sebi: Debenture Trustees Stall CCI Probe, but Now Under Sebi Lens

Mumbai: The defense argument of debenture trustees in the Bombay High Courtto avoid a probe by the anti-trust regulator Competition Commission of India (CCI), has provided the market regulator the locus standi to launch its own investigation into alleged price cartels by the custodians of debt instruments.

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

In February, CCI had initiated a probe against debenture trustees to find out if they were misusing their dominant market position. A leading southern non-banking finance company (NBFC) had complained to both Sebi and CCI, alleging that leading debenture trustees were cartelising the debenture issuance market and charging exorbitant fees.

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

The court put a temporary stay on the CCI investigation and asked Sebi to provide its opinion on the matter. The case is likely to be heard in the first week of July. An email sent to Sebi remained unanswered.

“While the court had asked for Sebi’s views, in the meantime the market regulator has initiated a probe into the matter,” said a person cited above. “Sebi has already asked the trustees to provide an extensive list of documents that explain how the pricing formula was arrived upon.”

Market participants say this is one of the rare instances where Sebi is looking into pricing-related matters. Normally, Sebi lets intermediaries and market competition decide the pricing. The only exception to this rule is the mutual fund industry where Sebi sometimes nudges the fund houses to keep costs lower for the benefit of public investors.


“Sebi has asked the debenture trustees to explain why the fees for handling a debt market issuance surged significantly in the last few years. They have also summoned documents such as financial statements, details of profitability,” said another person cited above. “Debenture trustees have been taking a view that the regulatory burden has increased as the new debt market rules put far more onus on them to secure the investments on behalf of bondholders.”

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

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

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