Retroactive application of SEBI circular on Standardization of Procedure to be followed by Debenture Trustee(s)
A recent case of Supreme Court allowed retroactive application of SEBI Circular on Standardization of procedure to be followed by Debenture Trustee(s) in case of default by issuers of listed debt securities.
Facts: The case arose out of an appeal by SEBI against the ruling of the Bombay High Court?where,?Reliance Commercial Finance Limited (RCFL) issued Non-Convertible Debentures to various?entities and committed its?first default under the Debenture Trust Deeds in March 2019.The?Reserve Bank of India (Prudential Framework for the Resolution of Stressed Assets) Directions issued but the RBI in June 2019 which provided for lenders to opt for resolution plans on entering into?an?ICA.?Thus,?the lenders and RCFL, entered into?an?ICA?in?July 2019.?
Meanwhile SEBI issued a circular on October 2020 on standardization of procedure to be followed by Debenture Trustees in cases where default by issuers of listed debt securities and accordingly, the Debenture Trust Deeds was amended in this case by executing a Supplementary Debenture Trust Deed which took note of the SEBI circular.?
Subsequently?the seventeen lenders filed a suit in Bombay High Court for the protection of their interests with respect to the funds owed by RCFL to them. The Bombay High Court?held that?prima facie a meeting of debenture holders was required and suggested that all the concerned parties enter into a negotiated settlement.?In the same order, the Court held that the SEBI Circular could not be permitted to operate retrospectively and did not govern the Debenture Trust Deeds. The Court directed?also Vistara?(one of the lenders)?to conduct a meeting of all debenture holders in terms of the Debenture Trust Deeds.
Consequently, SEBI appealed to the?Supreme Court?and?rejected the interpretation of the Bombay High Court on this matter of the SEBI circular and accordingly allowed the appeal by SEBI.?
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The RFCL?contended?that the SEBI Circular would be applicable only if the debenture holders chose to enter into an ICA under the RBI Circular. According to RCFL, it is open to debenture holders to choose not to enter into an ICA. Instead, they may approve of a Resolution Plan that the lenders have formulated independent of the modalities prescribed in the SEBI Circular. It was argued that this route permitted debenture holders to approve or reject Resolution Plans based on whether their interests were properly accounted for.?
The Hon’ble Apex Court did not accept this submission, instead stated that in the present case, the SEBI Circular owed its existence to statutory powers conferred by a special legislation enacted with a?view to protect the interests of investors and to ensure the stable and orderly growth and development of the market for securities. Further, Regulation 15(7) of the 1993 Regulations laid the foundation for the conditions specified in the SEBI Circular.
As such, the Hon’ble Apex Court stated,?the phrase provisions of the [1993 Regulations] in Clause 59 must be read to include the SEBI Circular and the circular would have retroactive application.