WINDING UP

xx xx xx

However, in terms of the SEBI Regulations, the

Scheme may be wound up if:

i. There are changes in the capital markets, fiscal laws

or legal system, or any event or series of events

occurs, which, in the opinion of the Trustee, requires

the Scheme to be wound up; or

xx xx xx

”

60. We have agreed with the High Court that the opinion of the trustees

under clause (a) to Regulation 39(2), therefore, must be consented

to by the unitholders in terms of the mandate of Regulation 

Page 67 of 77

18(15)(c). In view of this interpretation, the argument challenging

constitutional validity of the Regulations on the ground that they give

unbridled and absolute power to the trustees loses much of its sting

and force. There are, therefore, sufficient guidance and safeguards

in the Regulations itself on the power of the trustees to decide on

winding up of the fund.

61. The Regulations, in our opinion, rightly draw the distinction between

creditors and the unitholders. The unit holders are investors who

take the risk and, therefore, entitled to profits and gains. Having

taken the calculated risk, they must also bear the losses, if any.

Unitholders are not entitled to fixed return or even protection of the

principal amount (See Regulations 38 and 38A).21 Creditors, on the

other hand, are entitled to fixed return as per mutually agreed

contracts. Their rate of return is in the nature of interest and not

profit or loss. Creditors are not risk takers as is the case with the

unitholders. In this sense, unitholders are somewhat at par with the

21 Guaranteed Returns

38. No guaranteed return shall be provided in a scheme, -

(a) unless such returns are fully guaranteed by the sponsor or the asset management company;

(b) unless a statement indicating the name of the person who will guarantee the return, is made in the

offer document;

(c) the manner in which the guarantee is to be met has been stated in the offer document.

Capital Protection oriented schemes

38A. A capital protection oriented scheme may be launched, subject to the following:

(a) the units of the scheme are rated by a registered credit rating agency from the viewpoint of the ability

of its portfolio structure to attain protection of the capital invested therein;

(b) the scheme is close ended; and

(c) there is compliance with such other requirements as may be specified by the Board

in this behalf.

Page 68 of 77

shareholders of a company. The waterfall mechanism under the

Companies Act, or the Indian Bankruptcy Code, gives primacy to the

dues of the creditors over the shareholders. Identical is the position

of the unitholders. In fact, the argument that the unitholders should

be treated pari passu with the creditors is farfetched. Similarly, the

contention that unitholders are identically placed as home buyers

under the Indian Bankruptcy Code is equally frail and a weak

argument. Home buyers pay money to the builder and enter into a

contract for purchase of immovable property. Home buyers are not

risk or partakers in gains or losses like investors in a mutual fund.

Home buyers under the Bankruptcy Code are treated as creditors till

the ownership rights in the immovable property are transferred to

them, but they do not take the risks and are not entitled to benefit of

profits or suffer losses, as are taken by the unitholders who invest in

the mutual funds without any guarantee of returns and know that the

investment, including the principal, are subject to market risks. To

equate the unitholders with either the creditors or the home buyers

will be unsound and incongruous.

62. The expression ‘due and payable’ with reference to the liabilities is

significant. The words ‘due and payable’ have to be interpreted with 

Page 69 of 77

reference to the context in which the words appear.22 In the context

in question they refer to the present liabilities which may be in

praesenti or in futuro. There must be an existing obligation though

the appointed date of payment may not have arrived. ‘Payable’, in

this context, means capable of being paid, suitable to be paid and

legally enforceable. It would exclude labilities that are time barred or

those not payable in facts or in law.23 In case of any dispute a

summary but thorough inquiry may be made to ascertain whether

the liability is due and payable.24 Obviously, the liabilities which are

not due and payable would not get preferential treatment, thereby

reducing the amounts payable to the unitholders.

63. Since the Regulations are in the nature of economic regulations,

while exercising the power of judicial review, we would exercise

restraint unless clear grounds justify interference. We would not

supplant our views for that of the experts as this can put the

marketplace into serious jeopardy and cause unintended

complications. Policy decisions can only be faulted on the grounds

of mala fides, unreasonableness, arbitrariness and unfairness, in

addition to violation of fundamental rights or exercise of power

beyond the legal limits. The principle of manifest arbitrariness

22 B.K. Educational Services Private Limited v. Parag Gupta and Associates, (2019) 11 SCC 633.

23 Union of India v. Raman Iron Foundry, (1974) 2 SCC 231

24 Regulations do not bar civil remedy.

Page 70 of 77

requires something to be done in exercise in the form of delegated

legislation which is capricious, irrational or without adequate

determining principle. Delegated legislations that are forbiddingly

excessive or disproportionate can also be manifestly arbitrary. In

view of the interpretation placed by us and the discussion above, the

Regulations under challenge do not suffer from the vice of manifest

arbitrariness.

64. However, we must now refer to a grey area, which we would, at this

stage, not like to decide till we have full facts and decision in the

adjudication proceedings. The issue relates to interpretation of

Regulation 53, which reads:

“53. Every mutual fund and asset management

company shall,

(a) despatch to the unitholders the dividend warrants

within 189[30] days of the declaration of the dividend;

(b) despatch the redemption or repurchase proceeds

within 10 working days from the date of redemption or

repurchase;

(c) in the event of failure to despatch the redemption or

repurchase proceeds within the period specified in subclause (b), the asset management company shall be

liable to pay interest to the unitholders at such rate as

may be specified by SEBI for the period of such delay;

(d) notwithstanding payment of such interest to the unitholders under sub-clause (c), the asset management

company may be liable for penalty for failure to 

Page 71 of 77

despatch the redemption or repurchase proceeds

within the stipulated time.

Clause (b) to Regulation 53 requires that the AMC shall

despatch the redemption or repurchase proceeds within 10 working

days from the date of redemption or repurchase. Regulation 40, as

noticed above, states that on or from the date of publication of

notice under Regulation 39(3)(b), the trustees of the AMC, as the

case may be, shall cease to cancel or create units of the scheme;

cease to issue or redeem units of the scheme; and cease to carry

on any business activity in respect of the scheme so wound up.

65. Issue in question would, therefore, arise whether the AMC or the

trustees are bound to honour and pay the redemption or repurchase

proceeds for requests received before the date of publication of

notice in terms of Regulation 39(3). Interpreting the word ‘business’

in clause (a) of Regulation 40, the Division Bench of the High Court

has held that this expression refers to business activity and,

therefore, would include payment of redemption proceeds to the

unitholders, which would include the request for redemption

received prior to the date of publication under Regulation 59(3). The

High court has, accordingly, held:

“228. As regards redemption requests received prior to

compliance with clause (3) of Regulation 39, the

argument of AMC and the Trustees was that in view of 

Page 72 of 77

clause (d) of Regulation 53, the redemption or

repurchase proceeds are required to be dispatched

within ten working days from the date of redemption

notwithstanding the decision of winding up. As held

earlier, the dispatch of redemption proceeds or

repayment of redemption proceeds is also a part of

business activity of a Scheme which is completely

prohibited once the Regulation 40 triggers in.

Therefore, the argument that the redemption requests

made by the unit-holders on 23rd April, 2020 were

required to be honoured even after Regulation 40 had

triggered in cannot be accepted. Once there is a

compliance with clause (3) of Regulation 39, the

mandatory provisions of Regulation 40 forthwith

operate. There is no exception carved out to any of the

clauses in Regulation 40. It is obvious that such a

failure to dispatch the redemption or repurchase

proceeds due to applicability of provision of Regulation

40 cannot be termed as a failure within the meaning of

sub-clause (c) of Regulation 53. Therefore, the

consequences such as payment of interests and

penalty as provided in clause (c) of Regulation 53 may

not follow.”

66. On the aspect of borrowings etc. by the AMC to make payment

towards redemption, the High Court has held:

“225. But, in the context of the Scheme of the Mutual

Funds Regulations, this Court will have to consider the

meaning of ‘business activities’. As stated in the earlier

part of our discussion, a Scheme is launched by AMC

with the approval of the Trustees. There are different

categories of Schemes in which the investments are

made by the members of the public. From plain reading

of the provisions of Regulation 43, it is clear that the

money received from the unit-holders and investors is

required to be invested by AMC strictly in accordance

with Regulation 43. The investments are to be made

subject to investment restrictions specified in the

seventh schedule. As far as borrowings are concerned, 

Page 73 of 77

clause (2) of Regulation 44 provides that the Mutual

Fund shall not borrow except to meet temporary

liquidity needs of the Mutual Fund for the purpose of

repurchase, redemption of units or payment of interest

or dividend to the unit-holders. The proviso to clause

(2) of Regulation 44 clearly provides that a Mutual Fund

shall not borrow more than twenty percent (20%) of the

net assets of the Scheme and the duration of such

borrowing shall not exceed a period of six months.

Thus, in short, the business of a Mutual Fund consists

of (i) launching Schemes, (ii) receiving the investments

from the unit-holders/investors, (iii) investing the money

so collected from the unit-holders/investors in

accordance with Regulation 43 and other relevant

Regulations and (iv) paying the returns in various

modes to the unit-holders/investors. The returns can be

in the form of repurchase of the units, redemption of

units, payment of interest or dividend to the unitholders, as the case may be, depending upon the

nature of the Scheme. Making such returns is certainly

a business activity of a Scheme. The income so

generated by investments made in accordance with

Regulation 43, can also be invested by AMC. Clause

(3) Regulation 44 provides that save as otherwise

expressly provided, a Mutual Fund shall not advance

any loans for any purposes. However, clause (4) of

Regulation 44 provides that a Mutual Fund may lend

and borrow securities in accordance with the

framework relating to short selling and securities

lending and borrowing specified by SEBI. The

provisions of Mutual Funds Regulations are intended to

regulate activities of Mutual Funds for promoting its

healthy growth and for protecting interest of unitholders. In a case of Taxation law, the rules of

interpretation applicable provide that if there are two

interpretations possible, the one in favour of assessee

will have to be preferred. In case of Mutual Funds

Regulations, a construction needs to be adopted which

will subserve the object of SEBI Act.

Page 74 of 77

226. It is pertinent to note here that clause (a) of

Regulation 40 uses the words “business activities in

respect of the Scheme” and not merely business of the

Scheme. As siated earlier, the activities of repurchase

of units, redemption of units or payment of interest or

dividend are also a part of business of a Scheme. In

view of clause (2) of Regulation 44, a Mutual Fund can

borrow only for the purposes of meeting temporary

liquidity needs for the purpose of repurchase,

redemption of units, payment of interests or dividend to

the unit-holders. For example, if there are large number

of requests for redemption of units by the unit-holders

in respect of ‘open ended Scheme’, a Mutual Fund may

face temporary liquidity crunch. In such a situation, it is

permissible for a Mutual Fund to make borrowings only

for payment of redemption amount. Therefore,

borrowings made as specified in clause (2) of

Regulation 44 will certainly amount to ‘business

activities’ of a Mutual Fund or a Scheme, inasmuch as,

such borrowings are made for the purpose of meeting

demand for redemption which is a part of business of

the Scheme.

227. Regulation 40 is interlinked with Regulation 41. In

view of Regulation 40, the moment compliance is made

with clause (3) of Regulation 39, the ‘business

activities’ of the Scheme of a Mutual Fund must stop.

The creation or cancellation of units and issue or

redemption of the units of the said Scheme must also

cease. The reasons is, as required by sub-clause (a) of

clause (2) of Regulation 41, all the assets of the

Scheme under winding up are required to be disposed

of in the best interest of unit-holders and thereafter, as

per sub-clause (b) of clause (2) of Regulation 41, the

proceeds of the sale are required to be applied firstly

towards discharge of liabilities of the Scheme.

Secondly, the expenses in connection with the winding

up are required to be set apart and thirdly, the balance

amount remaining after clearing the liabilities has to be

distributed to the unit-holders in proportion to their

respective interest in the assets of the Scheme. The 

Page 75 of 77

object of Regulation 40 of the Mutual Funds Regulation

is to ensure that the moment compliance is made with

clause (3) of Regulation 39, the assets available at that

point of time should be made available for sale. The

assets cannot be allowed to be depleied by creating

more liability. That is the reason why the redemption

must immediately cease. Therefore, it must be held that

the borrowings made by AMC, in terms of clause (2) of

Regulation 44, are business activities' of a Scheme

within the meaning of clause (a) of Regulation 40. If

borrowings are made in accordance with clause (2) of

Regulation 44, the act of replacement of the borrower,

as done by the AMC and the Trustees in the present

case, will have to be also held to be a part of business

activities in respect of the Scheme.”

67. The case set up by some parties is at variance with the dictum

pronounced by the High Court. They have submitted that the mutual

fund must honour the request for redemptions received on or before

the date of publication of notice under Regulation 39(3). In other

words, Regulation 53(b) must be honoured and complied with even

if the time of payment of redemption, the 10 days period stipulated

therein, would fall after the date of publication of the notice under

Regulation 39(3). They are of the opinion that it would be illegal not

to honour the valid redemption requests. They are also of the

opinion that the AMC should be allowed and permitted to borrow

money within the prescribed limits to honour such valid redemption

requests as long as the valid redemption requests are received prior

to the cut-off date for winding up.

Page 76 of 77

68. Before we answer this aspect, we would like to have greater clarity

on the factual matrix, which would be possible once the proceedings

in pursuance of show-cause notices etc. are concluded. Notably,

many of the appellants have not addressed us on this aspect, their

grievance being that the Forensic Audit Report has not been made

available to them. At the same time, they did refer to news reports or

articles to suggest irregularities and illegalities of different kinds,

including preferential payments, breach of trust and mismanagement in deployment of funds of the scheme, violation of

investment objectives stated in the offer document or scheme

information document and breach of trust by withholding price

sensitive information etc. Once the facts are clear and ascertained,

we would be able to appreciate and understand the practical impact

of the respective interpretations, i.e. the interpretation placed by the

High Court and the interpretation sought to be placed and preferred

by SEBI, the appellants, the trustees and the AMC. This is also the

reason why we have refrained from referring and commenting on

facts and left the several issues open at this stage. Nevertheless,

we clarify that our observations in this Order and the earlier Order

should not be read as binding factual findings or conclusions on any

disputed facts, which could be a subject matter of a show-cause

notice and consequent decision. Of course, the legal interpretation 

Page 77 of 77

of Regulation 18(15)(c) and Regulations 39 to 42 to the extent

indicated above are conclusive and binding. For clarity, we would

also observe that any finding given by the High Court on facts or

even on legal issues not subject matter of this Order or our earlier

Order dated 12th February, 2021 would not be treated as conclusive

and binding as the findings are sub-judice and pending before this

Court on interpretation as well as merits.

......................................J.

(S. ABDUL NAZEER)

......................................J.

(SANJIV KHANNA)

NEW DELHI;

JULY 14, 2021.

the Government of Uttar Pradesh acceded to a proposal of the Appellant to enhance the age of superannuation of its employees from fifty-eight to sixty years, prospectively. A Division Bench of the High Court of Judicature at Allahabad set aside the decision of the State government to give prospective effect to the enhancement in the age of superannuation and in the exercise of its power of judicial review under Article 226 of the Constitution directed that retrospective effect be given to the Government Order from 29 2 September 2002 The argument of the employees that since they had moved the Chief Minister with a representation in August 2012 before their date of superannuation which was to fall at the end of the month and that they should have the benefit of the enhancement in the age of superannuation has no substance. On 31 August 2012, the respondents moved the High Court but no interim relief was granted to them and they attained the age of superannuation. They have not worked in service thereafter. Since the High Court‘s judgment dismissing the challenge to the government order dated 30 September 2012 has attained finality, the submission cannot be accepted. For the above reasons, we allow the appeals and set aside the impugned judgment and order of the Division Bench at Lucknow

the Government of Uttar Pradesh acceded to a proposal of the Appellant to enhance the age of superannuation of its employees from fifty-eight to sixty years, prospectively. 

A Division Bench of the High Court of Judicature at Allahabad set aside the decision of the State government to give prospective effect to the enhancement in the age of superannuation and in the exercise of its power of judicial review under Article 226 of the Constitution directed that retrospective effect be given to the Government Order from 29 2 September 2002

The argument of the employees that since they had moved the Chief Minister with a representation in August 2012 before their date of superannuation which was to fall at the end of the month and that they should have the benefit of the enhancement in the age of superannuation has no substance. On 31 August 2012, the respondents moved the High Court but no interim relief was granted to them and they attained the age of superannuation. They have not worked in service thereafter. Since the High Court‘s judgment dismissing the challenge to the government order dated 30 September 2012 has attained finality, the submission cannot be accepted.  For the above reasons, we allow the appeals and set aside the impugned judgment and order of the Division Bench at Lucknow

1

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

Civil Appeal No. 2310 of 2021

(Arising out of SLP(C) No 11793 of 2018)

New Okhla Industrial Development Authority & Anr. …Appellants

Versus

B D Singhal & Ors. …Respondents

W I T H

Civil Appeal No. 2311 of 2021

 (Arising out of SLP (C) No.3861 of 2020)

J U D G M E N T

Dr Dhananjaya Y Chandrachud, J

1 On 30 September 2012, the Government of Uttar Pradesh acceded to a

proposal of the Appellant to enhance the age of superannuation of its employees

from fifty-eight to sixty years, prospectively. A Division Bench of the High Court of

Judicature at Allahabad set aside the decision of the State government to give

prospective effect to the enhancement in the age of superannuation and in the

exercise of its power of judicial review under Article 226 of the Constitution

directed that retrospective effect be given to the Government Order from 29 

2

September 2002. The appeals by New Okhla Industrial Development Authority1

and the State of Uttar Pradesh question the correctness of this determination.

Simply put, the appeals raise the issue as to whether the High Court has

transcended the limits of its power of judicial review.

I The Facts

2 The New Okhla Industrial Development Authority is constituted under the

provisions of the UP Industrial Area Development Act 19762

. The object was to

constitute an authority for the development of certain areas of the State notified

under Section 3 of the Act, into industrial and urban townships. The legislation

provides for the constitution of the authority, its functions, powers, and for the

appointment of the staff members. While the administrative head is appointed by

the State government, Section 5 of the Act provides for the appointment of the

staff:

“5. Staff of the Authority. - (1) Subject to such control and

restrictions as may be determined by general or special

orders of the State Government, the Authority may appoint

such number of officers and employees, as may be

necessary for the performance of its functions, and may

determine their grades and designations.

(2) Subject as aforesaid the officers and other employees of

the Authority shall be entitled to receive from the funds of the

Authority, such salaries and allowances and shall be

governed by such other conditions of service as may be

agreed upon with the Authority.”

 1 “NOIDA”. 2 “the Act”.

3

Section 19 enables the authority, with the previous approval of the State

government to frame regulations for the administration of the affairs of the

authority. Section 19 reads as follows:

“19. Power to make regulations. - (1) The Authority may,

with the previous approval of the State Government, make

regulation not inconsistent with the provisions of this Act or

the rules made thereunder for the administration of the affairs

of the Authority.

(2) In particular, and without prejudice to the generality of the

foregoing power, such regulation may provide for all or any of

the following matters, namely,-

(a) the summoning and holding of meetings of the Authority,

the time and place where such meetings are to be held, the

conduct of business at such meetings, and the number of

members necessary to form a quorum thereat;

(b) the powers and duties of the Chief Executive Officer;

(c) the form of register of application for permission to erect a

building;

(d) the management of properties of the Authority ;

(e) fees to be levied in the discharge of its functions;

(f) such other matters as are to be provided for in regulation.”

In pursuance of its power under Section 9 of the Act, the Authority framed the

New Okhla Industrial Development Authority Service Regulations, 19813

governing recruitment, appointment, pay, and other service conditions of the

staff. Regulation 25 of the Noida Regulations, 1981 states that the age of

superannuation of the employees is fifty eight. It reads as follows:

“Retirement 25. An employee shall retire at the age of fiftyeight years.”

 3 “NOIDA Regulations, 1981”.

4

3 On 28 November 2001, the State government issued a notification4

enhancing the age of retirement of ‘Government servants’ from fifty-eight to sixty

years. Pursuant to this, Fundamental Rule 56A was amended on 27 June 2002

enhancing the age of superannuation of government servants to sixty years with

effect from 28 November 2001.

4 On 29 June 2002, the Board of NOIDA resolved to recommend that the

age of superannuation of its employees should be increased from fifty-eight to

sixty years. A recommendation to that effect was submitted to the State

government on 22 March 2005, since an amendment of the NOIDA

regulations,1981 would require the previous approval of the State government in

terms of Section 19 of the Act.

5 On 2 September 2005, the State government informed NOIDA that the

decision on its proposal was deferred. Eventually, on 22 September 2009, the

State government rejected the proposal to enhance the age of retirement of

NOIDA employees. Challenging the decision of the State government,

proceedings were initiated under Article 226 of the Constitution before the High

Court of Judicature at Allahabad5 by certain employees seeking:

(i) A Writ of certiorari to quash the government order dated 22 September

2009; and

(ii) A Writ directing the respondents to those proceedings not to retire the

employees at the age of fifty-eight and to allow them to continue till they

attain the age of sixty years.

 4 No. 1098/Pers-1/2001 5 Writ Petition No. 48162/2010.

5

6 A Division Bench of the High Court rendered judgment in the writ

proceeding on 17 January 2012 by which it directed NOIDA to consider the issue

in its next Board meeting after taking into account the financial burden that may

be occasioned to the authority by an increase in the age of retirement. The High

Court specifically left it open to the government to consider whether to give effect

to the increase in the age of retirement from the date on which NOIDA resolved

to bear the financial burden or from such other date as the government may find

expedient. As para 13 of the operative directions indicates:

“13. Having regard to facts and circumstances, we dispose of

the writ petition with directions that NOIDA may consider the

matter in its next Board meeting, taking into account its earlier

resolution made in the year 2002, to bear the financial

burden, after financial assessment of such burden, and the

effect of increase of retirement age on other employees. It

may thereafter refer the matter to the concerned

Administrative Department of the State Government for its

evaluation and recommendation, and for forwarding the same

to the State Government for its approval. We also direct that if

such a decision is taken by the State Government, it will be

open to the State Government to consider to give effect to·

the increase in the age of retirement with effect from the date

when the NOIDA had resolved to bear the financial burden, or

from any such date, which the State Government may find it

expedient.”

7 On 9 July 2012, the Board of NOIDA at its 176th meeting resolved to

recommend to the State government to increase the age of retirement for its

employees from fifty-eight to sixty years “with immediate effect”. The resolution

was communicated to the State government by a letter dated 17 July 2012 which,

in its material segment reads as follows:

“…the Board in its 176th Meeting held on 9.7.2012 has

passed a resolution proposing to increase the age of

superannuation from 58 to 60 years (attested copies of the 

6

agenda and the Minutes of the Board resolution are

enclosed), wherein it is clearly stated that the financial burden

on account of increasing the age of retirement from 58 to 60

years would be borne by the Authority from its own resources

and no financial aid of any kind would be taken from the State

Government either at present or in the future. Therefore, it is

requested that the increase in the age of retirement of the

officers I employees of the Authority be increased from 58 to

60 years with immediate effect.”

8 On 27 August 2012, a writ petition was instituted by the first and second

respondents to (i) challenge the order of the State government dated 22

September 2009 rejecting the original proposal for enhancement of the age of

retirement; and (ii) for a direction not to retire the first and second respondents at

the age of fifty-eight and to allow them to continue until the age of sixty. Now, at

this stage it is material to take note of certain facts pertaining to the first and

second respondents. The second respondent was appointed in service on 21

March 1977 (his date of birth being 18 August 1954). The first respondent was

appointed on 6 March 1980 (his date of birth being 15 August 1954). Both the

employees were due to retire on 31 August 2012 on attaining the then prevailing

age of superannuation. On 31 August 2012, notice was issued on the writ petition

but no interim order was passed resulting in both of them superannuating on 31

August 2012.

9 On 30 September 2012, the Government of Uttar Pradesh acceded to

NOIDA’s proposal for enhancing the age of retirement to sixty years. However,

this was expressly made prospective in terms of the paragraph 1 (ii), which reads

as follows:

7

“(ii) This provision shall come into force in the NOIDA with

immediate effect (from the date of issue of this Govt. order)

and there shall not for any retrospective effect.”

10 The petition before the High Court was amended to incorporate a relief

seeking to quash paragraph 1(ii) of the order of the State government dated 30

September 2012. A Division Bench of the High Court at Lucknow allowed the writ

petition and struck down the provisions of para 1(ii). While doing so the High

Court directed that the increase in the age of superannuation to sixty years shall

have retrospective effect from 29 June 2002, and the first and second

respondents would be deemed to have worked until the extended age of

retirement. Their benefits were directed to be computed accordingly. This led to

the filing of Special Leave Petitions before this court under Article 136. Assailing

the judgment of the High Court, a companion petition has been filed by the

Government of Uttar Pradesh. While issuing notice on 19 November 2018 on

NOIDA’s Special Leave Petition, this Court granted an ad interim stay of the

judgment of the High Court.

II The Contentions

11 Challenging the judgment of the High Court, Mr Ravindra Kumar, learned

Counsel appearing on behalf of NOIDA has urged the following submissions:

(i) The Service Regulations and consequently amendments to them are in

the nature of subordinate legislation. No part of the amended Regulations

could have been struck down –para 1(ii) in this case – unless they were

declared to be ultra vires the provisions of the Constitution or the parent 

8

Statute. There is no such declaration by the High Court while delivering the

impugned judgement;

(ii) The High Court has committed a manifest error while directing that the

revision in the age of the retirement shall apply retrospectively with effect

from the date of the Resolution dated 29 June 2002. While issuing such a

direction, the High Court failed to consider the following:

(a) The Government Order dated 30 September 2012 was issued

approving the recommendation of NOIDA dated 17 July 2012

and not in the context of the earlier recommendation dated 29

June 2002;

(b) The earlier recommendation dated 29 June 2002 had been

rejected by the State Government on 22 September 2009.

The Writ Petition6 which had been filed challenging the State

government’s rejection order dated 22 September 2009 was

decided on 17 January 2012, much before the filing of the writ

petition by first and second respondents on 27 August 2012 in

which the impugned judgment was delivered;

(c) In the above Writ Petition though a prayer was made to quash

the Government Order dated 22 September 2009, yet no

such relief as prayed was granted. On the contrary, the only

direction was that NOIDA may consider the matter again in its

next Board Meeting and thereafter refer the matter to the

State government for its approval. It was observed in the

 6 WP No. 48162 of 2010.

9

judgement dated 17 January 2012 that if any decision

approving the recommendation is taken by the State

Government, it will be open to it to decide the date from

which it may find it expedient to increase the age of

retirement; and

(d) After the judgement dated 17 January 2012, NOIDA sent a

fresh recommendation to the State Government on 17 July

2012. This recommendation was ultimately accepted by the

State Government and a Government Order dated 30

September 2012 was issued by it. This Government Order

directs that the increase in the age of retirement from fiftyeight to sixty years "shall come into force with immediate

effect (from the date of issue of this Government Order) and

there shall not be any retrospective effect".

(iii) When the order directing increase in the age of retirement is clear, namely

that it shall come into force with immediate effect coupled with the words

that the increase shall not have any retrospective effect, then the intention

of the maker of the subordinate legislation categorical obviates any

possible interpretation giving it retrospective effect. In these

circumstances, the Court cannot issue directions giving retrospective effect

to the amendment. The golden rule of statutory interpretation is that in the

absence of an express provision or a necessary intendment providing

retrospectivity, the interpretation must only be prospective. An exception to 

10

this rule is only available in matters of procedure. (P. Mahendran v. State

of Karnataka7

; C.Gupta v. Glaxo-Smithkline Pharmaceuticals Ltd.8

);

(iv) The observation of the High Court that the Government should have acted

instantly "when the resolution was received by it more than 3 years back"

is factually incorrect. The Government Order dated 30 September 2012

itself recites that it is issued in reference to the recommendation dated 17

July 2012. Therefore, there was no delay of 3 years in the issuance of the

Government Order. The Government Order was issued in a little more

than 2 months. The High Court has erred in directing that the writ

petitioners shall be deemed to have worked with NOIDA till the age of sixty

years and they be paid salary and other benefits for two years during

which they never worked. The first and second respondents were due for

retirement with effect from 31 August 2012. They filed the writ petition on

or about 27 August 2012, praying that they be permitted to continue on

their posts till they attain the age of sixty years and salary be paid to them

accordingly. However, while issuing notice on the writ petition or at any

time thereafter no interim order was granted by the High Court. When the

first and second respondents performed no work, they are not entitled to

receive salary for such period. The principle of ‘no work no pay’ will

applicable in such a situation. The inability of the writ petitioners to

persuade the High Court to grant interim orders cannot act to the

advantage of the respondents. This is not a case of termination of services

 7 (1990) 1 SCC 411. 8 (2007) 7 SCC 171. 

11

which is later set aside by an order of the court thereby directing payment

of salary as arrears;

(v) The High Court has granted relief which was not prayed. It has ordered

that the increase in the age of retirement would be effective from 29 June

2002. The first and second respondents in their counter affidavit (at page

146 and 155), have admitted that relief was prayed with effect from 9 July

2012. Thus, the direction contained in the impugned judgment that the

increase in the age of retirement would be effective from 29 June 2002 is

unsustainable;

(vi) The effect of the impugned judgment runs contrary to the earlier Division

Bench's judgment dated 17 January 2012, and is beyond the prayers

made in the writ petition. It has resulted in demands from dozens of

employees of NOIDA, who had retired decades ago. For example, in

September, 2004, employees made demands seeking arrears of pay and

allowances considering the retirement age as sixty years for them as well.

The interpretation / direction given in the impugned judgment has a

cascading effect and is unsustainable in law; and

(vii) The High Court was under the wrong impression that NOIDA, the authority

that is to bear the financial burden consequent to the increase in the age of

retirement supported the case of the Respondents/employees that the

Government Order issued on 20 September 2012 must have retrospective

effect.

12

12 Mr Vinod Diwakar, learned AAG for the State of Uttar Pradesh has

adopted the submission of Mr Ravindra Kumar, learned Counsel for NOIDA.

13 Ms Tanya Shree, learned Counsel has appeared on behalf of the

respondents to oppose the submissions in the appeals. Before elucidating the

submissions, it would be necessary to extract a submission from the counter

affidavit which has been filed by the respondents in response to the present

proceedings. Paragraph 6 of the counter affidavit reads as follows:

“Further, it is submitted that the Answering Respondents

herein did not seek the benefit of enhancement of age of

retirement of the employees of the Petitioner-Authority from

the date of its earlier resolution dated June 29, 2002. In fact it

was the case of the Answering Respondents before the

Hon'ble High Court in Writ Petition being Writ-A No. 43780 of

2012 that the age of retirement of the Answering

Respondents be enhanced w.e.f the date of resolution dated

July 9, 2012 of the Petitioner-Authority and the Answering

Respondents are only claiming a limited relief of enhancing

the age of retirement of the Answering respondents w.e.f. the

date of Resolution of the Petitioner-Authority i.e July 9,

2012.”

The above extract from the counter affidavit has clarified that the relief which the

respondents – employees sought is the enhancement of the age of retirement

with effect from 19 July 2012 which is the date on which the Board of NOIDA

resolved to increase the age of retirement. In this backdrop, Ms Tanya Shree

submitted as follows:

(i) The decision of the State government dated 20 September 2011 to

enhance the age of superannuation for its employees was circulated inter

alia to public sector undertakings and corporations enabling them to

determine whether they were in a position to bear the financial burden 

13

attendant upon an increase in the age of retirement. Upon examination of

the financial impact, if each corporation resolved to accept the financial

burden, it could then seek the approval of the State government. All such

decisions were to be implemented only after the approval of the State

government, though it was made clear that no financial grants would be

provided to meet the additional cost outlay;

(ii) In the case of several other public sector corporations, the State

government resolved to increase the age of retirement. In certain cases it

resolved to give retrospective effect; for instance in the case of the Uttar

Pradesh State Handicrafts Corporation Ltd., the government by its decision

dated 17 April 2012 resolved to increase the age of retirement with effect

from 20 December 2011;

(iii) On 16 August 2012, a letter was addressed by the respondents to the

Chief Minister requesting for an enhancement in the age of retirement

since NOIDA had agreed to bear the financial burden by its resolution

dated 9 July 2012 and adverting to the fact that several employees would

be retiring by the end of August 2012;

(iv) The State government did not provide any reasons why it did not make its

decision operative with effect from 9 July 2012, the date when the

resolution was passed by the Board of NOIDA to enhance the age of

retirement;

(v) Though, the respondents had approached the government of Uttar

Pradesh with a representation seeking permission to allow them to work 

14

till the age of 60 years, the representation was not allowed. As a

consequence of this they are entitled to the payment of their salary and all

other consequential benefits occasioned by the extension in the age of

retirement since it was the appellant authority that did not permit the

respondents to continue in service though they were willing to work. In

State of Uttar Pradesh v. Dayayanand Chakrawarthy9 it was held that if

the employer prevents the employee from performing his duties, the

employee cannot be blamed for his absence from duty and the principle of

‘no pay no work’ shall not be applicable to such an employee; and

(vi) The Board resolution of 9 July 2012 proposed to increase the age of

retirement of the employees with immediate effect. The authority is now

estopped from going back on its own resolution and denying the benefit of

the enhancement of age from the date of the resolution.

III The Analysis

14 The High Court while striking down para 1(ii) of the Government Order

dated 30 September 2012 to enhance the age of retirement with prospective

effect (para 1(ii) of the government order makes this position clear) has directed

that the enhancement of the age of retirement must date back to 29 June 2002.

This direction giving retrospective effect to the enhancement in the age of

retirement seems to be based on the fact that the original resolution of the Board

of NOIDA to enhance the age of retirement was issued on 29 June 2002. In

granting this relief, the High Court has formulated two reasons in its judgment:

 9 (2013) 7 SCC 595.

15

firstly, the government order dated 30 September 2012 is arbitrary for having

increased the age of retirement with effect from the date of the order without

giving the benefit to employees who had retired prior to that date ;and secondly,

there was no reason to refuse the benefit of an extension of the age of

superannuation retrospectively when the resolution was received by the State

government “more than three years back”.

15 The reasons which have weighed with the High Court are based on

factually incorrect premises and are founded on a misunderstanding of the legal

position. After the Board of NOIDA resolved on 29 June 2002 to enhance the age

of superannuation from fifty-eight to sixty years, its recommendation was

forwarded to the State government on 22 March 2005. On 2 September 2005, the

State government deferred a decision on the recommendation. Subsequently,

the proposal was rejected on 22 September 2009.

16 The order of rejection was challenged in writ proceedings10 which

culminated in the judgment of the Division Bench rendered on 17 January 2012.

The Division Bench refused to quash the order of rejection. Evidently, at that

stage, the basic issue was in regard to whether the financial burden could be

borne by an authority such as NOIDA. This is evident from the fact that the High

Court while deciding upon the merits of the proceedings under Article 226 held

that it was for the Board of NOIDA to consider whether it could bear the financial

burden occasioned by an increase in the age of retirement, and to thereafter

move the State government for its approval. While disposing of the Writ Petition,

the High Court specifically observed that “it will be open to the State government

 10 W.P No. 48162/2010. 

16

to consider to give effect to the increase in the age of retirement with effect from

the date when NOIDA has resolved to bear the financial burden, or from any such

date, which the State Government may find it expedient.” This order has attained

finality since it was not challenged before this Court.

17 It was in terms of the order of the High Court that the Board of NOIDA

resolved on 9 July 2012 to recommend to the State government that the age of

superannuation of its employees should be enhanced with immediate effect, and

the additional financial outlay would be met from the resources of the authority

without any claim for grants being made to the State government. The State

government responded to this proposal by acceding to the request to enhance

the age of superannuation, though prospectively from 30 September 2012.

18 NOIDA, as an authority, constituted by the UP Industrial Area

Development Act 1976 is bound by the rigour and discipline of the statute. The

power to appoint officers and employees is conferred upon the authority by

Section 5(i) “subject to such control and restrictions as may be determined by

general or special orders of the State government”. Section 19 requires the prior

approval of the State government to the regulations framed by the authority. The

regulations governing the conditions of service were notified on 14 January 1981

with the previous approval of the State government. Under Regulation 25 of the

NOIDA Regulations 1981, the age of superannuation was fixed at fifty-eight

years. Consequently, any enhancement of the age of superannuation would

require an amendment of the service regulations necessitating, in terms of

Section 19, the prior approval of the State government. 

17

19 Whether the age of superannuation should be enhanced is a matter of

policy. If a decision has been taken to enhance the age of superannuation, the

date with effect from which the enhancement should be made falls within the

realm of policy. The High Court in ordering that the decision of the State

government to accept the proposal to enhance the age of superannuation must

date back to 29 June 2002 has evidently lost sight of the above factual

background, more specifically (i) the rejection of the original proposal on 22

September 2009; and (ii) the judgment of the Division Bench dated 17 January

2012 refusing to set aside the order rejecting the proposal on 22 September 2009

which has attained finality. But there is a more fundamental objection to the basis

of the decision of the High Court. The infirmity in the judgment lies in the fact that

the High Court has trenched upon the realm of policy making and has assumed

to itself, jurisdiction over a matter which lies in the domain of the executive.

Whether the age of superannuation should be increased and if so, the date from

which this should be effected is a matter of policy into which the High Court ought

not to have entered.

20 The factual reasons which the High Court has indicated are specious. The

High Court has termed the decision to give prospective effect to the

enhancement of the age of superannuation from 30 September 2012 as arbitrary

on the ground that the government should have “acted instantly” when the

resolution was received from NOIDA, and that there was no justification not to

grant retrospective effect when the resolution had been received “more than

three years back”. Both these factors are erroneous. As a matter of fact, the

resolution of the Board of NOIDA dated 9 July 2012 (at its 176th meeting) was 

18

forwarded to the State government on 17 July 2012 and a decision was taken in

about two months from the date of receipt of the proposal. The High Court’s

observation on the delay of three years in taking a decision on the resolution of

NOIDA is in reference to the 2005 resolution, which was rejected on 22

September 2009. As stated above, the Government resolution of 2012 was

impugned before the High Court, and the 2009 rejection order had attained

finality in view of the judgment of the division bench of the High Court on 17

January 2012 which was not challenged before this court.

21 Whether the decision to increase the age of superannuation should date

back to the resolution passed by NOIDA or should be made effective from the

date of the approval by the State government was a matter for the State

government to decide. Ultimately, in drawing every cut-off, some employees

would stand on one side of the line while the others would be positioned

otherwise. This element of hardship cannot be a ground for the High Court to

hold that the decision was arbitrary. When the State government originally

decided to increase the age of superannuation of its own employees from fiftyeight to sixty years on 28 November 2001, it had left the public sector

corporations to take a decision based on the financial impact which would result if

they were to increase the age of superannuation for their own employees.

22 From time to time the authorities of the State took a decision bearing upon

the exigencies of service prevailing in each organisation. By an OM dated 16 May

2005, the age of retirement of employees of the Agricultural Produce and

Marketing Committee (APMC) was enhanced with immediate effect, without

giving retrospective operation. Similarly, on 15 December 2006 the age of 

19

retirement of employees of the UP Power Corporation was enhanced without

conferring retrospective effect. On 17 April 2012, the age of superannuation of

the employees of UP State Handicrafts Corporation Limited was enhanced with

effect from 20 December 2011. On 22 May 2012, the age of superannuation of

the employees of the UP State Industrial Development Corporation Limited was

enhanced “with immediate effect”. Different corporations of the State are

governed by their service rules and regulations, and by the exigencies of service.

The State government had evidently determined that it was for each organisation

to consider and determine the impact of the financial burden, and based on that

the organisation was to submit a proposal for the approval of the government.

23 The High Court’s observation that the Government order on 30 September

2012 increasing the age of superannuation prospectively is arbitrary seems to be

based on the premise that the respondent-employees have a vested right to the

increase in the age of retirement on the passage of the resolution by NOIDA.

However, Section 19 of the Act stipulates that regulations – which would include

amendments as in this case – will require the previous approval of the State

Government. The employees will have a vested right to the increased age of

superannuation only after the service regulations are modified upon approval of

the State Government, and from such date as maybe prescribed by the

Government. Para 1(ii) of the government order issued on 30 September 2012

clearly and in unambiguous terms states that the order shall come into force

prospectively. The government order can be given retrospective application only

if expressly stated or inferred through necessary implication. Therefore, the

respondent-employees could not have claimed a vested right that the 

20

enhancement in the age of retirement should be made effective from the date on

which NOIDA had resolved to submit a proposal for the approval of the

government.

24 The argument of the respondents that the appellant-authority is estopped

from claiming that the government order issued on 30 September 2012 cannot be

given retrospective effect from 9 July 2012 since the Board resolution proposed

an increase in the retirement age of its employees with ‘immediate effect’ is

unsustainable. For the principle of promissory estoppel to apply, one party must

have made an unequivocal promise, intending to create or affect a legal

relationship between the parties.11 The recommendation of NOIDA cannot create

or alter the legal relationship since it is subject to the approval of the government.

Justice H L Gokhale in a concurring opinion in Monnet Ispat and Energy Ltd. v.

Union of India12 clarified that the principle of promissory estoppel will not apply if

the communication issued was either a proposal or a recommendation. The

learned judge observed:

“289. As we have seen earlier, for invoking the principle of

promissory estoppel there has to be a promise, and on that

basis the party concerned must have acted to its prejudice. In

the instant case it was only a proposal, and it was very much

made clear that it was to be approved by the Central

Government, prior whereto it could not be construed as

containing a promise. Besides, equity cannot be used against

a statutory provision or notification.”

(emphasis supplied)

 11 Monnet Ispat & Energy Limited v. Union of India & Ors., (2012) 11 SCC 1. 12 (2012) 11 SCC 1.

21

In State of Jharkhand v. Brahmputra Metallics Ltd., Ranchi13, this court

speaking through of one us (D Y Chandrachud J) elaborated on the doctrine of

legitimate expectation, which is grounded in fairness and reasonableness.

Explaining that there is a legitimate expectation that the actions of the State are

fair and reasonable, it was observed:

“45. …The state must discard the colonial notion that it is a

sovereign handing out doles at its will. Its policies give rise to

legitimate expectations that the state will act according to what it

puts forth in the public realm. In all its actions, the State is bound

to act fairly, in a transparent manner. This is an elementary

requirement of the guarantee against arbitrary state action which

Article 14 of the Constitution adopts.”

(emphasis supplied)

Since the enhancement of the age of superannuation is a ‘public function’

channelised by the provisions of the statute and the service regulations, the

doctrine of promissory estoppel cannot be used to challenge the action of

NOIDA. Though NOIDA sought the approval of the State government for the

enhancement with ‘immediate effect’, it never intended or portrayed to have

intended to give retrospective effect to the prospectively applicable Government

order. The representation of NOIDA could not have given rise to a legitimate

expectation since it was a mere recommendation which was subject to the

approval of the State Government. Hence, the doctrine of legitimate expectation

also finds no application to the facts of the present case.

25 The reliance placed by the respondents on Dayanand Chakrawarthy

(supra) to argue that they were willing to work till they attained the age of sixty

years but were not permitted to, and thus the principle of ‘no work no pay’ would

not be applicable is misplaced. In Dayanand Chakrawarthy, the issue before

 13 Civil Appeal No. 3860-62 of 2020. 

22

the two judge Bench of this court was whether prescription of different ages of

retirement based on the mode of recruitment under the UP Jal Nigam

(Retirement on attaining age of superannuation) Regulations, 2005 was

unconstitutional for violating Article 14 of the Constitution. This court held that the

differential superannuating age was discriminatory. However, by virtue of

Regulation 31 of the UP Jal Nigam Services of Engineers (Public Health Branch)

Regulations, 1978 the service conditions of State government employees is

applicable to the UP Jal Nigam employees. Therefore when the Jal Nigam

through an Office memorandum had resolved that the age of retirement for its

employees shall be fifty eight years, though it was sixty years for State

government employees, it was set aside by this court in Harwinder Kumar v.

Chief Engineer, Karmik14. In Harwinder Kumar and the subsequent cases (U.P

Jal Nigam v. Jaswant Singh15 ; U.P Jal Nigam v. Radhey Shyam Gautam16)

involving the age of retirement of the UP Jal Nigam employees, this court had

held that employees who had approached the courts shall be entitled to full salary

until the age of sixty years. It was in this context that a two judge bench of this

court speaking through Mukhopadhaya J made the following observation in

Dayanand Chakrawarthy:

“48. …We observe that the principle of “no pay no work” is not

applicable to the employees who were guided by specific rules

like Leave Rules, etc. relating to absence from duty. Such

principle can be applied to only those employees who were not

guided by any specific rule relating to absence from duty. If an

employee is prevented by the employer from performing his

duties, the employee cannot be blamed for having not worked,

and the principle of “no pay no work” shall not be applicable to

such employee.”

 14 (2005) 13 SCC 300. 15 (2006) 11 SCC 464. 16 (2007) 11 SCC 507.

23

In Dayanand Chakrawarthy the court directed payment of arrears deeming the

employees to have worked till sixty years in spite of no interim order being issued

in that regard because (i) the Office Memorandum was held ultra vires ; (ii)

Harwinder Kumar, Jaswant Singh, and Radhey Shyam Gautam had already

held that the age of retirement of the Jal Nigam employees shall be 60 years

unless a regulation prescribing a lower retirement age is issued in terms of

Regulation 31, and had extended this benefit to all the parties who had filed writ

petitions. Therefore, the above observation must be read in the context of the

distinct factual situation in the case.

26 The argument of the employees that since they had moved the Chief

Minister with a representation in August 2012 before their date of

superannuation which was to fall at the end of the month and that they should

have the benefit of the enhancement in the age of superannuation has no

substance. On 31 August 2012, the respondents moved the High Court but no

interim relief was granted to them and they attained the age of superannuation.

They have not worked in service thereafter. Since the High Court‘s judgment

dismissing the challenge to the government order dated 30 September 2012 has

attained finality, the submission cannot be accepted.

27 For the above reasons, we allow the appeals and set aside the impugned

judgment and order of the Division Bench at Lucknow of the High Court of

Judicature at Allahabad dated 25 January 2018 in WA No 43780 of 2012. The 

24

Writ Petition shall in consequence stand dismissed. There shall be no order as to

costs.

28 Pending application(s), if any, stands disposed of.

…………...…...….......………………........J.

[Dr Dhananjaya Y Chandrachud]

…..…..…....…........……………….…........J.

 [MR Shah]

New Delhi;

July 15, 2021.

The displaced person- respondent No. 4 is claiming allotment on the basis of government policy decision dated 20.06.1978. The evacuee land has to be allotted to a displaced person as it forms part of the compensation pool in terms of Section 14 of the Act which can be allotted in terms of Section 20 of the Act. The evacuee land can be allotted only to a displaced person alone. The allotment to non-displaced person can be considered only after all the displaced person have been settled. Therefore, the clause to allot evacuee land to encroacher in the policy dated 20.6.1978 is beyond the scheme and purpose of the Act. However, if any allotment has been made to an encroacher and had attained finality, the same will not be re-opened. Therefore, an encroacher does not have any right of regularization of an evacuee land in the presence of a displaced person entitled to allotment in order to satisfy the objective of the Act.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2851 OF 2015

ISMAILBHAI I. KANSARA (D) THROUGH LR .....APPELLANT(S)

VERSUS

STATE OF GUJARAT & ORS. .....RESPONDENT(S)

J U D G M E N T

HEMANT GUPTA, J.

1. The present appeal is preferred by an encroacher on an evacuee

land measuring 0-14 acre-guntha of Survey No.191/2 at Godhara,

Gujarat since 1976 where he is running an auto garage named

Bharat Motor Garage since 1977. The Learned Single Bench

dismissed the writ petition of the appellant herein on 24.10.2013

challenging the eviction order dated 23.6.1992. The order has been

upheld by the learned Division Bench. Still aggrieved, the appellant

is before this Court.

2. The appellant was served with a notice on 23.6.1992 under Section

19(2)(b) of the Displaced Person (Compensation and Rehabilitation)

Act, 19541

. The appellant filed a writ petition in the High Court of

1 Hereinafter referred to as the ‘Act’

1

Gujarat at Ahmedabad bearing Special Civil Application (SCA) No.

4700 of 1992 on 16.07.1992. Another SCA No.2940 of 1992 filed by

one Srikant Deviprasad Joshi was heard along with SCA filed by the

appellant. Shri Joshi was claiming right over the property in

question on the basis of allotment made to him on 20.09.1972 as

an enemy property2

. The land allotted to Shri Joshi was cancelled

on 06.12.1974. The appeal against the said order was dismissed on

15.07.1975. It is thereafter Shri Joshi filed SCA before the High

Court which came to be dismissed on 24.10.2013. The said order

has attained finality qua Shri Joshi. Learned Single Bench decided

the SCA filed by the appellant by not considering him to be

encroacher but observing that it is an evacuee property and thus

the appellant has no right over it. While examining the notice of

the eviction and claim of regularization of possession, the Court

held as under:

“The challenge in this petition is to the notice of eviction

dated 23.6.1992 and this notice indicted that the same was

issued on account of property being treated as evacuee

property and likely to be disposed of in accordance

therewith and therefore, when this Court has not accepted

the petition of original petitioners and not disturbed the

stand of the State and authorities qua property being

evacuee property, then, the entire petition of present

petitioner will be required to be viewed from that angle only.

The claim for regularization if at all is there, then, the same

shall take second fiddle and as could be seen from the

aforesaid discussion, this Court has not accepted the

contention of the petitioner qua property being evacuee

property and hence, the basic premise on which the

property could have been has not been for regularization

does not exist in favour of the petitioner and therefore,

decisions cited at bar accompanying the written submission,

in my view, would be of no avail to the petitioner and

2 Enemy Property Act, 1968

2

therefore, the Court need not detain itself elaborately on the

aspect of regularization.”

3. In an intra Court appeal, an order was passed on 20.01.2014

remanding both the SCA’s before the learned Single Bench. But on

an application filed, the application and the Letters Patent Appeal

were dismissed on 10.03.2014.

4. Before this Court, Mr. Rauf Rahim argued that no opportunity was

granted to the appellant before the eviction order was passed on

23.06.1992. The appellant had averred in the SCA filed that he is

entitled to regularization of his possession on the basis of the

government resolution dated 8.1.1980.

5. The argument of learned counsel for the appellant before this court

is based upon the policy dated 20.6.1978 for allotment of evacuee

land to encroachers and the resolution dated 8.1.1980 in respect of

allotment of other public land to encroachers. The appellant as an

encroacher is covered by either or both of the policies, therefore, is

entitled to claim regularization of his possession.

6. We have considered the arguments raised and find no merit in the

present appeal. The appellant filed the writ petition soon after the

eviction order dated 23.06.1992 was served upon him. In the writ

petition, the appellant had made reference to the notice dated

1.5.1989. He had further stated that he appeared before the

Collector and also made an application for purchase of land in

question. Though, he has stated that the eviction notice was

3

dropped, no such order has been produced or referred to in the

written submission filed. The stand is that his purchase application

could not be considered on account of the pending writ petition.

Thus, the appellant had received show cause notice for

unauthorized possession of an evacuee property. Therefore, the

argument that eviction order was passed without notice is factually

incorrect.

7. The relief claimed by the appellant in the writ petition was to quash

and set aside the eviction order. The appellant has not sought any

relief qua allotment or regularization of his possession of the land

in question. Therefore, substantially, the claim of the appellant

before the High Court was to examine as to whether the order of

eviction passed on 23.06.1992 was suffering from any illegality or

irregularity which could have warranted interference in the writ

proceedings. Since the claim of the appellant was limited only to

challenge the eviction order and the fact that the possession of the

appellant was not regularized before 23.06.1992, therefore, we do

not find any illegality in the eviction notice issued against the

appellant. Hence, in terms of Section 19 of the Act, the order of

eviction passed cannot be said to be illegal or invalid.

8. Alternatively, we have also examined the claim of the appellant for

regularization of his possession over the land in question. The

Government Resolution dated 08.01.1980 is in respect of

4

encroachment on public land. The appellant is in possession of a

land meant for displaced person being an evacuee land, therefore,

it is not the circular dated 08.01.1980 that would be applicable but

the Circular of 20.6.1978 under which the claim of the appellant for

regularization of his possession alone can be examined.

9. The Circular dated 20.06.1978 is to the effect that the disposal of

the evacuee property shall be regulated in accordance with

provisions contained in Section 20 of the Act in the following

manner:

“Dated the 20th June, 1978

In supersession of the instructions issued in G.R.R.D.

No. EVP-1073-R, dated the 1st March 1975 it is hereby

directed that the valuation and sale of remaining

evacuee properties/lands which are undisposed and

are unclaimed by displaced persons, should be dealt

with in accordance with the provisions of the Displaced Persons (Compensation and Rehabilitation)

Act, 1954 and the Rules 1955 thereunder. The disposal of these properties shall be regulated in accordance with the provisions contained under Section 20

of the Displaced Persons (Compensation & Rehabilitation) Act, 1954 and Rules 87 of the Displaced Persons

(Compensation & Rehabilitation) Rules 1955 by the

Settlement Commissioners and Managing Officers appointed under the said Act in the following manner:

(I) XXX

(II) XXX

(III) The evacuee lands both agricultural and nonagricultural, which are not covered by item (i) and (ii) above

are not occupied but are open should be sold to displaced

persons without auction on payment of the present market

value, preference being given to a displaced persons, who is

(i) locally settled (ii) is in genuine need of land/plot for

rehabilitation and (iii) does not possess any property either

in his name or in the name of his family members and, if he

is a claimant displaced person, he has unsatisfied claim of

property left in Pakistan in his name or in the name of his

family members. ………

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(IV) The encroachment of evacuee lands both agricultural

and non-agricultural which do not conflict with the Town Plan

of the area should be regulated by Charging occupancy

price at penal rate of not less than two and half times the

ordinary occupancy price which should be fixed by the

Collector and Settlement Commissioner’s alongwith fine and

annual assessment etc., in the manner as chargeable for

regularization of encroachment of State lands as per

instructions contained in item No.3 of G.R.R.D. No. EG71/1072/2735-L dated 25-7-1972 for agricultural lands and

in G.R.R.D. No.8297/45 dated the 17th May 1950 for nonagricultural lands as amended from time to time. If the

encroachment is a displaced persons, the encroachment

may be regularized by recovering the single occupancy price

which should be fixed by the Collector and Settlement

Commissioner and fine and annual assessment in the

manner as chargeable as per the provisions of section 61 of

Bombay Land Revenue Code, 1879.”

10. A perusal of the said Circular would show that an encroacher can

be considered for regularization of his possession only if there is no

displaced person in terms of clause III. The said clause

contemplates that the evacuee land, both agricultural and nonagricultural should be sold to displaced person without auction on

payment of present market value. The preference is to be given to

(1) a locally settled displaced person, (2) is in genuine need of

land/plot for rehabilitation and (3) does not possess any property

either in his name or in the name of his family member.

11. In terms of such clause III, the Chief Settlement Commissioner

allotted the land to Respondent No. 4 on 12.10.1990 inter alia for

the reason that he has balance verified claim. The appellant was

also ordered to be evicted being an unauthorized occupant of

evacuee land. We do not find any merit in the argument that the

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appellant was required to be heard before passing such an order as

the appellant is not claiming any right being a displaced person.

Therefore, between the displaced person and a land encroacher,

the displaced person has a priority and thus, was rightly allotted

land. In fact, this Court in Ramesh Parsram Malani v. State of

Telangana

3

 held that, it is only after the displaced persons are

settled, the State Government may utilize the land for other

purposes. The Court held as under:

“32 However, we are unable to agree with the High Court

that transfer of land to the State Government takes such

transferred land out of compensation pool. The land

transferred to the State Government continues to be part of

compensation pool but it is required to be disposed of by the

officers of the State who have been conferred the powers of

the Managing Officer or of the Settlement Commissioner for

the settlement of the displaced persons alone. It is only

after the displaced persons are settled, the State

Government may utilize the land for other purposes.”

(Emphasis Supplied)

12. The appellant relied upon the judgment in Ramesh Parsram

Malani to contend that a displaced person has to file a claim

before 30.06.1955. We do not find any merit in such argument. The

referred case was where a displaced person was an owner of 83.11

acres of land in Pakistan which was verified by the Settlement

Claim Officer. An allotment of 40.4 standards acre was made prior

to commencement of the Act. It is 13 years after the death of

displaced person on 10.08.1988, the legal heir sought allotment of

the remaining verified claim of the displaced person as perennial

source of allotment. The appellant cannot take help from that

3 (2020) 11 SCC 653

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judgment, he having no claim of allotment to an evacuee land. The

displaced person is claiming allotment on the basis of government

policy decision dated 20.06.1978, which policy contemplate that

the allotment of the evacuee land shall be in terms of Section 20 of

the Act.

13. The displaced person- respondent No. 4 is claiming allotment on

the basis of government policy decision dated 20.06.1978. The

evacuee land has to be allotted to a displaced person as it forms

part of the compensation pool in terms of Section 14 of the Act

which can be allotted in terms of Section 20 of the Act. The

evacuee land can be allotted only to a displaced person alone. The

allotment to non-displaced person can be considered only after all

the displaced person have been settled. Therefore, the clause to

allot evacuee land to encroacher in the policy dated 20.6.1978 is

beyond the scheme and purpose of the Act. However, if any

allotment has been made to an encroacher and had attained

finality, the same will not be re-opened. Therefore, an encroacher

does not have any right of regularization of an evacuee land in the

presence of a displaced person entitled to allotment in order to

satisfy the objective of the Act.

14. It is stated that the possession of the land has been taken over by

the Government on 24.01.2014. The claim of the appellant is now

for restoration of possession by an encroacher, which is wholly

untenable in view of the above observations.

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15. In view thereof, we do not find any merit in the present appeal and

the same is dismissed.

.............................................J.

(SANJAY KISHAN KAUL)

.............................................J.

(HEMANT GUPTA)

NEW DELHI;

JULY 13, 2021.

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