Summary
In the winding up of six Franklin Templeton mutual fund schemes, an association of independent financial advisors sought trail commission for distributors for the period after publication of the winding-up notices under Regulation 39(3)(b) of the SEBI Mutual Funds Regulations. Regulation 52, which permits recurring expenses including agents' commission, applies only while a scheme operates. Once the notices are published, Regulation 40 bars all business of the scheme. Commission is not an expense connected with winding up under Regulation 41(2)(b). Nor is it a liability due and payable, since recurring trail commission is not a present liability. As the asset management company could claim nothing, its agents could not either, and SEBI's 2018 circular cannot override the Regulations. The application was dismissed, with the sponsors' undertaking to bear liquidation costs recorded.
Issues
- Whether mutual fund distributors are entitled to trail commission out of scheme assets for the period after publication of winding-up notices under Regulation 39(3)(b) of the SEBI (Mutual Funds) Regulations, 1996.
Provisions considered
- Regulations 39(3)(b), 40, 41(2)(b) and 52(4)(b), Securities and Exchange Board of India (Mutual Funds) Regulations, 1996Read harmoniously, Regulation 52's recurring expenses, including agents' commission, apply only while a scheme operates. After the winding-up notice, Regulation 40 ends business, and distributor commission is neither a winding-up expense nor a liability due and payable under Regulation 41(2)(b). (¶¶ 3, 4, 5, 6, 7, 8)
Held
- Regulation 52, which permits recurring expenses including agents' commission, applies only while a scheme is in operation. From publication of notices under Regulation 39(3)(b), Regulation 40 requires the trustees and asset management company to cease business in the scheme. Applying Regulation 52 after that point would undo the embargo and harm unitholders. (¶¶ 3, 4)
- Under Regulation 41(2)(b), expenses such as audit fees or statutory advertisement costs are allowed only if they are connected with the winding up. Commission payable to mutual fund distributors is not such an expense. (¶ 5)
- Liabilities due and payable are present liabilities with an existing obligation to pay, even if payment falls due later. Recurring trail commission is not a deferred one-time payment but an obligation that may accrue in future, and it ceases on redemption, as it does on winding up. It was therefore not due and payable. (¶¶ 6, 7)
- Distributors are paid by the asset management company out of its recurring expenses, not directly by unitholders. Since the asset management company could not claim recurring expenses after the notice, the distributors' claim also fails. SEBI's circular of 22 October 2018 on trail commission aims at transparency and cannot override the Regulations. (¶¶ 8, 9)
Result
Application dismissed without costs. The sponsors' statement that they will not charge the schemes the liquidation expenses they bore, about Rs 40 crores, is recorded.