SEBI Circular on Debenture Defaults Prevails Over Contrary Interpretations: Supreme Court in Securities and Exchange Board of India Vs Rajkumar Nagpal & Ors.
The decision of the Supreme Court in Securities and Exchange Board of India Vs Rajkumar Nagpal & Ors. examines the interplay between the SEBI (Debenture Trustees) Regulations, 1993, the SEBI circular dated 13 October 2020 on debenture defaults, the RBI’s Prudential Framework for Resolution of Stressed Assets dated 7 June 2019, and the contractual terms in Debenture Trust Deeds.
The Court addressed:
- Whether debenture holders and intermediaries must mandatorily follow the SEBI circular in case of default by issuers of listed debt securities, even where the default pre-dates the circular; and
- Whether civil courts have jurisdiction to supervise or alter mechanisms that are now regulated by SEBI and the company law framework.
While the full reasoning is not fully reproduced in the supplied material, the available portions clearly establish that the Supreme Court accepted SEBI’s position and disapproved the Bombay High Court Division Bench’s restrictive interpretation of the SEBI circular. The appeal was allowed in part, with additional directions issued under Article 142 of the Constitution to do complete justice between the parties.
Background of the Dispute
Issue of NCDs and Initial Default
Reliance Commercial Finance Limited (RCFL) issued Non-Convertible Debentures (NCDs) to multiple investors. Vistra ITCL (India) Limited was appointed as Debenture Trustee under three Debenture Trust Deeds executed on 3 May 2017, 23 May 2017, and 5 February 2018.
RCFL first defaulted under these Debenture Trust Deeds in March 2019.
RBI’s Prudential Framework and Inter-Creditor Agreement
On 7 June 2019, the Reserve Bank of India issued the Reserve Bank of India (Prudential Framework for the Resolution of Stressed Assets) Directions 2019. These directions:
- Applied to scheduled commercial banks, certain all-India financial institutions, small finance banks and specified NBFCs.
- Required lenders to recognize and address stressed assets promptly.
- Mandated that where a Resolution Plan (RP) is to be implemented, all lenders must enter into an Inter-Creditor Agreement (ICA).
- Stipulated that decisions supported by lenders representing 75% by value and 60% by number would bind all lenders, including dissenters, subject to minimum “liquidation value” protection for dissenting lenders.
Pursuant to this RBI framework, Bank of Baroda and other lenders of RCFL entered into an ICA on 6 July 2019, with Bank of Baroda later acting as lead bank.
The RBI circular clearly applied to lenders as defined in it, and did not directly extend to debenture holders or other non-lender investors.
SEBI Circular of 13 October 2020 and Supplementary Debenture Trust Deed
To address the position of debenture holders and to standardise the approach of Debenture Trustees in case of default by issuers of listed debt securities, SEBI issued a circular on 13 October 2020 titled:
“Standardisation of procedure to be followed by Debenture Trustee(s) in case of ‘default’ by issuers of listed debt securities”
Subsequently, on 11 March 2021, RCFL and Vistra executed a Supplementary Debenture Trust Deed, expressly taking note of and incorporating the SEBI circulars and amendments to the SEBI (Debenture Trustees) Regulations, 1993 and related SEBI debt regulations. The Supplementary Deed:
- Recorded the various SEBI gazette notifications and circulars issued in October and November 2020;
- Stated that, in accordance with “applicable laws”, the parties were amending the principal Debenture Trust Deeds; and
- Inserted a new schedule (
Schedule – SEBI Amendments 2020) incorporating the SEBI debenture circulars as an integral part of the Trust Deeds, with RCFL affirming that it would ensure compliance with the SEBI circulars “in letter and spirit”.
Approval of Resolution Plan
On 15 July 2021, a Resolution Plan submitted by Authum Investment and Infrastructure Limited was approved by RCFL’s lenders under the ICA. The plan treated both:
- ICA lenders; and
- Non-ICA lenders, including debenture holders,
as part of a comprehensive restructuring. Individual/HUF debenture holders with holdings up to Rs. 10 lakhs were to receive 100% of principal, while those above that threshold were to receive significantly lower recoveries (for example, around 24.96% in the case of certain secured exposures), with an additional 5% settlement uplift in some cases recorded later before the Bombay High Court.
The Suit Before the Bombay High Court
Claims by Debenture Holders
Seventeen debenture holders filed a suit on the Original Side of the Bombay High Court on 1 July 2021, impleading:
- RCFL as first defendant;
- Bank of Baroda as second defendant; and
- Vistra as third defendant.
They contended, among other things, that:
- Their interests as secured debenture holders had been ignored;
- Funds held with Bank of Baroda had been distributed among various creditors without proper recognition of secured/unsecured status and without their consent;
- They had a first charge on RCFL’s receivables which was not properly respected;
- The RBI Circular had allegedly enabled “illegal” distribution of funds;
- RCFL, Bank of Baroda and Vistra could not seek ex post facto consent for the ICA or Resolution Plan; and
- Vistra was mandatorily required to sign the ICA on behalf of debenture holders before any Resolution Plan could be considered.
They also challenged the RBI Circular as illegal and ultra vires, and sought an injunction against its implementation.
Single Judge’s Directions for Meeting of Debenture Holders
By order dated 20 August 2021, the Single Judge (G.S. Patel, J.) observed prima facie that a meeting of debenture holders was necessary. However, he declined to prescribe:
- The exact manner in which such meeting should be convened; or
- Any shortening or alteration of notice requirements prescribed under the Trust Deeds or regulations.
The Court noted that these aspects fell within the remit of the regulator rather than the civil court.