IDBI Trusteeship Services Limited vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

The appellant has challenged the order dated December 23, 2022 passed by the Adjudicating Officer (“AO” for short) of the Securities and Exchange Board of India (“SEBI” for short) imposing a penalty of Rs. 3 lakh under Section 15HB of the SEBI Act, 1992 for violating Clause 2.1 of the SEBI Circular dated October 12, 2020.

The facts leading to the filing of the present appeal is, that the appellant is a registered Debentures Trustee under the SEBI (Debenture Trustees) Regulations, 1993. An inspection was conducted during February 16-22, 2022 for the period April 1, 2020 to November 30, 2021 wherein certain deficiencies were brought out in the functioning of the appellant as a Debentures Trustee. Explanation was sought on the findings given in the inspection report which was not found satisfactory and accordingly a show cause notice dated November 7, 2022 was issued calling upon the appellant to show cause as to why an enquiry should not be held and penalty should not be imposed under Section 15HB of the SEBI Act.

The discrepancies indicated in the show cause notice was with regard to the asset cover certificate submitted by the appellant to the stock exchanges which was not in conformity with the format provided in the circular dated November 12, 2020. The show cause notice also alleged that the appellant had not updated the default history information with regard to the instruments and consequently had violated Clause C of Annexure-I of SEBI circular dated October 22, 2013. The AO after considering the reply found that the appellant had violated the circulars and accordingly imposed a penalty of Rs. 3 lakh.

We have heard Shri Somasekhar Sundaresan, the learned counsel assisted by Ms. Yugandhara Khanwilkar and Shri Ajay Khaire, the learned counsel for the appellant and Shri Vishal Kanade, the learned counsel assisted by Shri Manish Chhangani, Ms. Samreen Fatima and Shri Sumit Yadav, the learned counsel for the respondent.

We find that with regard to the asset cover certificate and the non-compliance of the circular of November 12, 2020 the AO has given a finding that as per circular of November 12, 2020 the Debenture Trustee or its advisors or experts are required to certify independently after examining compliance with covenants / terms of the issue of listed debt securities and should not merely rely upon the certificates of the Chartered Accountant of the issuer. In this regard, for better understanding Clause 2 and 2.1 of the circular dated November 12, 2020 is extracted here under:-

“A. Monitoring of ‘security created’ / ‘assets on which charge is created’

SEBI Circular No. SEBI/ HO/ MIRSD/ CRADT/ CIR/ P/ 2020/218 dated November 03, 2020, has prescribed the manner in which debenture trustees shall carry out due diligence for creation of security at the time of issuance of debt securities and as required under Regulation 15(1)(s) & 15(1)(t) of DT Regulations, debenture trustee(s) shall carry out due diligence on continuous basis. Debenture trustee shall carry out periodical monitoring in following manner:

2.1. Debenture trustee shall incorporate the terms and conditions of periodical monitoring in the debenture trust deed wherein listed entity shall be liable to provide relevant documents/ information, as applicable, to enable the debenture trustee(s) to submit the following reports/ certification to Stock Exchange(s) within the timelines mentioned below:”

A perusal of Clause 2 of the circular dated November 12, 2020 indicates that due diligence with regard to monitoring of security created is to be carried out in the manner prescribed as per SEBI circular dated November 3, 2020. In this regard Clause 6 and 7 of the SEBI circular dated November 3, 2020 prescribes the procedure for carrying out due diligence which is extracted here under:

“6. Debenture trustee(s) by itself or through its advisers or experts shall independently carry out due diligence. The terms and conditions with respect to exercising due diligence shall also be included in the debenture trustee agreement. The due diligence to be exercised by debenture trustee(s) with respect to creation of security shall inter-alia include the following:

6.1 Debenture trustee shall verify that the assets provided by issuer for creation of security are free from any encumbrances or necessary permissions or consents has been obtained from existing charge holders by carrying out the following checks:

(a) Verify from Registrar of Companies, Sub-registrar, CERSAI, IU or other sources where charge is registered / disclosed as per terms.

(b) In case of conditional consent/ permission received as per para 4.3(b) above:

I. Verify whether such conditional consent / permission given to issuer by existing charge holders is valid as per terms of transaction documents;

II. Intimate to existing charge holders via e-mail about the proposal to create further charge on assets by issuer seeking their comments / objections, if any, to be communicated to debenture trustees within next 5 working days.

6.2 In case of personal guarantee, corporate guarantee and any other guarantees / form of security, the debenture trustee shall verify the relevant filings made on websites of Ministry of Corporate Affairs, Stock Exchange(s), CIBIL, IU etc. and obtain appraisal report, necessary financial certificates viz. from statutory auditor in case of corporate guarantee, certificate from Chartered Accountant in case of personal guarantee, as applicable, of the guarantor / issuer.

Debenture trustee, by itself or through its appointed agencies viz. chartered accountant firm, registered valuer, legal counsel etc., shall prepare one or more reports viz. valuation report, ROC search report, title search report/appraisal report, asset cover certificate, any other report/certificate as applicable etc. and shall independently assess that the assets for creation of security are adequate for the proposal issue of debt securities.”

Under Regulation 15(6) of SEBI (Debenture Trustees) Regulations, 1993 the debenture trustee is required to exercise independent due diligence. Regulation 15(1) of the aforesaid regulations places obligations on the debenture trustees to ensure that the assets of the issuers are sufficient to discharge the interest and principle amount with respect to debt securities of the issuers at all times.

Clause 6 and 7 of the circular dated November 3, 2020 indicates that the debenture trustees may itself or through its adviser or expert carry out due diligence. Clause 7 of the circular further clarifies that the debenture trustees by may itself or through a chartered accountant firm prepare an asset cover certificate. Thus, a debenture trustee can carry out due diligence and submit reports through a Chartered Accountant. In this regard the Chartered Accountant certificate submitted by the debenture trustee stated the following:-

“c) Compliance of all the covenants / terms of the issue in respect of listed debt securities of the listed entity:-

Jain Princy & Associates Chartered Accountants, Asset Cover Certificate dated Aug 30, 2021, UDIN:21435304AAAACG2816 certifying the compliances made by the listed entity in respect of the covenants/terms of the issue of the listed debt securities (NCD”s)

We conducted our examination in accordance with the Guidance Note on “Audit Reports or Certificates for Special Purposes” (Revised 2016) issued by The Chartered Accountants of India (ICAI). The Guidance Note requires that we comply with the ethical requirements of the Code of Ethics issued by the ICAI.

This certificate has been issued at the request of the IDBI Trusteeship Services Limited basis on the information / documents / financial results / asset cover certificate as provided to us by ITSL / Issuer Company for onward submission to the stock exchange, hence, this certificate may not be suitable for any other purpose and is intended solely and entirely for the information of and use of the IDBI Trusteeship Services Limited, accordingly, our certificate should not be quoted or referred to in any other document or made available to any other person or persons without our prior written consent. Also, we neither accept nor assume any duty or liability for any other purpose or to any other party to whom our certificate is shown or into whose hands it may come without our prior consent in writing.”

From the aforesaid, it is clear that the chartered accountant conducted an examination in accordance with the Guidance Note issued by the Chartered Accountants of India (ICAI) and considered ethical requirements of Code of Ethics issued by Chartered Accountants of India (ICAI). Further, the certificate was issued on the basis of information / documents / financial results / asset cover certificate as provided by the issuer company.

Thus, the finding that the appellant has not independently examined the matter and has only relied upon the certificate issued by the chartered accountant of the issuer company is incorrect. The certificate issued by the chartered accountant of the appellant clearly indicated that he had considered the information / documents and financial results provided by the issuer company in addition to the asset cover certificate of the chartered accountant of the issuer company.

Insofar as the charge of not updating the default history information, a finding has been given that the default history information about the instrument was not updated within 7 days from the date of knowledge of default and therefore the circular of October 22, 2013 was violated. In this regard we find that a specific assertion was made that the history information could not be updated on account of system glitches or technical errors on the website. This fact has not been considered and penalty has been imposed only on the ground that there has been a delay of more than 7 days. In our opinion the AO was required to deal with the contention raised by the appellant and was required to give a finding as to whether the contention raised was correct or incorrect. We find that without giving a finding on this aspect the AO has proceeded on a presumption that the appellant has violated the circular.

We may also point out that every irregularity or deficiency noticed during the course of inspection does not call for initiation of penalty proceedings. The purpose of inspection is to advise the entity to cure the lapse that have been found. If any serious lapse is discovered, then penalty action can be taken. In this regard this Tribunal in UPSE Securities Limited vs Securities and Exchange Board of India (Appeal no. 109 of 2011 decided on July 25, 2011) held:-

“5. Before concluding we cannot resist observing that the object of carrying out inspection of the books of accounts and records of any intermediary including a stock exchange or its subsidiaries is to ensure compliance with the provisions of the Act, Rules, Regulations, By-laws and circulars issued from time to time which are meant to regulate the securities market. Every little irregularity / deficiency noticed during the course of the inspection is not culpable and does not call for initiation of penalty proceedings. The purpose of inspection in quite a few cases could be better achieved if the inspecting team at the time of the inspection were to advise the erring entity. However, if any serious lapse is discovered, it would always be open to the Board to take penal action in accordance with law. Having said this, we leave the matter at that.”

In the instant case, we find that the lapses pointed out were technical and not serious in nature.

In view of the aforesaid, the impugned order cannot be sustained and is quashed. The appeal is allowed with no order as to costs.

This order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Certified copy of this order is also available from the Registry on payment of usual charges.