Chandigarh State Commission Holds Debenture Trustee And Credit Rating Agencies Of DHFL Liable For Failure To Protect Investors' Interest
The State Consumer Disputes Redressal Commission, Chandigarh bench comprising Raj Shekhar Attri, President and Rajesh K. Arya, Member has held the debenture trustee- Trusteeship Catalyst Limited liable for failure to protect interests of debenture holders on default in payment by Dewan Housing Finance Ltd. The bench further held the Credit Rating Agencies- Credit Analysis & Research...
The State Consumer Disputes Redressal Commission, Chandigarh bench comprising Raj Shekhar Attri, President and Rajesh K. Arya, Member has held the debenture trustee- Trusteeship Catalyst Limited liable for failure to protect interests of debenture holders on default in payment by Dewan Housing Finance Ltd. The bench further held the Credit Rating Agencies- Credit Analysis & Research Ltd. and Brick Works Ratings India Pvt. Ltd. liable for unfair trade practice and manifest breach of SEBI rules and regulations.
Brief facts:
On 26.07.2016, Dewan Housing Finance Corporation Ltd. ('DHFL'), issued a public prospectus approved by Securities and Exchange Board of India ('SEBI') for public issue of secured redeemable non-convertible debentures having a face value of Rs. 1,000/-. The tenure of the security was 3 years. Catalyst Trusteeship Limited was appointed as the debenture trustee ('trustee') for the issue. The public issue was given a 'AAA' credit rating by Credit Analysis and Research Ltd. ('Credit agency 1 ') and Brick Works Ratings India Pvt. Ltd. ('Credit agency 2').
Pursuant to the said issue, the complainant purchased 342 secured Non-Convertible debentures for Rs. 3,42,00/- to be matured on 16.08.2019. It was stated that despite speculations in early year 2018 that DHFL might be heading towards a financial crisis, the credit agencies continued to rate the debentures as 'AAA'. The credit rating was downgraded to 'D- lowest score' overnight in February 2019 after DHFL siphoned off thousands of crores of public money in subsequent tranches of its public issue. It was further stated that DHFL defaulted to redeem the principal amount of debentures along with the interest amount. Hence, a complaint was filed against the issuer company, its debenture trustee, credit rating agencies and SEBI by the complainant.
The Chandigarh District commission dismissed the complaint vide order dated 06.03.2023. Hence, am appeal was filed by the complainant before the Chandigarh State Commission.
The issuer company- Dewan Housing Finance Corporation Ltd. was taken over by Piramal Capital Housing Finance Ltd. as a successful resolution applicant. Hence, it was impleaded in place of DHFL.
Submissions of the complainant:
As per the complainant, the debenture trustee failed to protect/ safeguard her interest by failing to ensure realization of the debenture amount which became due on 16.08.2019. It was submitted that the debenture trustee was supposed to hold the security to secure the debenture amount which it failed to do so. It was further submitted that the trustee also violated Rule 18 (7) (c) of Companies (Share Capital and Debentures) Rules, 2014 mandating the maintenance of Debenture Redemption Reserve. s
It was stated that the rating of 'AAA' was given by the credit rating agency in the year 2016 but was suddenly dropped to 'D' when the default could no longer be masked. As peer the complainant, the acts of Debenture trustee and Credit Rating Agencies does not fairly report the financial risks to prevent small retailer depositors and was also in breach of Regulation 13 of SEBI (Credit Rating Agencies) Regulations 1999.
Submissions of Debenture trustee:
As per the trustee, it had acted in accordance with the trust deed and the liability of payment of claim was solely of DHFL. It was submitted that the claim of the complainant has already been settled under the Insolvency and Bankruptcy Code, 2016 and he has been paid an amount of Rs. 1,68,584/- as a full and final settlement. It was further submitted that all claims stood settled on implementation of the resolution plan by Piramal Capital Housing Finance Ltd.
Submissions of Credit Rating Agency:
The agency submitted that a credit rating is not an advice to buy, sell or hold securities and investors are expected to take their investment decisions after considering all the relevant factors. It was further submitted that a credit rating is not a guarantee against future losses and is a professional opinion based on the ability and willingness of an issuer to meet debt servicing obligations.
Submissions of issuer company:
It was submitted that the appellant was required to raise its dispute with the Resolution Professional and having failed to do so, the claim against the issuer stands extinguished. It was further submitted that the complainant has not claimed any relief towards the issuer and the investment in the debentures was made solely on her own understanding.
Observations of the commission:
The question which fell for consideration before the bench was whether the debenture trustee performed its duties in securing the interests of the complainant by enforcing security or maintaining statutory reserves.
After examining the provisions of the trust deed, it was observed that the deed provided for protecting interests of the debenture holders, taking necessary legal or enforcement actions in case of default and ensuring financial and statutory obligations to safeguard investor interests. The bench also highlighted the statutory duties of a trustee under the Indian Trusts Act, 1882 which include the obligation to protect trust's title, preserve its assets and not assert any interest adverse to the beneficiary. In case of breach, the trustee is liable to compensate for the losses.
the bench also examined Regulation 15 of SEBI (Debenture Trustees) Regulations, 1993 which outlines the duties of a debenture trustee. It was observed that the debenture trustee was legally empowered and obligated to take necessary steps for protections and enforcement of rights of debenture-holders. It was further observed that though notices have been placed on record to show the promptness of the trustee, there was no decisive action taken by it to protect the interests of the complainant and it failed to act with urgency.
Highlighting the role which a debenture trustee plays, it was observed that the law mandates debenture trustee not merely to hold a nominal position but to act as an active protector of the interests of debenture-holders.
Reliance was placed on an Adjudication order passed by SEBI, imposing a monetary penalty of Rs. 1,00,000/- on Catalyst Trusteeship Limited for violating provisions of SEBI ( Debenture Trustee) Regulations, 1993, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and circulars.
Since the complainant already received an amount of Rs. 1,68,584/- under the IBC, it was held that the debenture trustee is liable to pay the remaining amount i.e. Rs. 2,04,880/- to the complainant.
Role of Credit Rating Agencies:
It was observed that the sudden downgrading of rating from 'AAA' to 'D' without prior indication of deterioration raised grave doubts regarding the independence and integrity of the Credit Rating Agencies. The bench further observed that the letter dated 08.08.2019 issued by DHFL to the Stock Exchange in which it was admitted that it was grappling with liquidity crisis despite which the credit rating agency continued to assign top-tier rating to the company's Non-Convertible Debentures.
Thus, it was held that continuance of such high rating amounted to gross misrepresentation which misled the public severely and was a violation of Regulation 13 of SEBI (Credit Rating Agencies) Regulations,1999 along with enhanced disclosures guidelines. Regulation 13 mandates that Credit Rating Agencies must carry out their functions with due diligence, ensure proper care and independence in the rating process.
The bench further shed light on the directives and guidelines issued by Reserve Bank of India concerning Credit Rating Agencies which mandates a review of rating regularly and the ratings must reflect the current creditworthiness of the borrower.
It was held that the Credit Rating Agencies have failed to explain the rationale for a sudden downgrade in the rating and clearly breached their duty of care and also the RBI guidelines. Further adverting to the role of Credit Rating Agencies, the bench held that these intermediaries operating under a regulatory regime are not merely facilitators but gatekeepers of market integrity and any breach on their part can result in irreversible damage to investor confidence and sanctity of capital markets.
Thus, both the Credit Rating Agencies were held liable to compensate the complainant on account of deficiency in service and unfair trade practice and for manifest breach of SEBI rules and regulations.
Since no relief was sought against Piramal Capital Housing Pvt. Ltd. and SEBI, the complaint was dismissed against them.
Hence, the complaint was partly allowed with the following reliefs:
- 1.Catalyst Trusteeship Ltd. directed to pay to the complainant, Rs. 2,04,880/- with interest @9%.
- 2.Credit Rating Agencies- Credit Analysis & Research Ltd. and Brick Works Ratings India Pvt. Ltd. each directed to pay Rs. 1,00,000/-as compensation
- 3.Debenture trustee and Credit Rating Agencies to jointly and severally pay Rs. 33,000/- to the complainant as litigation costs.
Case Title: Jyoti Khemka vs Catalyst Trusteeship Ltd. & Ors.
Case Number: Appeal No. 58/ 2023
Date of Decision: 31.07.2025