Debenture Trustee penalised by SEBI

SEBI alleged that United Bank of India holding certificate to act as Debenture Trustee violated following:
1) Regulations 13(a), 13A (b), 14, 15(1)(a) and 15(1)(i) of SEBI (Debenture Trustee) Regulations, 1993,
2) Clause 4 & 19 of Code of Conduct read with Regulation 16 and Regulation 21 (1) of SEBI (Debenture Trustee) Regulations, 1993,
3) Regulations 15(2) and 23(4) of SEBI (Issue and Listing of Debt Securities) Regulations 2008,
4) SEBI Circular No. MIRSD/DPS III/Cir-11/07 dated August 06, 2007; and
5) Clause 10.2.3 of the SEBI(Disclosure and Investor Protection) Guidelines.

SEBI (Adjudicating Officer) decision dated 10 September 2015.

Facts:

SEBI’s inspection team perused the records and documents of the Debenture Trustee for its various conduct since 1992 onwards. Inspection revealed certain deficiencies. SEBI found reply of the debenture trustee as not satisfactory and hence proceeded with adjudication proceedings.

Alleged violations were:

1) Regulation 13A (b): had lent loans to the issuer company for whom it has acted as Debenture Trustee.

Reply: It was having transactions prior to acting as Debenture Trustee. It continued to act Debenture Trustee though no new assignments were accepted from the borrower. All debentures were repaid. It acted without any ulterior motive.

SEBI did not accept the reply.

 

2) Violation of Regulation 23(4) of SEBI (Issue and Listing of Debt Securities) Regulations 2008 and SEBI Circular No. MIRSD/DPS III/Cir-11/07 dated August 06, 2007.

Debenture Trustees are required to disseminate all information and reports on debt securities, including compliance reports filed by the issuers, to the investors and to the general public by placing them on their website.

Reply: Half Yearly Report on Debenture Trustee activities for the half year ended September, 2013 has been uploaded on its website on regular basis since September 2013 onwards.

SEBI noted that compliance was made from September 2013 onwards but violation for the prior period was found.

 

3) Violation of clause 4 & 19 of code of conduct read with Regulation 16 and 21(1) of SEBI (Debenture Trustee) Regulations, 1993.

Clause 4 of code of conduct of Debenture Trustee Regulations states that a Debenture Trustee shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment.

Clause 19 of code of conduct of Debenture Trustee Regulations states that a Debenture Trustee shall not make untrue statement or suppress any material fact in any documents, reports, papers or information furnished to SEBI.

Regulation 16 states that every Debenture Trustee shall abide by the Code of Conduct as specified in Schedule III.
Regulation 21 (1) of Debenture Trustee Regulations states that it shall be the duty of every director, officer and employee of the Debenture Trustee who is being inspected, to produce to the inspecting authority such books and other documents in his custody or control and furnish him with the statements and information relating to the Debenture Trustee within such time as the inspecting authority may require.

Reply: Debenture Trustee some relevant data were inadvertently quoted as it last accepted assignment of a listed entity in March 2002, due to very old periodicity. It also contended that difficulties were also faced while fetching data / information from the issuers considering the lapse of time in-between. There was no mala fide intention on its part.

SEBI did not accept the reply.

 

4) Regulation 13(a) of SEBI (Debenture Trustee) Regulations, 1993 – by delaying of entering into the written agreement with issuer company (after the opening of the subscription list for issue of debentures instead of before the opening).

Reply: Debenture Trustee stated that violation if of 2000-2002 and all debentures are repaid by issuer. Contravention is a one time off case. Henceforth will comply all regulations.

SEBI noted the violation.

5) Regulation 14 of SEBI (Debenture Trustee) Regulations, 1993 and Regulation 15(2) of SEBI (Issue and Listing of Debt Securities) Regulations 2008 – by not explicitly incorporating certain clauses in trust deed.

Reply: Issuer have repaid all issues of Debentures with interest on time.

SEBI noted the violation.

 

6) Clause 10.2.3 of the SEBI(Disclosure and Investor Protection) Guidelines – by delaying execution of the trust deed.

Reply: Debenture Trustee contended that all issues repaid by issuer and matter is fifteen years old and hence violation may be condoned.

SEBI noted the violation.

 

7) Regulation 15(1)(i) of SEBI (Debenture Trustee) Regulations, 1993.

Debenture Trustees required to exercise due diligence to ensure compliance of listing agreement by the issuer company and issuer companies did not submit the half yearly communication to the debenture holders and also to the stock exchanges.

Reply: Debenture Trustee had been following up with the Issuer for reports at regular Intervals. However, the Issuer did not bother to reply or provide reports barring on one occasion. In view of the non-cooperation from the Issuer and considering that the issues had been duly redeemed, the non-compliance may be condoned.

SEBI noted the reply.

 

8) Regulations 15(1)(a) of SEBI (Debenture Trustee) Regulations, 1993 – requires debenture trustees to call for periodic reports from body corporate, which it failed to obtain.

Reply: All the periodical reports from the issuer could not be obtained despite follow-up with the issuer from time to time. Evidence furnished.

SEBI noted the reply.

 

SEBI found that in first six out of aforesaid eight allegations, the Debenture Trustee has violated the legal requirements. And hence found Debenture Trustee liable for monetary penalty. Penalty of Rs. 2 lakh was levied.

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