SAT Quashes SEBI’s Penalty Order On DHFL For Alleged Violation Of Debenture Listing Norms
DHFL Banner on a building. (Source: BloombergQuint)

SAT Quashes SEBI’s Penalty Order On DHFL For Alleged Violation Of Debenture Listing Norms

The Securities Appellate Tribunal has quashed the market regulator’s order imposing a penalty on Dewan Housing Finance Corp. Ltd. for allegedly violating debenture listing norms.

The Securities and Exchange Board of India had in May imposed a penalty worth Rs 20 lakh on DHFL, directing it to pay the amount within 45 days. The company, SEBI said, failed to create a debenture redemption reserve and invest 15% of the amount of non-convertible debentures maturing on March 31.

A three-member bench of the SAT, however, said SEBI initiated proceedings after the National Company Law Tribunal had admitted an insolvency application against the housing finance company and declared a moratorium. As such, no proceedings can be instituted to impose and recover a penalty, the SAT said, while setting aside the order.

DHFL was facing a financial stress since 2018 after payment defaults by IL&FS Group entities triggered a liquidity crisis, drying up funds for non-bank lenders and housing financiers. In November 2019, the Reserve Bank of India superseded DHFL’s board, appointed an administrator and filed an application to initiate insolvency proceedings. The NCLT then admitted the plea in December and declared an interim moratorium.

No Jurisdiction To Institute Proceedings During Moratorium: SAT

SEBI argued that the moratorium would not prevent it from determining DHFL’s liability arising from the alleged non-compliance. While the moratorium applies to enforcement or recovery, SEBI’s officer would only determine the liability and not seek to recover the penalty during the period.

Mustafa Doctor, senior counsel representing DHFL, termed the market regulator’s actions as “perverse, illegal” and against various orders of the Supreme Court, which prohibited institution of suits or proceedings during moratorium. SEBI ignored these decisions and went ahead in a manner which amounts to contempt of court, the counsel argued.

Dismissing SEBI’s arguments, SAT observed that the law dealing with the moratorium is very clear and explicit, and any action or proceeding under the SEBI Act will not be sustainable in law.

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