SEBI: Debenture trustees put on hold CCI probe, but now under SEBI lens

Mumbai: Defense of Debenture Trustees Bombay High CourtTo avoid scrutiny by the anti-trust regulator competition commission of India (CCI), has empowered the market regulator to initiate its investigation into alleged price cartels by custodians of debt instruments.

People with direct knowledge of the matter said that the Securities and Exchange Board of India (SEBI)SEBI) is investigating debenture trustees to ascertain whether they have violated the fairness and transparency standards applicable to market intermediaries.

In February, the CCI had launched an investigation against the debenture trustees to find out whether they were abusing their dominant market position. A leading southern non-banking finance company (NBFC) had complained to both SEBI and CCI, alleging that the principal debenture trustees were cartelizing the debenture issuing market and charging exorbitant fees.

In April, the debenture trustees moved the Bombay High Court seeking a stay on the proceedings of the CCI on the ground that SEBI was the regional regulator and hence had jurisdiction to act against them.

The court temporarily stayed the CCI probe and asked SEBI to give its opinion on the matter. The matter is likely to be heard in the first week of July. Emails sent to SEBI did not elicit any response.

“The court had sought SEBI’s opinion, meanwhile the market regulator has started an investigation into the matter,” said a person. “SEBI has already asked the trustees to provide a comprehensive list of documents that explain how the pricing formula came about.”

Market participants say this is one of the rare instances where SEBI is looking into matters related to pricing. Generally SEBI allows middlemen and market competition to decide the price. The only exception to this rule is the mutual fund industry where SEBI sometimes asks fund houses to keep costs low for the benefit of public investors.

Another person mentioned above said, “SEBI has asked the debenture trustees to explain why the fees for handling debt market issues have increased significantly in the last few years. They have also submitted documents like financial statements, statement of profitability summoned.” “Debenture trustees are of the view that the regulatory burden has increased as the new debt market regulations put more pressure on them to secure investments on behalf of bondholders.”

Debenture trustees represent the interests of the bondholders. They oversee bond issuers’ adherence to the terms of the agreement. In case of default, the debenture trustees are required to enforce the protection by taking steps such as liquidation pledges and moving the appropriate legal forums.

Legal experts say the SEBI probe may not be the end of regulatory hurdles for debenture trustees as the CCI still has powers to initiate probe against them from the perspective of competition law.