Sebi fines Catalyst Trusteeship for violations while handling issue by Spandana Sphoorthy

In the order, the market regulator took into consideration that the material available does not estimate the losses made by the investor and that there has been no action taken against the DT in the past.

The market regulator has penalised Catalyst Trusteeship for violating the regulations governing debenture trustees, when handling an issue by Spandana Sphoorthy Financial Ltd.

The operations of the debenture trustee (DT) between March 31, 2023, and October 31, 2023, were looked into as part of Sebi's examination of breach of convenants (or terms of an issue) by the NBFC.

In the order dated August 26, the Securities and Exchange Board of India (Sebi) said that, when there was a breach or default, the debenture trustee had not communicated that to all the securities holders and that it had not organised a meeting for all of them. The order also said that it had not informed the concerned credit rating agency (CRA) in time. In the order, the regulator asked the DT to pay a fine of Rs 1 lakh.

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On the violation when communicating with the securities holders, the order said, "the Noticee (the debenture trustee) had communicated the event of default to some of the debenture holders and the meeting was also conducted by it. But the Noticee has not provided any documentary evidence in support of having communicated all the debenture holders w.r.t breach of covenants and whether all of them attended the said virtual meeting."

"Further, it is noted that the Noticee has not provided any document in support of having communicated all the debenture holders via RPAD/SPAD or Courier in addition to the email communication," said the order.

As the order noted, intimating one or few debenture holders and merely submitting that the debenture holders were intimated cannot be construed as a proper communication.

On its communications with the CRA, the order noted, " (the regulator's finding) conspicuously shows that the Noticee didn’t share any information upfront with India Ratings despite breach of covenants observed by it on June 20, 2023 and therefore, submission of the Noticee is devoid of merits."

The order noted that the "material available on record has not quantified the amount of disproportionate gain or unfair advantage, if any" made by the DT and the loss, if any, suffered by investors. It also noted that the DT had not been penalised by Sebi in the past.

The order also stated, "The Noticee being a registered intermediary is expected to adhere to fair practices and maintain a high degree of professionalism in the conduct of its business."

"Further, it is pertinent to that the role of a DT is crucial as it is primarily responsible to ensure that the interest of the debenture holders is not hampered by the issuer companies. Much power is given to trustees as they stand as a protector for the investors. The Noticee was under a statutory obligation to abide by the provisions of the Circulars issued by the Regulator, which it failed to do during the IP (investigation period).