Shareholders Of RCFL Permitted To Carry Out A Voting Process Based On Debenture Trust Deeds In Compliance With RBI Circular: Bombay High Court Dismisses SEBI's Appeal

A Debenture Trust Deed was executed between RCFL as 'Issuer' and Vistra ITCL (India) Limited as 'Debenture Trustee' for the issuance of Non-Convertible Debentures (NCDs) in the sum of Rs.2,000 Crores. Two Debenture Trust Deeds were also executed between RCFL as 'Issuer' and Vistra as 'Debenture Trustee'.

The RBI issued its Prudential Framework for Resolution of Stressed Assets Circular in which directions were issued with a view to providing a framework for early recognition, reporting, and time-bound resolution of stressed assets.

An Intercreditor Agreement was entered into between Bank of Baroda (BoB) and other lenders of RCFL (ICA). Under the ICA, BoB was appointed as the lead bank.

On September 20th, 2019, RCFL committed its first default under the DTDs.

Vistra wrote to SEBI, informing them about the steps taken by it as Debenture Trustee and seeking guidance in respect of the ICA and mechanism thereunder.

The SEBI issued a circular titled "Standardisation of procedure to be followed by Debenture Trustee(s) in case of "Default" by Issuers of listed debt securities."

A Supplementary Debenture Trust Deed was entered into between RCFL and Vistra, amending the DTDs. The 17 Debenture Holders filed a suit seeking an injunction restraining RCFL, BoB, and RBI from implementing the RBI Circular.

Vistra made a representation to SEBI, calling upon it to clarify as to whether any meeting or meetings of debenture holders were required to approve the ICA and the Resolution Plan and, if so, whether voting in the meeting was to be conducted by the Debenture Trustee in accordance with SEBI Circular, i.e., ISIN-wise or in accordance with the provisions contained in the DTD.

The single judge bench ruled that the Supplementary Trust Deed must be read in conjunction with the previous three trust deeds in a coherent and consistent manner.A mere reference to SEBI circulars will not and cannot override the express terms of any of the trust deeds.

Aggrieved by the order of the single judge, SEBI has filed an appeal before the division bench of the Bombay High Court.

Counsel for the SEBI contended that the SEBI Circular is wholly applicable. The DTDs and Resolution Plan within themselves contemplate the requirement of compliance with securities laws, which would include compliance with the SEBI Circular as well as the clarificatory letter dated August 23, 2021. The SEBI Circular has the force of law. In the event of a conflict between the SEBI Circular and the DTDs, the SEBI Circular must prevail owing to the DTDs.

On the other hand, the Counsel for the RCFL contended that SEBI's stand completely disregards the rights of the Debenture Holders of RCFL. The SEBI Circular is inapplicable as the SEBI Circular cannot be given retrospective effect.

Counsel for the RCFL argued that SEBI's attempted application of the SEBI Circular (which was for the purpose of signing the ICA) after the ICA had already been approved was entirely misconceived.

Counsel appearing for BoB urged that the SEBI Circular has no application as the SEBI Circular does not contemplate a scenario where the debenture holders would enter into a compromise, settlement, or arrangement with the issuer of the debentures. Whilst the logic of mandating an ISIN-wise consent appears to be to protect debenture holders, having signed the ICA, the Debenture Trustee is entitled to single-handedly, and with no recourse to debenture holders, take a decision involving even the sacrifice of their interest without being placed before them for their consideration.

Counsel for the investors/Authum contended that Authum has locus to intervene in these proceedings considering that it has already acted on the basis of and in pursuance of the suggestions for settlement made by the Single Judge in the suit and has altered its position by paying a sum of Rs. 91,00,000. Therefore, it was not open to SEBI to contend that Authum had no locus to intervene and/or be joined as a respondent to the appeal. If ISIN-wise voting was permitted, the common security available for the benefit of the debtors would not be released. If voting were to be done ISIN-by-ISIN, and any of the ISIN debtors did not approve the settlement at the meeting of secured debenture holders, the common security held by the secured debtors would not be released to the resolution applicant.

The court noted that the SEBI Circular stated that it would take effect immediately on October 13, 2020.In the present case, RCFL committed defaults prior to October 13, 2020, and the ICA was executed on July 6, 2019, which are dates prior to the coming into force of the SEBI Circular and prior to the Supplementary DTD incorporating reference to the SEBI Circular.

The court observed that the SEBI Circular prescribes the process to be followed by Debenture Trustees upon the commission of a default by an issuer after October 13, 2020.

"This being so, on first principles, we do not see how the SEBI Circular can be applied to defaults committed prior to 13th October, 2020 also considering that on the date of such default, the mechanism to vote etc. was already provided for under the DTDs," the court added.

The court held that there was no provision in the SEBI Circular which provides for its applicability to defaults prior to October 13, 2020. As a matter of law, legislation, delegated or otherwise, is deemed to be prospective unless it has been given retrospective effect expressly or impliedly.

The court held that the SEBI Circular cannot be applied retrospectively on settled principles of statutory interpretation. The SEBI Circular does not take away or impair the voting rights of debenture holders.

"In any event, we do not see how the interest of retail investors is not protected should voting be carried out in terms of the DTDs. Under this procedure, the decision making power still vests with each individual Debenture Holder. Every Debenture Holder will have the right to vote and the faith of the vote shall be decided by a majority of 3/4th after taking into consideration the votes cast by the Debenture Holders. This mechanism is, in our opinion, fair, just, equitable and in keeping with the interest of all stakeholders," the court said.

The court stayed the order till March 28, so that the SEBI could approach the Supreme Court in Appeal.

Case Title: Securities and Exchange Board of India Versus Rajkumar Nagpal & Ors.| Commercial Appeal (L) No. 27370 of 2021

Citation: 2022 LiveLaw (Bom) 97

Dated: 21.03.2022

Counsel For Appellant: Senior Advocate Mr. Arvind Datar

Counsel For Respondent: Senior Advocate Mr. Darius Khambata

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