Breach of Fiduciary Duty: Debenture Trustee & Rating Agencies Held Liable for Investor's Loss Post-'AAA' to 'D' Downgrade, says Chandigarh Consumer Commission. - 2025-08-20

Debenture Trustee and Rating Agencies Held Liable for Investor's Loss in DHFL Collapse, Ordered to Pay Compensation

Chandigarh, U.T. – The State Consumer Disputes Redressal Commission, Chandigarh, has held a debenture trustee and two credit rating agencies liable for deficiency in service and unfair trade practices, ordering them to compensate an investor who suffered losses following the default of Dewan Housing Finance Corporation Limited (DHFL) debentures.

In a significant ruling that underscores the fiduciary duties of financial intermediaries, the Commission, comprising President Justice Raj Shekhar Attri and Member Mr. Rajesh K. Arya, overturned a District Commission order and directed Catalyst Trusteeship Limited, CARE Ratings, and Brickworks Ratings to compensate the investor, Jyoti Khemka. The case highlights the failure of these entities to protect investor interests in the lead-up to the DHFL financial crisis.

Background of the Case

The appellant, Jyoti Khemka, invested ₹3,42,000 in DHFL's secured Non-Convertible Debentures (NCDs) in August 2016. Her investment decision was heavily influenced by the 'AAA' rating—the highest degree of safety—assigned to these NCDs by credit rating agencies CARE (Respondent No. 2) and Brickworks (Respondent No. 3). Catalyst Trusteeship Limited (Respondent No. 1) was appointed as the debenture trustee, tasked with safeguarding the interests of the debenture holders.

When the debentures matured in August 2019, DHFL defaulted on its payment obligation of ₹3,73,464 (principal plus interest). The complainant pointed out that despite clear signs of financial distress at DHFL since 2018, the rating agencies maintained the 'AAA' rating, only to abruptly downgrade it to 'D' (Default) in February 2019. She alleged that this constituted a gross failure of due diligence and that the debenture trustee failed to enforce the security or maintain statutory reserves, thereby breaching its duties.

Arguments from Both Sides

Appellant's Arguments (Jyoti Khemka): - Catalyst Trusteeship: Failed in its statutory and contractual duties to protect her interests. It did not enforce the security held against the debentures, failed to ensure DHFL maintained a Debenture Redemption Reserve (DRR), and was slow to act on the default, breaching the Indian Trusts Act, 1882, and SEBI regulations. - CARE & Brickworks: Induced the investment through a misleading 'AAA' rating. The sudden downgrade from the highest to the lowest rating overnight was impossible without prior negligence or lack of due diligence, especially given that forensic audits later revealed massive siphoning of funds at DHFL since 2007. This was a manifest breach of SEBI (Credit Rating Agencies) Regulations, 1999.

Respondents' Arguments: - Catalyst Trusteeship: Claimed it had taken all necessary steps and that the ultimate liability for payment lay with the issuer, DHFL. It argued that the complainant's claim was settled under the Insolvency and Bankruptcy Code (IBC) proceedings where she received ₹1,68,584. - CARE & Brickworks: Argued that a credit rating is merely an "opinion" and not a recommendation to buy or sell securities. They claimed their disclaimers absolved them of liability and that investors are expected to make their own decisions. - Piramal Capital (formerly DHFL): Stated that as the successful resolution applicant under IBC, it bears no liability for actions against DHFL prior to its takeover.

Commission's Analysis and Key Findings

The Commission conducted a thorough examination of the duties of debenture trustees and credit rating agencies under various laws, including the Indian Trusts Act, 1882, and SEBI Regulations.

On the Role of the Debenture Trustee (Catalyst)

The Commission found a "clear dereliction of fiduciary duty" by Catalyst Trusteeship. Citing an order from the Bombay High Court in a related matter, the Commission noted that the trustee had been "slow to act in a matter of securing interest of the debenture-holders." The judgment emphasized that a trustee's role is not passive but requires proactive and timely intervention.

"The failure to initiate enforcement measures, secure the charged assets or communicate timely with stakeholders constitutes a serious breach of trust. The inertia displayed by opposite party No.1 amounts to an abdication of its statutory role, which caused grave and irretrievable harm to the complainant-debenture-holders' interest."

On the Role of Credit Rating Agencies (CARE & Brickworks)

The Commission heavily criticized the rating agencies for their failure to exercise due diligence. The sudden and drastic downgrade from 'AAA' to 'D' raised "grave doubts regarding the robustness, independence and integrity of the rating process."

The Commission highlighted that DHFL itself had admitted to a severe liquidity crisis since September 2018, yet the agencies continued to assign the highest safety rating. This disconnect was termed an "egregious failure" and a "gross misrepresentation."

"The continuance of such a high rating despite concrete and material adverse developments pertaining to the company's financial health amounted to a gross misrepresentation, which served to severely mislead the investing public who rely heavily on such ratings as indicators of creditworthiness."

The Commission concluded that this conduct was a manifest breach of SEBI regulations and constituted both deficiency in service and an unfair trade practice.

Final Judgment and Directions

The State Commission set aside the District Commission's order and partly accepted the complaint against the debenture trustee and the rating agencies.

• Catalyst Trusteeship Limited was directed to pay the complainant the outstanding amount of ₹2,04,880 (total claim of ₹3,73,464 minus ₹1,68,584 received via IBC resolution) with 9% annual interest from August 16, 2019.
• CARE Ratings and Brickworks Ratings India Pvt. Ltd. were each directed to pay ₹1,00,000 as compensation to the complainant for deficiency in service and unfair trade practice.
• The three respondents were jointly and severally directed to pay ₹33,000 towards litigation costs.

The complaint against Piramal Capital (DHFL) and SEBI was dismissed as no relief was sought against them. The ruling reinforces the accountability of financial intermediaries and serves as a crucial precedent for investor protection in India.