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  • Vanshika Tandon


The issuance of corporate bonds has emerged as a crucial alternative to the traditional banking system. It has been observed that a well-developed market-based ‘source of finance’ contributes to the overall financial stability. An efficient bond market fulfils this function as it aims at mitigating the risks by expanding the class of investors. To achieve this end, the Reserve Bank of India (“RBI”) and the Securities and Exchange Board of India (“SEBI”) as the market regulators have undertaken concreate steps to advance the development of corporate bond market by validating the interests of various stakeholders.

The recent takeover of Reliance Commercial Finance Resolution (“RCFR”) by the Authum Investment and Infrastructure Limited (“AIIL”) highlighted the gaps in the rulemaking by these regulators. This case directly concerned the interplay between the ‘Prudential Framework for Resolution of Stressed Asset, 2019’ issued by the RBI (“RBI Framework, 2019”) and the 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, 2020”). The Court determined the scope of intercreditor agreement (“ICA”) till the extent of including the rights and remedies of the debenture-holders in the event of default by the corporate.

This article analyses the takeover of RCFR in the backdrop of trends stipulated by the RBI and SEBI. It is argued that the present decision is a landmark precedent. It sets forth the objective of guaranteeing comprehensive debt resolution process along with a unified framework to the lenders and the debenture-holders of the listed debt securities under the RBI Framework, 2019.

Factual Background

RCFL issued Non-Convertible Debentures to various persons, wherein Vistra ITCL Limited was the Debenture Trustee under three Debenture Trust Deeds (“the Deeds”). In March 2019, RCFL committed its first default. RBI Framework, 2019 came into force in July which gave the lenders an option to either enter into an ICA for the purposes of resolution plan or initiate proceeding against the corporate for recovery. Consequently, lenders of the RCFL entered into ICA. In 2020, the SEBI circular was issued which resulted in the amendment of the Deeds. In July 2021, the resolution plan was submitted by AIIL and approved by RCFL.

Seventeen debenture-holders approached the Bombay High Court with respect to the amounts due to them by the RCFL, impleading them as the first defendants and Bank of Baroda (creditor-bank) as the second defendant. It was alleged by the plaintiffs that funds were distributed amongst the creditors by the virtue of ICA—made in compliance with the RBI Framework,2019. This was done without the consent of the plaintiffs who had a first charge on the receivables. It was argued that contrary to the SEBI circular, RBI Framework sanctioned this ultra vires distribution, thus, RBI Framework is illegal. The Court held that SEBI’s circular could not be implemented retrospectively which allowed the RBI Framework to operate in the present case. Thus, the takeover by AIIL and the voting process was allowed.

The Ambit of Regulations

The introduction of the New Economic Policies,1991 (“NEPs”) substantiated the importance of equity markets in India. At the same time, the element of stock lending remained absent. To this extent, ‘debt’ remained a growing concern in India which resulted in negligible existence of corporate bonds within the financing sector. It was reported that while there was an upsurge in the role played by the banks in financing of large firms, the bond market remained stagnated at 3.5% in 2000-01 and to 3.9% in 2010-11. Thus, large firms were either dependent upon banks or excessive internal financing for funds, followed by a stagnant bond market.

The perceptible size of the bond market in India enabled the RBI to formulate policies for improving the financial system in India. Moreover, the ‘credit culture’ and development of a resilient financial system in India is argued to be facilitated by clear demarcation of the rights and remedies available to the debenture-holders in the series of events resulting in bankruptcy or any other situation. This concern was corrected by the regulator—SEBI through its circular.

The RBI Framework,2019 signifies the mechanism for dealing with stressed assets outside the Insolvency Bankruptcy Code,2016 (“IBC”). It encourages prompt resolution efforts and proper recognition of increased credit risk to lenders due to concessions as debt recast through implementation of resolution plan. Further, the framework contemplates that “lenders” must enter into an ICA (paragraph 3) but the definition of ‘lenders’ excluded debenture-holders. The SEBI circular on the other hand, in consonance with Regulation 15(7) of the SEBI (Debenture Trustees) Regulations,1993(“Trustees’ Regulations”) determines the mechanism for debenture -holders to become party to the ICA and consequently to the resolution framework. It prescribes that resolution is deemed to be passed when majority of the investors agree. The SEBI circular through clause 6(6) stipulates that for the purposes of entering into ICA, the consent of the majority (debenture-holders) means ‘the approval of not less than 75% of the debenture-holders by value of the outstanding debt and 60% of the debenture-holders by number at the International Securities Identification Numbering System (“ISIN”) level’. In this sense, while the SEBI circular and the Trustees’ Regulations enable the debenture-holders to have a say in the resolution procedure through the ICA, the same does not find a mention in the RBI Framework,2019. The Rajkumar Nagpal case became a manifestation of the said discrepancy.

Setting of the Precedent

1. That SEBI Circular has Retroactive Implication

The bench lead by Justice D.Y. Chandrachud observed that ‘merely because a law operates on certain circumstances which are antecedent to its passing does not mean that it is retrospective’.[i] In this sense, the Court acknowledged the common law doctrine of “retroactive effect” of law which enables a judicial body to determine if the litigant’s past events violated a law. The bench correctly distinguished retrospective law (true retroactivity) from quasi-retroactivity and held that a new rule can be applied to an act or transaction which is in the process of completion. This owed its implication to the recognised legal principle that retroactive statute does not operate retrospectively but in futuro.

In the present case, the SEBI circular does not extinguish vested rights but operates upon the events which had been drawn from antecedent events. It subscribed to the RBI Framework and expanded the scope of the term ‘lenders’ to include debenture-holders, thereby mandating their participation in the Resolution Plan through the ICAs. Factually, the status of the case was limited by the debt and default of RCFL as of October 13, 2020—when SEBI circular came into effect. An agreement for restructuring was not in existence. At the same time, debenture-holders were not vested with any rights towards resolution plan under the Deeds indicating—that the transaction was incomplete. To this end, SEBI circular through its statutory character overrides the contractual relations reached amongst the creditors through the Deeds. Thus, the retroactive nature of the circular results in its implication in the present case.

2. That the Debenture-holders can opt to Participate in the Resolution Process

The Court commented upon the ‘facilitative nature’ of the SEBI Circular and observed that while the RBI Framework, 2019 does not bind the debenture-holders to participate in the resolution process, its facilitative character cannot be abused to evade the modalities framed by the circular. Thus, it was crystalised by the Court that the category of lenders as provided in the RBI Framework, 2019 is not exhaustive and extends to the debenture-holders as well. However, the respective debenture-holders by the virtue of RBI Framework, 2019 must enter into an ICA which is a sine qua non for the implementation of a Resolution Plan.[ii]

In the case of dissenting debenture-holders, the Court applied the principle of compromise as enshrined under Section 230 of the Companies Act,2013. The dissenting debenture-holders will be bound at the ISIN level to ensure that an approved resolution for debt recovery is not disrepute at the cost of non-compliance by the debenture-holders. This results in certainty in the implementation of a resolution plan and its outcome.

The voting procedure for entering into the ICA as per the ISIN level, perhaps poses certain concerns over yielding effective resolution plan. For instance, in the cases of common interest in the securities—irrespective of the different ISINs, the decision becomes applicable by the virtue of cramming down.[iii] Thus, the regulators must establish a feasible solution to this end.


The Indian bond market is often restricted by the participation and faith of investors in the process. The present Case brought to light the lacunae in the processes adopted by the RBI and the SEBI in the cases of corporate default. It addresses the concern associated with IBC, 2016 and dictates its application as the last resort. The mechanism of corporate recovery through ICA is deemed to be less time consuming. The Court therefore identified the nuances embedded within these procedures along with the stake of the debenture-holders. It was affirmed that the RBI Framework, 2019 is not illegal, thus subscribing to the need of ICA for a comprehensive and inclusive resolution plan.

The Court also recognised the role of SEBI as a regulator. It was noted that any inconsistency arising due to the ISIN level voting will be considered by the regulator and corrective measures will be undertaken.

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