Vistra Itcl (India) Ltd.(Formerly ... vs Sebi

Date: 17.10.2019

Appeal No.484 of 2018

Vistra ITCL (India) Ltd. (Formerly known as the IL&FS Trust Company Limited) The IL&FS Financial Center Plot No.C-22, G Block, 7th Floor, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. .... Appellant

Versus

Adjudicating Officer Securities and Exchange Board of India SEBI Bhavan, Plot No.C4-A, "G" Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400051. ... Respondent

Mr. B. Gopalakrishnan, Advocate with Ms. Ishita Merchant and Reuben Mascreen, Advocates i/b. S.K. Singhi & Co. for the Appellant.

Mr. Vishal Kanade, Advocate with Mr. Sushant Yadav, Advocates i/b. K. Ashar & Co. for the Respondent.

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

Per : Justice Tarun Agarwala (Oral)

1.

The present appeal has been filed against the order of

the Adjudicating Officer imposing a penalty of Rs.5 lakhs

under Section 15HB of the Securities and Exchange Board of 2 India Act, 1992 (hereinafter referred to as the 'SEBI Act') for

violation of Regulation 15(1)(i) and 16 of the Securities and

Exchange Board of India (Debenture Trustee) Regulations,

1993 (hereinafter referred to as 'DT Regulations') read with

the Code of Conduct Schedule III Clause (1), (2), (3) and (4).

The penalty was imposed on the ground that the appellant did

not exercise due diligence to ensure compliance by the

Company within the provisions of the Companies Act or the

trust deed.

2. The facts leading to the filing of the appeal is, that the

appellant is a SEBI registered debenture trust company.

LRN Finance Ltd., the Company had entered into a

Debenture Trust Agreement with the appellant whereby the

Company appointed the appellant as their debenture trustee

for debenture series 'B' (NCD). Through this series the said

Company raised 27 crores.

3. The appellant was issued a show cause notice to show

cause as to why an enquiry should not be held for violation of

the Companies Act and the DT Regulations. Upon receipt of

the reply, the Adjudicating Officer, after giving an

opportunity of hearing and after considering the material on

record, found that due diligence was not carried out by the 3

debenture trustee, i.e. the appellant and that Regulations 14,

15 and 16 of the DT Regulations read with the Code of

Conduct were violated. The Adjudicating Officer, after

considering the mitigating circumstances and other factors

enumerated under Section 15J, passed an order imposing a

sum of Rs.5 lakhs as penalty. The appellant, being aggrieved

by the said order, has filed the present appeal.

4. We have heard the learned counsel for the parties. An

attempt was made by the learned counsel that the company

being an NBFC was not required to comply with the

provisions of Section 67 of the Companies Act, 1956 in as

much as the said provision was not applicable to an NBFC.

Thus, holding that the appellant did not carry out due

diligence and allowing the Company to issue debentures to

more than 50% was wholly erroneous. It was also contended

that in any case, due diligence was carried out in as much as

the appellant had a limited role to play in the issuance of the

debenture by the said Company and upon perusal of the

quarterly compliance report of the Company, the appellant

had issued an advertisement on August 1, 2013 warning the

investors and the general public about the Company not

being authorized for raising any further amount under 4

series B. It was thus contended that at the earliest opportune

moment the appellant after coming to know of the illegalities

being done by the Company issued a public advertisement

and carried out due diligence.

5. Having heard the learned counsel for the parties at some

length, we find that the contention that the appellant only

came to know of the illegalities being committed by the

Company pursuant to the quarterly reports in 2013 is

misconceived. A specific finding has being given by the

Adjudicating Officer that the appellant had submitted the list

of 4178 debenture holders to SEBI for the quarter ending

September 30, 2012 on the basis of which, the Adjudicating

Officer consequently held that the appellant was well aware

that the Company had issued NCD B series to 4178

debenture holders in 2012 itself and did not take immediate

steps to stop such fund raising or bring it to the notice of

SEBI and other regulators. The advertisement which was

issued by the appellant was done much later and, that too,

after the issuance of a circular by SEBI on June 13 and July,

2013.

6. We also find that one of the cardinal principle of inviting

subscription of NCD under Section 67 of the Companies Act 5

is to issue an invitation to a certain set of persons inviting

them to subscribe to the NCDs. There is nothing on record to

show or demonstrate that the Company or the appellant that

invitation for subscription was made only to specific or

predetermined persons or persons who were associated in

some manner with the company so as to make the offer in the

nature of private placement. On the other hand, evidence has

come on record to show that the Company on its website was

advertising seeking public subscription to the said issue even

after the closure of the said issue. No evidence has been

brought forward to show that the investors to the NCDs were

employees, workers or associated in some form or the other

with the company. Consequently, we are of the opinion that

the Adjudicating Officer was justified in holding that the

exemption available to an NBFC is in terms of the second

proviso to section 67(3) of the Companies Act, 1956 but the

requirement of section 67(3)(a) and (b) of the Companies Act

has to be followed to show that the offer was not made to the

public which in the instant case has not been provided by the

appellant.

7. Consequently, for the reasons stated aforesaid we are of

the opinion that due diligence was not exercised by the 6

appellant who was appointed specifically as a debenture

trustee to the said issue. For the reasons stated aforesaid, we

do not find any merit in the appeal. Dismissed.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C. K. G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member

17.10.2019 Prepared and compared by RHN