Debentureholders’ rights in Intercreditor agreements

Supreme Court lays principles in case of debenture defaults

Sikha Bansal, Partner, Vinod Kothari & Company |

A well-developed corporate bond market not only provides cost-effective funds to the issuer, but also enables lenders like banks and other financial institutions to streamline their asset-liability mismatches. As such, there have been a lot of efforts to facilitate the development of the corporate bond market in India. While the market is growing steadily, the size of the market remains small as compared to other emerging markets in Asia[1]. Therefore, India may still have a long way to go.

An important element in ensuring smooth functioning of the bond market is to ensure that there is sufficient clarity on the options, remedies, and rights which the debentureholders have or may have in a given scenario. One such aspect has been dealt with by the Supreme Court (SC) in the recent ruling Securities and Exchange Board of India v. Rajkumar Nagpal and Others[2] (‘SC ruling’). The SC was dealing with the interplay between the RBI’s ‘Prudential Framework for Resolution of Stressed Assets’ issued in June, 2019 (‘RBI Resolution Framework’) and SEBI’s Circular on ‘Standardisation of procedure to be followed by Debenture Trustees in case of ‘Default’ by Issuers of listed debt securities’ (‘SEBI Circular’) and consequent impact of the same on the rights of the debentureholders.

As we see below, the SC ruling is crucial – that it clears the air around the force which SEBI Circular carries and protects dissenting investors from non-statutory compromises. However, most importantly, this SC ruling can be seen as highlighting the problems and gaps which may arise because of segregated rule-making where two regulators were bound by their respective regulatory ambit, thereby leading to a not-so-comprehensive resolution framework.

The author, in this article, has not gone into the facts of the particular case (which, inter alia, necessitated the SC to invoke Article 142 of the Constitution). Instead, the author has deliberated on the key takeaways from the SC ruling.

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