Chandigarh State Commission Holds Catalyst Trusteeship And Credit Rating Agencies Liable For Failing To Safeguard DHFL Debenture Holders
Pranav B Prem
The Chandigarh State Consumer Disputes Redressal Commission, comprising President Raj Shekhar Attri and Member Rajesh K. Arya, has held Catalyst Trusteeship Limited, the debenture trustee of Dewan Housing Finance Corporation Ltd. (DHFL), liable for failing to protect the interests of debenture-holders after DHFL defaulted in redeeming secured debentures. The bench further held Credit Analysis & Research Ltd. and Brick Works Ratings India Pvt. Ltd., the credit rating agencies involved, guilty of unfair trade practice and manifest breach of Securities and Exchange Board of India (SEBI) regulations.
Background
In July 2016, DHFL issued a public prospectus approved by SEBI for secured redeemable non-convertible debentures (NCDs) of ₹1,000/- each, with a tenure of three years. Catalyst Trusteeship Ltd. was appointed as the debenture trustee, while Credit Analysis & Research Ltd. and Brick Works Ratings India Pvt. Ltd. assigned a top-tier “AAA” rating to the issue.
The complainant, Jyoti Khemka, purchased 342 NCDs worth ₹3,42,000/-, which were due for maturity on 16 August 2019. Despite speculations in early 2018 about DHFL’s looming financial crisis, the credit rating agencies continued to affirm the “AAA” rating. However, in February 2019, the rating was suddenly downgraded to “D,” the lowest category, after revelations that DHFL had siphoned thousands of crores of public money. DHFL eventually defaulted on repayment of the principal and interest, leading the complainant to file a consumer complaint against DHFL, the trustee, the credit rating agencies, and SEBI.
The Chandigarh District Commission dismissed the complaint in March 2023, prompting an appeal before the State Commission. Meanwhile, DHFL underwent resolution proceedings under the Insolvency and Bankruptcy Code, 2016, with Piramal Capital Housing Finance Ltd. taking over as the successful resolution applicant.
Complainant’s Stand
The complainant argued that the debenture trustee failed in its statutory duty to protect her interest by not securing the debenture amount that matured in August 2019. It was contended that the trustee violated Rule 18(7)(c) of the Companies (Share Capital and Debentures) Rules, 2014 by failing to maintain the Debenture Redemption Reserve. Further, the continued “AAA” rating by the agencies, until an abrupt downgrade, amounted to gross misrepresentation in violation of Regulation 13 of the SEBI (Credit Rating Agencies) Regulations, 1999.
Defence of Trustee and Agencies
The trustee submitted that it had acted in line with the trust deed and that repayment was solely the liability of DHFL. It further contended that the complainant had already received ₹1,68,584/- under the IBC resolution plan as full and final settlement. The credit rating agencies argued that ratings are professional opinions, not guarantees, and that investors must make independent decisions.
Observations of the Commission
The bench examined whether the trustee had fulfilled its duty of protecting investors by enforcing security or maintaining statutory reserves. Referring to the trust deed, the Indian Trusts Act, 1882, and SEBI (Debenture Trustees) Regulations, 1993, the Commission observed that a trustee is mandated to act not as a mere figurehead but as an “active protector of debenture-holders’ interests.” It noted: “The Debenture Trustee was legally empowered and obligated to take necessary steps for protection and enforcement of rights of debenture-holders. However, no decisive action was taken with urgency.”
The Commission also referred to a SEBI adjudication order imposing a penalty of ₹1,00,000/- on Catalyst Trusteeship Ltd. for violating SEBI regulations, reinforcing its failure in duty. Since the complainant had already received ₹1,68,584/- under IBC, the trustee was held liable to pay the balance of ₹2,04,880/-.
Regarding the credit rating agencies, the bench found that the abrupt downgrade from “AAA” to “D” raised serious doubts over their independence and integrity. Despite DHFL’s disclosure to the stock exchange in August 2019 about a liquidity crisis, the agencies continued to assign the top rating. The Commission held that such conduct amounted to “gross misrepresentation” and a breach of Regulation 13 of the SEBI (Credit Rating Agencies) Regulations, 1999, as well as RBI’s directives mandating periodic and realistic reviews. The bench emphasized that rating agencies are not “mere facilitators” but “gatekeepers of market integrity,” and any breach can cause irreparable harm to investor confidence.
Concluding that both the trustee and the rating agencies had failed in their statutory and regulatory duties, the Commission partly allowed the complaint with the following directions:
Catalyst Trusteeship Ltd. to pay ₹2,04,880/- with 9% interest to the complainant.
Credit Analysis & Research Ltd. and Brick Works Ratings India Pvt. Ltd. to pay ₹1,00,000/- each as compensation.
The trustee and credit rating agencies jointly and severally to pay ₹33,000/- as litigation costs.
The complaint was dismissed against Piramal Capital Housing Finance Ltd. and SEBI as no relief was sought against them.
Appearance
Sh. Shreenath K. Khemka, Advocate for the appellant. Sh. Anirudh Gambhir, Advocate for respondent No.1 (on VC). Sh. N. S. Jagdeva, Advocate proxy for Sh. Lakhbir Singh, Advocate for respondent No.2. Sh. Rajender S. Rana, Advocate for respondent No.3. Ms. Shweta, Advocate for respondent No.4 Respondents No.4 & 5 already exparte vide order dated 22.05.2023.
Cause Title: Jyoti Khemka V. Catalyst Trusteeship Ltd. & Ors.
Case No: Appeal No. 58/ 2023
Coram: Raj Shekhar Attri [President], Rajesh K. Arya [Member]
