2021 (2) TMI 913 - HC - SEBI

Debenture Trustees liability in default - Violation of SEBI Act - Company issued Debentures which are deemed public issues, without complying with the statutory requirements for public issue - 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 - whether by acting as Debenture Trustees of the Company without having registration as required under Section 12 of the Securities and Exchange Board of India Act, 1992 read with Regulation 7 of SEBI (Debenture Trustees) Regulations, 1993, they have violated law. Section 12(1) of the SEBI Act, 1992? - HELD THAT - 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. The petitioners, who are allegedly acting as Debenture Trustees, are members of Institute of Chartered Accountants of India. The petitioners have no case that they are holding registration to act as Debenture Trustees. Therefore, there is prima facie violation of Section 12(1) of SEBI Act, 1992. Petitioners have a case that the Company being a NBFC, is regulated by, apart from the Companies Act, by RBI Act and Regulations only and is not amenable to the jurisdictional authority of SEBI and hence Ext.P2 show-cause notice is ultravires. This Court is unable to accept the said proposition. Even though the Company is an NBFC, as far as regulation of issue of Debentures and Non-current Bonds is concerned, it is the bounden duty of SEBI to protect the interest of investors in securities. As long as NBFCs are not specifically excluded from the purview of SEBI Act, 1992, the Board will have jurisdiction over securities transactions of an NBFC, including the Debenture Trustees. Proceedings of SEBI are only at the show-cause stage. The petitioners have the opportunity to establish their case before the Board. As rightly pointed out by the Standing Counsel for the SEBI relying on the judgment of the Hon ble Apex Court in Peerless General Finance and Investment Company Limited v. Reserve Bank of India 1992 (1) TMI 337 - SUPREME COURT the function of the court is to see that lawful authority is not abused but not to appropriate to itself the task entrusted to that authority. This Court does not find any reason to interfere with Ext.P2 proceedings initiated by the SEBI at this stage.

Summary

Issues:
1. Allegations of statutory violations against the Company and its Directors by SEBI.
2. Challenge to show-cause notice by Debenture Trustees.
3. Jurisdiction of SEBI over NBFCs and Debenture Trustees.
4. Compliance with SEBI Act and Regulations by Debenture Trustees.
5. Applicability of SEBI regulations to Debenture Trustees.

Analysis:

1. The SEBI issued a show-cause notice to the Company and its Directors alleging various violations, including issuing debentures without complying with statutory requirements, failure to obtain consent for extending debenture tenures, and non-compliance with Companies Act provisions. The petitioners, Debenture Trustees, challenged the notice on grounds of SEBI's lack of supervisory powers and the Companies Act's repeal. They cited relevant judgments to support their argument.

2. The Standing Counsel for SEBI contended that the petitioners should address their objections before SEBI instead of seeking interference from the High Court at the show-cause stage. The Court noted the arguments but did not delve into SEBI's jurisdiction over the Company, as the Company did not challenge it. The Court emphasized that Debenture Trustees act independently for debenture holders' benefit.

3. The main issue concerning the petitioners was their alleged violation of SEBI regulations by acting as Debenture Trustees without registration. Section 12(1) of the SEBI Act mandates registration for dealing in securities, which includes Debenture Trustees. Regulation 7 of SEBI (Debenture Trustees) Regulations, 1993 specifies eligibility criteria for acting as a Debenture Trustee.

4. The petitioners, being Chartered Accountants, were not registered as Debenture Trustees, prima facie violating SEBI regulations. The Court rejected the argument that SEBI lacks jurisdiction over NBFCs like the Company, emphasizing SEBI's duty to regulate securities transactions, including those involving NBFCs and Debenture Trustees.

5. The Court upheld SEBI's jurisdiction over the Company's securities transactions, including those involving Debenture Trustees. It emphasized that the petitioners could present their case before SEBI and dismissed the writ petitions, stating that the Court should prevent abuse of authority but not interfere with lawful proceedings. The Court found no reason to intervene at that stage, allowing SEBI's proceedings to continue.

This detailed analysis covers the issues raised in the legal judgment, addressing the statutory violations, challenges to the show-cause notice, SEBI's jurisdiction, compliance with SEBI regulations, and the applicability of regulations to Debenture Trustees.