Central Bank Of India vs Sebi

Central Bank of India Chandermukhi, Nariman Point, Mumbai - 400021. ..... Appellant

Versus

Securities & Exchange Board of India SEBI Bhavan, C-4A, G Block, Bandra Kurla Complex, Mumbai 400051. ...... Respondent

Mr. Ankur Kumar, Advocate i/b. Ezylaws for the Appellant.

Mr. Sumit Rai, Advocate with Ms. Faiza Dhanani, Mr. Chirag Bhavsar, Advocates i/b. MDP & Partners for the Respondent.

CORAM: Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Justice M.T. Joshi

1.

The present appellant had earlier carried out the business

of debenture trustee. During the period of 12th November, 2009

to June, 2010, the appellant had accepted five listed trusteeship

assignments. The respondent Securities and Exchange Board of

India (hereinafter referred to as 'SEBI') has conducted 2

inspection of its record for a period from September 9, 2009 to

August 31, 2015 and found violations of various provisions of

Securities and Exchange Board of India (Debenture Trustee)

Regulations, 1993 (hereinafter referred to as 'DT Regulations').

Therefore, the show cause notice was issued and after

considering the reply given by the appellant the adjudicating

proceedings was started. After duly hearing the appellant, the

Adjudicating Officer vide the impugned order found that the

appellant was in violation of various provisions of DT

Regulations. In the circumstances, a cumulative penalty of Rs.3

lakhs was imposed on the appellant under the provisions of

Section 15I of the Securities and Exchange Board of India Act,

1992 (hereinafter referred to as 'SEBI Act') in terms of the

provisions of Section 15HB of the SEBI Act. Hence, the present

appeal.

2. First of the violation noted by SEBI was violation of

Regulation 13(a) of the DT Regulations which provides for

entering into written agreements with the issuer companies.

SEBI has found that in respect of Britannia Industries Ltd,

Deepak Fertilizers and Petrochemicals Corporation Ltd. no such

agreement was entered into.

3

According to the appellant, no format of agreement is

prescribed by the DT Regulations and, therefore, as appointment

and inspection letters of the assignment are on record there is no

violation of this regulation.

The Adjudicating Officer however did not accept the

explanation by observing that though any format is not

prescribed, SEBI has prescribed, details of agreement under DT

Regulations.

Learned counsel for the appellant submitted before us that

an offer in writing from the issuer Company and acceptance

letter of the trusteeship by the appellant amounted to agreement

as per the Indian Contract Act. On the other hand, learned

counsel for the respondent SEBI submitted that the copies of

those acceptances would show that there were certain counter

offers. In the circumstance, the specific provision of DT

Regulation of having a written agreement is not followed.

From the record we find that though there is no specific

written agreement executed between the issuer Company and the

appellant it is an admitted fact that on the basis of acceptance

letter of the offer of the issuer Company the appellant acted as

debenture trustee. Thus by conduct the conditions of acceptance

letters were accepted. Since written proposal from the issuer 4

Company and the acceptance letter from the appellant are on

record in our view there is a technical violation of this specific

regulation.

3. The second charge against the appellant was that a

director of the appellant was also director of one of its client that

is the issuer Company IL&FS. The appellant explained that the

appellant bank is a public sector bank. Its directors are

appointed in terms of the Banking Companies (Acquisition and

Transfer of Undertakings) Act, 1970. Central Government held

81.46% of the equity capital on June 30, 2015. 18.54% shares

were held by shareholders other than Central Government

including LIC Pension Funds Ltd. As per the rule 2 Directors

were elected by shareholders. Mr. S. Bandyopadhyay was the

Managing Director and CEO of LIC Pension Fund Limited, a

subsidiary Company of LIC of India. He assumed the office of

independent Director of the appellant on 1st July, 2015. LIC had

also investment in IL&FS Ltd. Therefore, it had appointed Mr.

S. Bandyopadhyay as a Director in IL&FS. Therefore, he was

not involved in the management either of the appellant bank or

IL&FS at the relevant time. It was further explained that

debenture trusteeship business of IL&FS was undertaken on 5th

November, 2014 i.e. before election of Mr. S. Bandyopadhyay 5

as Director of the appellant. The appellant had ceased to be

debenture trustee by the time Mr. S. Bandyopadhyay became

director. However, as IL&FS could not appoint new trustee, the

appellant was required to continue as interim debenture trustee.

Therefore, there was no violation of Regulation 15(3) of the DT

Regulations.

According to the Adjudicating Officer, the composition of

the Board of Director of the appellant as a public sector bank or

the type of Directorship in the issuer company is immaterial

according to DT Regulation. Therefore, the explanation was not

accepted.

4. 13A(a) of DT Regulations provide as under:-

"13A. No debenture trustee shall act as such for any issue of debentures in case--

(a) it is an associate of the body corporate,

"associate" in relation to a debenture trustee, or body corporate shall include a person, -

(i) who, directly or indirectly, by himself, or in combination with relatives, exercise control over the debenture trustee or the body corporate, as the case may be, or

(ii) in respect of whom the debenture trustee or the body corporate, as the case may be, directly or indirectly, by itself, or in combination with other persons, exercise control, or 6

(iii) whose director, is also a director, of the debenture trustee or the body corporate, as the case may be."

5. Upon hearing both sides in our view since the provisions

in clear terms prohibit a person who inter alia "exercise control

over the debenture trustee or the body corporate" would not

mean a nominee Director or an independent Director. Unless

and until the promoter or a person is able to exercise control he

cannot be termed as associate. In the present case, Mr. S.

Bandyopadhyay was merely nominee and independent director

respectively. Further, the appellant had already discontinued to

be debenture trustee of IL&FS but was required to merely act as

interim debenture trustee. Therefore, in our view, there is no

violation of the Regulations.

6. The third alleged violation by the appellant is that of

Regulation 13A(b) of the DT Regulations which provide that the

Debenture Trustee shall not act as such for any issue of

debenture in case it has lent and the loan is not yet fully repaid

or is proposing to lend money to the issuer Company. The

appellant started granting loans to IL&FS Ltd since February,

1996 and the relationship continued, even then the appellant

acted as debenture trustee for 12 issues of IL&FS. 7

The appellant submitted that the provision of DT

Regulation was inserted with effect from 4th July, 2003. Since

June, 2010 the appellant has stopped new business of debenture

trusteeship. The loan was sanctioned to IL&FS since more than

two decades and the limitations were being reviewed every year.

It was gradually reduced and at the time of inspection it was

Rs.37.50 crores while in the year 2008-2009 it was Rs.82.50

crores. There was no enhancement of the credit facility to

IL&FS. In view of the fact that the credit facility could not have

been abruptly stopped, gradual exit from the position had taken

place and ultimately the appellant also decided to gradually exit

from the position of debenture trustee of IL&FS. Notice for

retirement was issued on 5th November, 2014. It is therefore

submitted that in view of the above facts the violation if any may

be condoned.

The Adjudicating Officer found that some time the loan

limit was even increased by Rs.2.50 crores and as there is

admission of violation of the Regulations the Adjudicating

Officer found that the violation has been proved.

Upon hearing both sides in our view though technically

there is violation of the Regulations, the explanation of the

appellant will have to be accepted as there cannot be any sudden 8

exit from the loan facility availed by IL&FS though at a time

there may be small increase in the limit. Ultimately it is to be

noticed that the appellant decided to exit from the position of

debenture trustee of IL&FS. Therefore, there was only a

technical violation of the provisions.

7. The fourth violation held by the Adjudicating Officer is of

Regulation 15(i)(n) of the DT Regulations. SEBI alleged that

the appellant was required to communicate to the debenture

holders on half yearly basis the compliance of the term of issues

by the issuer companies and default if any in payment of interest

etc. The appellant's submissions were that during the inspection

period it was acting as a trustee in respect of five companies

only. As regards IL&FS there were no issue of default in

payment by the issuer company of default in payment of interest

letter under joint signature of the Company and the appellant

was being sent to all the debenture holders every half yearly.

After the inspection, the appellant has started sending

communication exactly under the Regulation to the debenture

holders and copies thereof have been uploaded in the appellant's

website. It is therefore submitted that it was only limited non

compliance of the Regulations which is technical in nature. 9

The Adjudicating Officer however observed that the duty

cast by DT Regulation 15(1)(A) is not fulfilled by the appellant.

The Adjudicating Officer further observed that while the show

cause notice is regarding five companies the appellant has given

explanation regarding only one Company namely IL&FS.

Further since there was admission of limited non compliance the

Adjudicating Officer did not accept the explanation.

In our view though the show cause notice was regarding

the non compliance of the Regulations in respect of five

companies the explanation is regarding only one issuer

Company namely IL&FS. In the circumstances, the violation of

the Regulation is clearly established in the present case.

8. Lastly the Adjudicating Officer found that the appellant

has violated the provisions of SEBI circular no. MIRSD/DPS

III/Cir-11/07 dated 6th August, 2017 and Regulations 23(4), (5),

(6) of SEBI (Issue and Listing of Debt Securities) Regulations,

2008.

According to the circular and the Regulation, the

debenture trustee is required to disseminate information and

reports on securities filed by the issuer to the investors. The

debenture trustee is required to place the same on the website.

Further, press release is also required to be issued. 10

The appellant submitted that it was complying with the

circular. Periodical report had been uploaded on the appellant's

bank's website. There were no defaults in payment of interest of

redemption money by the issuer Company during the relevant

period therefore no information in this regard was required to be

posted on the website. Further no press release was required.

The Adjudicating Officer held that merely because there

were no defaults by the issuer Company post SEBI inspection,

the dissemination of the information cannot be withheld in this

regard. The explanation of the appellant was therefore not

accepted.

In our view, since there were no default the requirement

of posting information in this regard was merely a formality.

The appellant was disseminating other information in substance

as detailed above. The default, if any, was therefore only

technical in nature.

9. In view of the above findings, the Adjudicating Officer

concluded that the appellant is liable for monetary penalty. The

Adjudicating Officer found that the amount of disproportionate

gain or unfair advantage cannot be quantified. He, therefore,

held that a penalty of Rs.3 lakhs would be sufficient. The

learned counsel for the appellant pointed out the fact as 11

contended in the reply to the show cause notice that the appellant

has stopped its business of debenture trusteeship since the year

2009 and all the trustee assignment have been now taken by the

subsidiary namely Central Bank Financial Services Ltd. He

further submitted that the nature of violation as detailed above

cannot be termed as intentional or serious in nature and,

therefore, appeal be allowed. On the other hand learned counsel

for the respondent submitted that except the explanation

regarding the nonexistence of written agreement, the plea of the

appellant is not in denial of the fact of violation but only in

explaining as to why there were violations. He therefore

submitted the appeal be dismissed.

10. Upon hearing both sides we find that the appellant is a

public sector bank. While some of the violations are technical in

nature some violations particularly regarding the disbursement

of loan to IL&FS was the cause of old standing relations

between the appellant and the Company which could not have

been suddenly stopped due to amendment of the DT Regulations

in between. In that view of the matter, in our view, instead of

monetary penalty censuring the appellant on this count would be

just and sufficient. Hence the following orders. 12

The appeal is partly allowed. The order of the

Adjudicating Officer imposing monetary penalty upon the

appellant is set aside instead the appellant is let off on censure

for the violations.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C. K. G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member

9.9.2019 Prepared and compared by RHN