• Tue. Sep 20th, 2022

Commission payable to mutual fund distributors and not plan wind-up expense

ByChad J. Johnson

Aug 15, 2022

The Supreme Court observed that the commission owed to mutual fund distributors is certainly not an expense related to plan wind-up.

The bench of Judge S. Abdul Nazeer and Judge Sanjiv Khanna observed, “We would concede that, in the given case, some of the recurring expenses referred to in paragraph (b) of Regulation 52(4) such as audit fees, insurance premium, cost of legal advertisements, etc., would be covered and would meet the requirement of paragraph (b) of Regulation 41(2). However, if and only when they fall within the liquidation expenditure requirement and satisfy it, they may be authorized under Article 41(2)(b). Such expenditures are permitted not because of paragraph (b) of Regulation 52(4), but because the expenditures incurred would satisfy the requirement to be related to such liquidation under Regulation 41(2). (b). The commission due to mutual fund distributors is certainly not a plan wind-up charge.”

The Court also held, ““The intent behind the specification of the total expense ratio and performance disclosure for mutual funds is to bring greater transparency in expenses and to confer no rights on mutual fund distributors to claim expenses under clause (b) of Regulation 41(2), which relates to the procedure and manner of liquidation.”

While explaining the meaning of the phrase due and payable under the Security and Exchange Board of India (SEBI) Regulations 1996, the Supreme Court reiterated that the phrase ‘due and payable’ must be interpreted with reference to the context in which the words appear.

Headquarters observed that to cover liability under the said phrase, there must be an obligation to pay even though the fixed date for payment may not have arrived.

“Any liability which is not enforceable, in fact and in law, would not be covered by the expression “due and payable.”, the bench has given its opinion.

The Court dealt with the petition filed by the Foundation of Independent Financial Advisors (FIFA) asserting that independent financial advisors/mutual fund distributors were entitled to payment of a commission agreed between them and Franklin Templeton Asset Management (India) Private Limited.

Lawyer Jasmeet Singh appeared for the appellants while Lawyer Warning Christi Jain represented the respondents.

The Court had dismissed the said application subject to its earlier Order and by this Order the Court has given the reasons for such dismissal.

While setting out the reasons for the rejection of the said application, the Court thus observed “If we are to accept FIFA’s assertion, the necessary follow-up is also to acknowledge and accept that the asset management company, even after the issuance of notices under Regulation 39(3)(b) , would be entitled to the fees and expenses mentioned and covered by Regulation 52, under the conditions and in the amount specified in Sub-Regulation 6 of Regulation 52. Sub-paragraph (c) of Regulation 52(6) specifies the percentage of expenses amounts of the program that is authorized, varying from % to 1.75% of the daily net assets. This, in our opinion, would not be a correct interpretation and would lead to anomalies and tribulations with adverse consequences for holders of suffering shares, and would cancel the embargo ordering the cessation of activity.

“…FIFA has asserted that the payment of commission due to mutual fund distributors on or after April 23, 2020 is an amount ‘due and payable under the scheme’, as it is an amount or ‘a payment which had accrued prior to the publication of notices under Regulation 39(2)(b), but was not paid as it was payable in the future. The commission payable to mutual fund distributors of placement is in the nature of a lead and, therefore, is payment due for services rendered to unitholders prior to liquidation. This argument is far-fetched and misleading.”estimated the bench.

The Court stated that recurring liability is not a present liability, but an obligation which, upon the satisfaction of certain conditions, may accrue in the future.

The Court further explained that the asset management company is permitted to charge fees and expenses under sub-rules (1) and (2) of Regulation 52 and that mutual fund distributors do not have not entitled to direct payment from unitholders.

“From the publication of the notice of liquidation pursuant to Article 39(3)(b), the trustees and the asset management company may not claim any payment for recurring expenses under the subparagraph (b) of sub-regulation (4) to Regulation 52. However, as stated above, FIFA’s claim must be dismissed.”the court said.

The Court further stated that even if a distributor renders certain services to unitholders after the publication of the notice under section 39(3)(b), this would not entitle him to claim an amount to the portfolio management company.

Title of Case – Franklin Templeton Trustee Services Private Limited & Another v. Amruta Garg & Others Etc.

Click here to read/download the Order