Investments Are Subject To Deficiency In Service? Analysis Of Jyoti Khemka Ruling For Web3 Industry

I. Key Highlights of the Ruling and Affected Stakeholders

In the Ruling, the complainant, in August 2016, had invested Rs 3,42,000/- (Three Lakhs Forty-Two Thousand only) in 342 Non- Convertible Debentures (“NCDs”) floated by Piramal Capital Housing Finance Limited (earlier Dewan Housing Finance Corporation Limited (“DHFL”)). The NCDs were given a “AAA” rating by Credit Analysis and Research Limited and Brick Works Rating India Private Limited (together the “Credit Rating Agencies”). Despite the market speculation of DHFL's financial distress emerging in early 2018, the Credit Rating Agencies maintained a “AAA” rating on the NCDs. However, in August 2019, when the complainant sought to redeem their investment, DHFL defaulted on the principal and interest. Furthermore, DHFL is ordered^[2] by the National Company Law Tribunal, Mumbai Bench to cause a public announcement intimating the initiation of the Corporate Insolvency Resolution Process, under which the complainant received INR 1,68,584/- as part of the distribution.

Upon the matter reaching the State Dispute Redressal Commission (“SCDRC”) on appeal by the complainant, the SCDRC found that the debenture trustee, i.e. Catalyst Trusteeship Limited, failed to enforce security or maintain statutory reserves despite early warning signs, which is a breach of obligation stipulated within Sections 12, 13, 14, 19 and 23 of the Indian Trusts Act, 1882, Regulation 16 of the SEBI (Debenture Trustees) Regulations, 1993, and the Trust Deed. It was also found that the Credit Rating Agencies abruptly downgraded the NCDs from “AAA” to “D” in 2019. This was a breach of their obligations listed within Regulation 13 of the SEBI (Credit Rating Agencies) Regulations, 1999, and the Enhanced Disclosure Guidelines of 2018.

Accordingly, the SCDRC, exercising its powers under Section 47(1)(iii) of the Consumer Protection Act, 2019, held that DHFL is liable to pay INR 2,04,880/- (i.e. INR 3,42,000/- minus INR 1,68,584), along with interest till actual payment. The SCDRC further held that the Credit Rating Agencies are liable to compensate the complainant on account of deficiency in service and unfair trade practice and for manifest breach of prescribed rules and regulations.

II. Grievance Redressal in the VDASP Industry

Although the nomenclature of VDAs is similar to traditional securities, contrary to traditional securities in the market, India's late and partial recognition of VDAs and VDASPs has led to a mixed response on the acceptance and regulation of the sector. Unlike the European Securities and Market Authority in Europe or the Securities and Exchange Commission in the U.S., there is no dedicated body to regulate VDAs and VDASPs in India. Presently, the industry is loosely governed by multiple industries. For instance, the Central Board of Direct Taxes governs the taxation aspects of VDAs, the Financial Intelligence Unit- India supervises Anti Money Laundering compliance for VDASPs, the Computer Emergency Response Team- India oversees cybersecurity and data reporting, etc.

Thus, unlike a dedicated grievance redressal body such as SEBI Complaints Redressal System (“SCORES”), to address investor grievances in securities, there is currently no dedicated, overarching Indian regulator for VDASPs. This means that reporting grievances to an authority will lead a VDA investor to juggle across jurisdictional uncertainty. Furthermore, due to India's longstanding position of non-recognition/ partial recognition, multiple VDASPs prefer offering services to Indian users while operating outside India. This, coupled with pejorative policies of VDASPs within their Terms of Services citing unfavourable Arbitration clauses (for instance, stipulating an offshore location as a seat of arbitration) to such VDASP users, becomes a significant barrier for the average VDASP user.

III. Extent of Application of the Act to VDASPs

Section 2(42) defines any description that is made to potential users, including the provision of facilities in connection with banking, financing, insurance, transport, telecom, boarding or lodging, excluding receiving any service free of charge or under a contract for personal service, as “Service”. Furthermore, Section 2(7) of the Consumer Protection Act, 2019 classifies any person who buys goods or hires services for a consideration as a “Consumer”. By extension of this rationale, several core domains of a VDASP (such as gaming and metaverse, financial and investment, custodial and wallet services) squarely fall under the ambit of the Act, and also qualify a VDASP user as a Consumer under the Act.

Section 2(11) (deficiency in service) and Section 2(47)(unfair trade practice) stipulate that in such cases, a consumer can seek (i) a refund of the actual loss suffered; and/or (ii) compensation for mental agony, harassment, or inconvenience; and/or (iii) punitive damages from a service provider. This means, beyond the limited grievance redressal mechanisms that are provided via the VDASP on their platform, a VDASP user can agitate their rights by filing a consumer complaint.

However, due to the above-mentioned regulatory ambiguity, Indian consumer forums have been reluctant to adjudicate such cases. The Supreme Court in the case of Hajarimal Bathra and Ors. Vs Union of India and Ors^[3]. While dismissing a Writ Petition seeking court frame guidelines under Article 142 to prevent fraudulent cryptocurrency transactions, held that such regulatory measures fall within the domain of the executive, not the judiciary. Similarly, in Prashanth Vasudev Nilkund vs Giottus Technologies Private Limited,^[4] where a user lost 12,484 USDT due to an app-related issue that led to cyber theft, the Bengaluru Consumer Dispute Redressal Commission, while holding that a consumer cannot seek redressal of his grievances before the Commission for goods and services not recognized by the Government of India or any Statute, dismissed the case on account of there being no deficiency in service by the Respondent.

IV. Concluding Remarks

The Ruling proves to be a landmark decision asserting investor protection against market intermediaries, and the Act provides a powerful framework for protecting the consumer rights of VDASP users as well. However, the partial recognition of the cryptocurrency industry by the Government, a lack of supporting legislation to address investor grievances, predatory and non-transparent practices by VDASPs towards users, and a judicial silence to dispense justice in the matter (as seen in recent dismissals of consumer complaints and pleas before higher courts) collectively weaken the efficacy of this framework. Unlike the recently shelved Cryptocurrency & Regulation of Official Digital Currency Bill, 2021, which was consistently postponed, inclined toward an outright ban on private VDAs, and lacked stakeholder consensus, India needs a law that recognises VDAs, governs VDASPs, and addresses investor grievances in the sector.

The author is an Advocate at Delhi High Court, views are personal.