Description

SEBI settlement order against SBICAP Trustee Company Limited for failure to create encumbrance on securities through the depository system while acting as Debenture Trustee for JM Financial Asset Reconstruction Company Limited NCD issuances.

Summary

SEBI issued a settlement order (SO/SM/KS/2025-26/8267) against SBICAP Trustee Company Limited (STCL), a registered Debenture Trustee (Registration No. IND000000536), for alleged violations related to its role as trustee in two NCD issuances by JM Financial Asset Reconstruction Company Limited (JMFARCL). STCL filed a settlement application (No. 8267/2024) to resolve the adjudication proceedings without admission or denial of the findings.

Key Points

  • STCL acted as Debenture Trustee for two JMFARCL NCD issuances (ISINs: INE265J07555 and INE265J07449)
  • Hypothecation was created on security receipts of the issuer, but encumbrance was not registered through the depository system
  • STCL failed to obtain holding statements from the depository participant as required under Clause 2.1(g) of the DT Master Circular
  • STCL did not exercise due diligence in obtaining necessary documents and creating encumbrance through the depository system
  • Settlement application filed pending adjudication proceedings; proceedings settled without admission or denial of findings

Regulatory Changes

No new regulatory changes introduced. The order reinforces existing obligations under:

  • Regulation 16 of SEBI (Debenture Trustee) Regulations, 1993, read with Clauses 1 and 4 of the Code of Conduct in Schedule III
  • Clause 2.1(g) of the Master Circular for Debenture Trustees
  • Clause 2.4 of the Master Circular for Debenture Trustees

Compliance Requirements

  • Debenture Trustees must ensure encumbrance on securities offered as collateral is created through the depository system, not merely through deed of hypothecation
  • DTs must obtain holding statements from depository participants for securities offered as security
  • DTs must exercise due diligence in verifying creation of encumbrance and obtaining required documentation from issuers

Important Dates

  • August 06, 2024: SEBI appointed original Adjudicating Officer (Shri Amar Navlani)
  • October 08, 2024: Show Cause Notice issued to STCL
  • Settlement Application No. 8267/2024 filed by STCL
  • September 19, 2025: New Adjudicating Officer appointed following transfer of original AO
  • March 27, 2026: Settlement order issued

Impact Assessment

This settlement order has moderate compliance significance for the debenture trustee industry. It underscores SEBI’s expectation that debenture trustees must go beyond executing hypothecation deeds and must ensure formal encumbrance is registered through the depository system. Financial institutions acting as debenture trustees for NCD issuances should review their processes for security creation and documentation. The settlement, resolved without admission of guilt, limits direct reputational impact on STCL but serves as a regulatory signal to all registered debenture trustees regarding due diligence obligations.

Impact Justification

Settlement order against a registered debenture trustee for procedural lapses in encumbrance creation; resolved without admission of guilt, limited broader market impact but relevant to debenture trustee compliance standards.