Punjab & Haryana High Court Issues Notices To SEBI, DHFL For Failing To Safeguard Interests Of Debenture Holders

The Punjab & Haryana High Court has issued notices to the Securities and Exchange Board of India (SEBI), Dewan Housing Finance Corporation Ltd (DHFL) and Catalyst Trusteeship Ltd, among others, for the failure of the company and the trustee to safeguard interests of debenture holders.

The petition, filed by Jyoti Khemka through Advocate Shreenath A Khemka, had requested the court to direct the SEBI to take regulatory action against the market intermediaries by conducting an investigation involved in the DHFL non-convertible debenture (NCD) issue.

Catalyst Trusteeship was the trustee for the debentures issued by DHFL in 2016. At that time, ratings agencies CARE and Brickworks had given their highest 'AAA' rating to the DHFL debentures which had three year tenures. However, upon maturity on August 16, 2019, DHFL defaulted in payment.

Khemka’s petition has stated that, “Catalyst failed to safeguard the interests of the complaint, by completely failing to ensure realization of the debenture amount which became due on August 16, 2019. The said debentures were 'secured', and the debenture trustee was supposed to hold adequate Security to secure the debenture amounts. Yet, Catalyst failed to secure and realize the amounts that became due”.

While the credit rating agencies had given AAA rating to the DHFL debentures, during February to May 2019, it was downgraded to 'D' (default) when it had become apparent that DHFL being insolvent will default in its financial obligations. The consistent downgrading demonstrated that financial health of DHFL did not suddenly deteriorate due to external shock, Khemka has stated in her petition.

According to Khemka’s petition, “It is impossible for the credit rating of a housing finance company in the business of mortgage finance to fall so sharply overnight, especially for housing finance companies in the business of mortgage finance. There are ongoing investigations by into the conflict of interest issues surrounding the credit rating agencies in the case of IL&FS and its subsidiaries, therefore vitiating the proposition of having acted in bona fide fiduciary capacity”.

It may be recalled that earlier, the Bombay High Court had extended its previous stay on further payments by DHFL to its creditors except for payments made parri passu (in equal proportion) to all secured creditors. The extension was given after hearing a case filed by Reliance Nippon Life Asset Management Company.