SEBI Fines IDBI Trusteeship ₹2 Lakh For Delays In Default Notices, Debenture Holder Meetings

The Securities and Exchange Board of India has imposed a penalty of ₹2 lakh on IDBI Trusteeship Services Limited (ITSL) for failing to comply with certain regulatory obligations applicable to debenture trustees in cases of issuer defaults, including delays in issuing default notices to investors and convening debenture-holder meetings within prescribed timelines.

The order was passed by SEBI's Adjudicating Officer Jai Sebastian following a thematic inspection undertaken to assess compliance by debenture trustees with their responsibilities in cases of issuer defaults.

The inspection of ITSL, covering the period between July 2022 and July 2024, identified several alleged lapses relating to the handling of default events by issuers.

Based on the inspection findings, SEBI initiated adjudication proceedings alleging that ITSL had failed to issue default notices to debenture holders within prescribed timelines, omitted mandatory disclosures in certain notices, delayed verification and updation of default information on the India BondInfo database, failed to appoint nominee directors on the boards of defaulting issuers, and did not convene meetings of debenture holders within the prescribed time.

ITSL denied the allegations and contended that it had substantially complied with its regulatory obligations by keeping debenture holders informed of defaults through multiple communication channels and by acting in accordance with decisions taken by the debenture holders. It said that no prejudice had been caused to investors and that several of the alleged lapses were, at best, procedural irregularities.

The trustee further argued that in several instances the concerned issuers were undergoing insolvency resolution or government-supervised restructuring processes, rendering appointment of nominee directors impractical. It further contended that certain debenture holders had requested that enforcement measures be deferred while discussions with issuers were ongoing.

Examining the allegations relating to communication of defaults, SEBI observed:

“The language, object and intent of the regulatory framework make it clear that the requirement to send a notice to the debenture holders within three days of the event of default is a mandatory obligation intended to ensure market integrity and prompt dissemination of default information to the investors to protect their interest.”

SEBI held that the trustee had failed to issue notices within the stipulated period and had not maintained proof of delivery in certain instances, thereby violating the applicable provisions of the Debenture Trustee Regulations and SEBI circulars.

The regulator also found merit in the allegation that a default notice issued in relation to India Home Loans Limited did not contain certain mandatory clauses prescribed under the regulatory framework, including provisions relating to enforcement of security and consent mechanisms concerning an Inter-Creditor Agreement.

However, SEBI did not sustain all the charges levelled against the trustee.

With respect to the allegation that ITSL had delayed verification and updation of default history on the India BondInfo database, the Adjudicating Officer noted that the material on record did not conclusively establish a violation and therefore extended the benefit of doubt to ITSL.

Similarly, the regulator accepted ITSL's explanations regarding non-appointment of nominee directors in several cases. SEBI took note of factors such as ongoing insolvency proceedings and government-appointed management in certain entities, among others.

On the issue of debenture-holder meetings, SEBI concluded that ITSL had failed to convene meetings within the mandatory thirty-day period following default events in certain cases.

“The obligation to convene meetings within the prescribed timelines cannot ordinarily be dispensed with merely on the basis of informal discussions or assumptions that the default may subsequently be cured.” it added

The regulator rejected ITSL's contention that meetings were not convened because debenture holders had advised against taking further action.

Accordingly, SEBI imposed a monetary penalty of ₹2 lakh on ITSL.