SEBI Imposes ₹6 Lakh Penalty On Vistra ITCL For Violating Debenture Trustee Regulations

Key among the violations identified was the failure of Vistra to perform independent due diligence in the preparation of asset-cover certificates. SEBI's November 3, 2020, circular mandates that debenture trustees independently verify the adequacy of assets for debt security issuance. However, SEBI's findings highlighted significant shortcomings in Vistra's process.

The process involved the issuer of debt securities selecting a chartered accountant (CA) from a list provided by Vistra. The CA, chosen by the issuer, would prepare the asset-cover certificate which was then forwarded to Vistra's compliance team for submission to stock exchanges. SEBI found this process problematic for several reasons.

Firstly, allowing issuers to select their own CAs potentially creates conflicts of interest. There is a risk that CAs might manipulate certificates in exchange for higher fees, as the payment is made directly by the issuer. Secondly, since the CA submits the certificate to the issuer rather than directly to Vistra, the issuer might withhold the certificate if it is unfavorable. This could lead to the issuer seeking another CA from the list to obtain a more favorable certificate. Thirdly, SEBI noted that Vistra was not involved in the information exchange between the CA and the issuer, undermining the independent oversight intended by the debenture trustee.

In addition to the issues with asset-cover certificates, SEBI identified other regulatory breaches. These included performing trusteeship activities before executing the formal debenture trustee agreement, failing to update default information in the Centralized Database for Corporate Bonds/Debentures, and relying solely on issuer confirmations for payment status without independent verification.

The inspection also revealed inadequate tracking of interest payments. SEBI noted that Vistra did not maintain proper documentary evidence of independent verification of interest and principal payments. In some instances, such as with Future Retail Limited, Vistra relied only on issuer confirmations and failed to verify payment statuses from other independent sources.

Further, Vistra was found to have not updated default histories in the centralized database for certain issuers, which contravened SEBI's guidelines. The failure to update the database was specifically noted for Blue Horizon Hotels Private Limited.

According to Regulation 15(1)(t) and 15(1)(s) of the SEBI (Debenture Trustees) Regulations, 1993, and SEBI circular SEBI/HO/MIRSD/CRADT/CIR/P/2020/218 dated November 3, 2020, debenture trustees are required to independently assess the adequacy of assets for creating security. However, the process followed by Vistra was found to lack due diligence.

SEBI's circulars, including SEBI/HO/MIRSD/MIRSD3/CIR/P/2017/72 dated June 30, 2017, and various provisions of the SEBI (Debenture Trustees) Regulations, 1993, mandate that debenture trustees ensure timely and accurate tracking of interest payments. The inspection revealed that Vistra did not independently verify interest payments and relied solely on confirmations from issuers.

SEBI circulars, including CIR/IMD/DF/17/2013 dated October 22, 2013, and SEBI/HO/DDHS/P/CIR/2021/613 dated August 10, 2021, require debenture trustees to update default histories accurately in the centralized database.

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