Market regulator Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs2 lakh on DS Kulkarni Developers Pvt Ltd for the company's failure to create a debenture redemption reserve (DRR) to protect non-convertible debenture (NCD) holders.
In an order, Soma Majumder, an adjudicating officer (AO) of SEBI, says, "...it is not possible from the material on record to quantify the amount is proportionate gain or unfair advantage resulting from the default of DS Kulkarni Developers or the consequent loss caused to investors as a result of the default. Further, I note that the evidence available on record does not indicate that default of DS Kulkarni Developers is repetitive in nature. However, it is pertinent to note that the concept of DRR was introduced for protection of debenture holders by reducing the risk as well as the impact of default by company in repayment of its debt securities. Thus, I find the default by DS Kulkarni Developers, i.e., not creating a DRR as per the conditions stipulated under extant laws, indicates its disregard for placing a safety net for the NCD holders which may jeopardise the interests of these investors and therefore deserves an appropriate penalty."
The AO then imposed a penalty of Rs2 lakh on DS Kulkarni Developers.
The case is related with a reference made by Central Economic Intelligence Bureau (CEIB) to SEBI about the affairs of DS Kulkarni Developers. The market regulator then conducted an examination, into the matter of public issue of NCDs worth Rs111 crore issued by the company in August 2014. SEBI observed certain violations of provisions of Regulation 16(1) of SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations) read with Rule 18(7)(c) of Companies (Share Capital and Debenture) Rules, 2014 by DS Kulkarni Developers. It then initiated adjudication proceedings against the company.
Through the NCDs, DS Kulkarni Developers raised over Rs111 crore in four series of NDCs of Rs51.72 crore, Rs23.42 crore, Rs2.12 crore and Rs34.43 crore.
In an email dated 23 November 2020, Catalyst Trusteeship Ltd, the debenture trustee of DS Kulkarni Developers, sent an email to SEBI informing that the company had created DRR in FY15-16 and FY16-17, the year in which DS Kulkarni Developers incurred losses.
Catalyst Trusteeship also told SEBI that DS Kulkarni Developers defaulted in payment of interest due on its NCDs on 1 July 2017 and the company did not utilise the DRR for repayment of its NCDs.
Further, in an email dated 25 November 2020, Catalyst Trusteeship informed SEBI that the amount marked towards DRR created in FY15-16 and FY16-17 continued to be reflected in the books of account of DS Kulkarni Developers till then.
SEBI, in an email on 11 January 2021, asked DS Kulkarni Developers to explain why the DRR was not utilised towards the repayment of NCDs.
The resolution professional (RP) informed SEBI that, from 26 September 2019, DS Kulkarni Developers is under a corporate insolvency resolution process (CIRP).
The RP of DS Kulkarni Developers, vide his letter dated 13 January 2021, also submitted that the company had defaulted in the payment of interest due on 1 July 2017 and had not redeemed the NCDs on 6 September 2017, 6 March 2020 and 6 September 2020, i.e. when the redemptions were due.
Further, the RP also stated that DS Kulkarni Developers had not invested or deposited 15% of the amount of its debentures maturing during the FY17-18 before 30 April 2017, as required under Companies (Share Capital and Debenture) Rules, 2014.
In his reply to SEBI's show-cause notice, the RP contended that since the company is under CIRP, the National Company Law Tribunal (NCLT), in an order on 26 September 2019, had imposed a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) for DS Kulkarni Developers.
Manoj Kumar Agrawal, the RP, contended that provisions of Section 14 of IBC expressly bar the institution or continuation of adjudication proceedings during the moratorium period. He cited decisions of the Securities Appellate Tribunal (SAT) in Dewan Housing Finance Corporation Ltd (DHFL) vs SEBI, Supreme Court in Alchemist Asset Reconstruction Company Limited vs Hotel Gaudavan Pvt Ltd and orders passed by National Company Law Appellate Tribunal (NCLAT).
However, while referring to a judgement of the apex court in a matter related to Section 14 of IBC, the AO noted that SEBI, as a statutory authority, can take steps to determine the penalty, if any, with regard to its matters relating to the corporate debtor. "...the limited purpose of present adjudication proceeding against Noticee is to determine if Noticee has violated any of the provisions of securities laws and if so, to assess and determine the penalty, in order to enable SEBI to crystallise its claim," the AO says.
The AO also noted that SEBI had challenged the order passed by SAT in the DHFL matter before the Supreme Court and it is pending. The AO clarifies that "...enforcement of the penalty in this order, if any, will be subject to the outcome of the appeal before the SC in the matter of SEBI vs DHFL."
