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2022 Supreme(Online)(SEBI) 131
SECURITIES AND EXCHANGE BOARD OF INDIA
S.J. KATHAWALLA, JJ, MILIND N. JADHAV, JJ
Securities and Exchange Board of India – Appellant
Versus
Rajkumar Nagpal – Respondent
COMMERCIAL APPEAL (L) NO. 27370 OF 2021 | INTERIM APPLICATION (L) NO. 14224 OF 2021 | COMMERCIAL SUIT (L) NO. 14223 OF 2021
For the Appellants/Petitioners: Arvind Datar, Mustafa Doctor, Suraj Choudhary, Mihir Mody, Dhaval Patil, Arnav Misra
For the Respondents: Rohan Mathur, D.J. Khambatta, Prateek Sekseria, Subir Kumar, Disha Shah, Karan Rukhana, Nishant Chotani, Yash Chheda, Ravi Kadam, Yohaann Limathwalla, Shahbaz Malbari, Birendra Saraf, Tine Abraham, Siddharth Ranade, Varuna Bhanrale, Samrudhi Chothani, Raghav Bhargava, Janak Dwarkadas, Tushad Kakalia, Anaisha Zachariah, Vidhi Dhanuka
The SEBI Circular cannot be applied retroactively to defaults occurring before its enactment, and terms of Debenture Trust Deeds prevail in matters of voting and resolution of claims.
Headnote:(A) Securities and Exchange Board of India Act, 1992 - Clarification of SEBI Circular - Appeal by securities regulatory body against orders pertaining to Debenture Trust Deeds (DTDs) filed post-default - Court addresses applicability of laws governing resolutions of stressed assets, clarifying that retrospective application of SEBI Circular is unsustainable - Principle established that DTDs govern relation among parties unless superseded by express law. (Paras 30, 40, 41, 61, 67)
(B) Consent and Voting Mechanisms - Court finds that voting and meeting requirements of DTDs prevail in case of conflicting regulations, as regulations cannot override explicit contractual obligations agreed by parties - Approval mechanism demands majority decision at the ISIN level, emphasizing adherence to terms of DTDs in resolution context. (Paras 12, 66)
Facts of the case:
SEBI challenges an order regarding the execution of Debenture Trust Deeds amidst multiple defaults, asserting authority based on a circular aimed at standardizing procedures for debenture holders in such situations. (Paras 1, 12, 41)
Findings of Court:
Court clarifies that SEBI cannot enforce circular retroactively, emphasizing the necessity of adhering to terms of DTDs for voting on resolutions. (Paras 67)
Issues: Main legal questions pertain to the applicability of the SEBI Circular to past defaults and its enforceability against established DTD terms. (Paras 40, 52)
Ratio Decidendi: The Court ruled that existing DTD provisions govern where conflicts with the SEBI Circular arise, stressing that SEBI's circular, issued post these contractual agreements, cannot alter obligations already established without explicit provisions for retrospection. (Paras 41, 61)
Result: Appeal dismissed, maintaining existing orders and emphasizing contractual fidelity. (Paras 67)
| Table of Content |
|---|
| 1. overview of appeal and pertinent facts (Para 1 , 2) |
| 2. arguments regarding the applicability of the sebi circular (Para 3 , 4 , 5 , 6 , 7 , 8 , 9 , 10 , 11) |
| 3. observations regarding statutory interpretation and retrospective application (Para 12 , 40 , 41 , 42) |
| 4. contention on the interplay between sebi circular and existing dtds (Para 16 , 17 , 19) |
| 5. conclusion on the non-retroactive applicability of sebi circular (Para 46 , 47 , 48) |
| 6. final judgment dismissing the appeal (Para 67) |
INTRODUCTION :
1. This Appeal filed by the Securities & Exchange Board of India (“SEBI”) challenges an order dated 28th October, 2021 read with an order dated 15th November, 20211, both passed by the Ld. Single Judge (“Impugned Orders”)
FACTS
2. Prior to proceeding further, it would be necessary to set-out the following facts:
2.1 On 3rd May, 2017, a Debenture Trust Deed was executed between Reliance Commercial Finance Limited / Respondent No.11 (“RCFL”) as ‘Issuer’ and Vistra ITCL (India) Limited / Respondent No.13 (“Vistra”) as ‘Debenture Trustee’ for the issuance of Non-Convertible Debentures (“NCDs”) in the sum of Rs.2,000 Crores.
2.2 Two further Debenture Trust Deeds were also executed on 23rd May, 2017 and 5th February, 2018 respectively between RCFL as ‘Issuer’ and Vistra as ‘Debenture Trustee’.
2.3 The aforesaid Debenture Trust Deeds are hereinafter collectively referred to as the “DTDs”
2.4 On 7th June, 2019, the Reserve Bank of India / Respondent No.14 (“RBI”) issued its Prudential Framework for Resolution of Stressed Assets Circular (“RBI Circular”)
2.5 On 6th July, 2019, an Inter-Creditor Agreement was entered into between Bank of Baroda / Respondent No.12 (“BoB”) and other lenders of RCFL (“ICA”) Under the ICA, BoB came to be appointed as the lead Bank.
2.6 On 20th September, 2019, RCFL committed its first default under the DTDs.
2.7 By a letter dated 7th November, 2019, Vistra wrote to SEBI informing them about the steps taken by it as Debenture Trustee and sought guidance in respect of the ICA and mechanism thereunder.
2.8 On 13th October, 2020, SEBI issued a Circular in relation to “Standardisation of procedure to be followed by Debenture Trustee(s) in case of ‘Default’ by Issuers of listed debt securities” (“SEBI Circular”)
2.9 On 11th March, 2021, a Supplementary Debenture Trust Deed was entered into between RCFL and Vistra amending the DTDs (“Supplementary DTD”)
2.10 On 1st July, 2021, the Plaintiffs, being 17 Debenture Holders, filed a Suit before this Court seeking an injunction restraining RCFL, BoB and RBI from implementing the RBI Circular.
2.11 On 15th July, 2021, the Resolution Plan submitted by Authum Investment and Infrastructure Limited / the Intervenor (“Authum”) came to be approved by RCFL’s lenders with a majority of over 75% in value and 60% in number (“Resolution Plan”)
2.12 Following approval of the Resolution Plan, the Plaint came to be amended now seeking an injunction restraining RCFL and BoB from acting upon, implementing or taking any steps for diluting, extinguishing or creating third party rights in respect of the security provided under the DTD.
2.13 On 9th August, 2021, on the Plaintiffs’ Interim Application, the Ld. Single Judge passed the following order:
“4. Until that date (and no further), there will be an ad-interim order in terms of amended prayer clause (a)(i) restraining the 1st and 2nd Defendants from creating any third party rights over the security mentioned in the plaint. The reason is that if these Defendants are permitted to transact the security which was offered in a contract to the Plaintiff Debenture Holders, then there is every likelihood that the Plaintiffs will be left without any recourse. It is equally likely that the suit itself will be rendered infructuous as a result. On the other hand, the grant of the injunction for a limited period of time can cause no conceivable prejudice either to the 1st and 2nd Defendants or to other lenders/security holders in question. It surely cannot
