SEBI Fines Catalyst Trusteeship ₹2 Lakh For Wrong CRA Disclosure and Delay In Default Reporting

The Securities and Exchange Board of India (SEBI) has imposed a penalty of ₹2 lakh on Catalyst Trusteeship Limited for furnishing incorrect information to a credit rating agency, delaying a mandatory press release on an issuer default, and failing to update default history information on the India BondInfo database within the prescribed timelines. It dropped a separate charge relating to delay in notifying debenture holders.

The order was passed by Adjudicating Officer Jai Sebastian in proceedings arising out of SEBI's thematic inspection of debenture trustees to assess compliance with regulatory obligations in the event of issuer defaults.

The adjudication proceedings against Catalyst, a SEBI-registered debenture trustee, covered the inspection period between July 31, 2022 and July 31, 2024.

The case arose from a default by Srivatsa Encivil Pvt. Ltd. in payment of principal under certain non-convertible debentures on June 30, 2024. SEBI alleged that Catalyst failed to issue notices to debenture holders within the prescribed timeline, furnished incorrect information regarding the payment status to a credit rating agency, delayed issuing a mandatory press release concerning the default, and failed to update the default history on the India BondInfo database within the stipulated period.

A show-cause notice was subsequently issued proposing action under Section 15HB of the SEBI Act.

In response, Catalyst argued that the debentures had been privately placed with two institutional investors belonging to the same group, Edelweiss India Real Estate Fund and Edelweiss Alternative Asset Advisors Limited. It said the investors were fully aware of the default and had actively instructed the trustee on the course of action to be taken. Catalyst also contended that there was no investor prejudice or information asymmetry.

The Adjudicating Officer accepted Catalyst's defence on the allegation relating to delay in issuing notice to debenture holders.

“I am inclined to accept the submissions of Noticee that the issuance of a formal notice to the debenture holders within three days would have been a mechanical and redundant exercise, devoid of substantive regulatory purpose. In this specific context, Noticee's conduct as a fiduciary conduit was aligned with the underlying regulatory objective, as there was no information asymmetry or investor prejudice,” the order said.

However, SEBI upheld the remaining allegations.

On the charge of incorrect disclosure to the credit rating agency, the regulator found that although the issuer had disclosed to stock exchanges on July 1, 2024 that part premature redemption of the debentures was pending, Catalyst informed the CRA the same day that payment had been made and no amount was due.

SEBI rejected Catalyst's explanation that the initial intimation was based on the issuer's disclosures.

“Noticee's submission that the initial intimation was made to the CRA on the basis of disclosures provided by the issuer indicating default in payment is incorrect and misplaced,” the Adjudicating Officer said.

The regulator said the absence of an adverse rating action did not dilute the violation.

“Whether an adverse rating action was taken by the CRA or not is immaterial to the underlying violation as the regulatory mandate requires Debenture Trustees to provide accurate and timely information to CRAs regarding interest and redemption payments regardless of the subsequent rating outcome,” the order said.

SEBI also found that Catalyst failed to issue a mandatory press release within one day of the default, as required under the regulatory framework. Instead, the press release was issued only on July 12, 2024.

Rejecting Catalyst's defence that the issuer's stock exchange disclosure sufficiently informed the market, the regulator held that the obligation imposed on debenture trustees was independent.

“The obligation of the Noticee to issue a press release within the prescribed timeline is neither contingent upon nor substituted by the issuer's own disclosures,” the order said.

On the delay in updating the India BondInfo database, SEBI noted that Catalyst had knowledge of the default on June 30, 2024, but updated the default history only on July 12, 2024, beyond the seven-day deadline.

Holding that Catalyst had violated the applicable regulatory provisions, the Adjudicating Officer imposed a monetary penalty of ₹2 lakh.