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

The Bombay High Court bench of Justice Milind N. Jadhav and Justice S.J. Kathawalla, while dismissing the appeal filed by the Securities and Exchange Board of India (SEBI), has permitted the shareholders of Reliance Commercial Finance Ltd. (RCFL) to carry out a voting process based on debenture trust deeds (DTDs) in compliance with the circular issued by the Reserve Bank of India (RBI). 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...

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

Mariya Paliwala

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