Important points:
No Debenture Trustee can deal in securities except under, and in accordance with, the conditions of registration obtained from the SEBI, in accordance with the SEBI (Debenture Trustees) Regulations, 1993. Regulation 7 of the said Regulations, 1993 mandates that no person shall be entitled to act as a Debenture Trustee unless he is either -(a) a Scheduled Bank carrying on commercial activity; or (b) a public financial institution within the meaning of Section 4A of the Companies Act, 1956; or (c) an insurance company; or (d) body corporate.

JUDGMENT :

Petitioners are Fellow Members of the Institute of Chartered Accountants of India. They were appointed as Debenture Trustees of an incorporated Company. The petitioners are aggrieved by a show-cause notice dated 13.03.2020, issued by the Deputy General Manager of Securities and Exchange Board of India.

2. The parties to the writ petitions are referred to in this judgment in the order they appear in the cause title and the exhibits as they are marked, in W.P.(C) No.13682 of 2020. The 2nd respondent is Securities and Exchange Board of India (hereinafter referred to as ‘the SEBI’). The 4th respondent is BRD Securities Limited (hereinafter referred to as ‘the Company’). The Reserve Bank of India (RBI), in exercise of its powers under Section 45-IA of the Reserve Bank of India Act, 1934, issued Ext.P1 Certificate of Registration to the 4th respondent-Company to commence/carry on the business of Non Banking Financial Institution, subject to conditions.

3. While the 4th respondent-Company was functioning, the SEBI issued Ext.P2 show-cause notice dated 13.03.2020. Ext.P2 was issued to 14 noticees. Noticees 1 to 12 are the Company and its 11 Directors/former Directors. The 13th and 14th noticees are the petitioners in W.P.(C) No.22430 of 2020 and W.P.(C) No.13682 of 2020 respectively. In Ext.P2 show-cause notice, the following charges were levelled:-

(1) The Company issued Debentures which are deemed public issues, without complying with the statutory requirements for public issues;

(2) The Company failed to provide the details as to whether the consent of the Debenture holders has been obtained, for extending the tenure of the Debentures;

(3) Details of issuance of Bonds-Noncurrent (Unsecured Subordinate Debt) were not e-filed by the Company with ROC as required under the Companies Act, 1956/2013.

(4) The Company has not submitted any information to prove that the offer/allotment of Debentures and bonds were not intended to be available for subscription to general publicity compliance of Section 67(3) of the Companies Act, 1956.

(5) The issuance of bonds by the Company during 2014–'15 and 2017–'18 has to be treated as a public issue of securities in view of the RBI Circular and read with Section 42 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. The Company has reached the number of 200 subscribers, where subscription per investor is less than Rs.1 Crore.

(6) Under Section 73 of the Companies Act, 1956, every Company making public offer shall, before making such an offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange foreign exchanges. No such application was made by the Company.

(7) The Company and its Directors failed to return money to investors as required under Section 73(3) of the Companies Act, 1956.

(8) The Company has not registered the Prospectus with the Registrar of Companies, nor sent abridged prospectus along with application form and thereby violated Section 56(1), Section 56(3) and Section 60 of the Companies Act, 1956.

(9) The Company failed to appoint a registered Debenture Trustee and failed to comply with any of the requirements specified in SEBI ILDS Guidelines.

(10) Unregistered Debenture Trustees were appointed violating Section 12(1) of the SEBI Act, 1992 read with Regulation 7 of SEBI (Debenture Trustees) Regulations, 1993.

4. The petitioners challenge Ext.P2 show-cause notice on various grounds. Supervisory powers on Non-Banking Financial Companies in raising deposits, maintenance of accounts etc. is vested in Reserve Bank of India under Chapter 3B of the RBI Act, 1934. The SEBI has issued the impugned show-cause notice on the presumption that it has supervisory powers under Sections 55A, 117B and 67 of the Companies Act, 1956. The SEBI has no such powers. The impugned show-cause notice has been issued only to make a rowing enquiry to find out whether there has been any statutory v