Muthoot Finance Limited vs. Trustees’ Association of India and Others

Public Version

COMPETITION COMMISSION OF INDIA

Case No. 29 of 2021

In Re:

Muthoot Finance Limited
Informant

And

Trustees’ Association of India
through TAI-Trustees’ Association of India
Opposite Party No. 1/OP-1

IDBI Trusteeship Services Limited
Opposite Party No. 2/OP-2

Axis Trustee Services Limited
Opposite Party No. 3/OP-3

SBI CAP Trustee Company Limited
Opposite Party No. 4/OP-4

Present:

Order under Section 27 of the Competition Act, 2002

1. The Information in the present case has been filed by Muthoot Finance Limited (‘Informant’) under Section 19(1)(a) of the Competition Act, 2002 (the ‘Act’), against Trustees’ Association of India (‘OP-1’/‘TAI’); IDBI Trusteeship Services Limited (‘OP-2’/‘IDBI Trustee’); Axis Trustee Services Limited (‘OP-3’/‘Axis Trustee’) and SBI CAP Trustee Company Limited (‘OP-4’/‘SBI CAP’) inter alia alleging contravention of the provisions of Sections 3 and 4 of the Act. OP-1, OP-2, OP-3 and OP-4 are collectively referred to hereinafter as ‘Opposite Parties’/‘OPs’. The Informant, OPs, TAI- Trustees’ Association of India (‘New TAI’), are collectively referred to hereinafter as ‘Parties’

Facts in brief

2. As per the Information, the Informant is a publicly listed company having its registered office in Ernakulam, Kerala. It has been regularly raising working capital from debt securities market through issuance of Non-Convertible Debentures (‘NCDs’) by way of 25 series of public issues and private placement with OP-2 as its Debenture Trustee (‘DT’) for the last 10 years. Under Section 71(5) of Companies Act, 2013 (‘Companies Act’), every company making a public offer of debentures is mandatorily required to appoint one or more DTs in the manner prescribed thereunder. Further, Regulation 8 of the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’) requires every issuer of non-convertible securities to appoint a DT registered with Securities and Exchange Board of India (‘SEBI’) for any public issue or private placement of NCDs, proposed to be listed on a stock exchange. Accordingly, the Informant appointed OP-2 to act as DT in respect of all NCD issuances made during the last 10 years. As on 30.06.2021, the Informant’s total NCD book stood at INR 13,478 crores.

3. OP-1 is stated to be an association of DTs, with OP-3 as its President, OP-4 as its Secretary and OP-2 as its Treasurer.

4. OP-2 is a trusteeship company providing various trusteeship services, and is jointly promoted by IDBI Bank Ltd., Life Insurance Corporation, and General Insurance Corporation of India. OP-3 and OP-4 are also trusteeship companies providing trusteeship services in India.

5. In August 2021, the Informant proposed to issue secured NCDs worth INR 982 crores through private placement and sought a fee quotation from OP-2 for acting as its DT. According to the Informant, OP-2, however, quoted a fee structure several folds higher than that charged under its previous pricing structure for providing debenture trusteeship services.

6. The Informant alleged that OP-2 attributed the revised pricing structure to a decision taken and enforced by OP-1, which comprises several DTs as its members. Under the revised pricing mechanism, the fees fixed by OP-1, for undertaking trusteeship services for issuers other than Public Sector Undertakings (‘PSUs’) in respect of listed debentures comprised an "Initial Fee" ranging from INR 75,000/- to INR 15,00,000/- and an "Annual Fee" ranging from INR 1,00,000/- to INR 22,50,000/- depending on the issue size. For an issue size between INR 100 crores and INR 1500 crores, the "Initial Fee" was prescribed as 0.01% of the issue size, and the "Annual Fee" was prescribed as 0.015% of the issue size. Accordingly, for the proposed issuance of INR 982 crore by the Informant, OP-2 quoted the following fees:

7. OP-2 further informed the Informant by e-mail that, since the revised fee structure had been decided by OP-1, any deviation therefrom would lead to adverse repercussions for the Informant. OP-2 also stated that the revised fee structure had been applicable to both existing as well as new clients with effect from 01.04.2021.

8. According to the Informant, the revised fee structure saw a manifold increase in the minimum fee in less than a year, while the roles and responsibilities of the DTs remained unchanged. The Informant alleged that the fee was increased unilaterally without any prior consultation with the Informant in advance. As a result, the Informant was unable to make any alternative arrangements, which resulted in the Informant not being able to file the offer document to raise working capital resources on time. Further, the Informant averred that there was a lack of clarity on the duration for which the annual fee would be payable in respect of NCDs having different maturities. According to the Informant, going by past practice, issuers, including the Informant, will be required to pay the total revised fees until redemption of NCDs having the longest maturity.

9. Further, the Informant averred that when it asked for an explanation regarding the increase in fees, OP-2 stated that the revised fee structure for the trusteeship fees had been fixed in light of the SEBI Circular dated 27.05.2019 (‘SEBI May 2019 Circular’) which required DTs to disclose on their websites the minimum fees charged for providing trusteeship services. The Informant alleged that, on the pretext of the SEBI May 2019 Circular, DTs unilaterally raised the fees in furtherance of an agreement under the aegis of OP-1 and imposed an anti-competitive pricing mechanism without providing any specific reason or background for the substantial increase.

10. It was alleged that OP-1 and its members have entered into an anti-competitive agreement, presumed to have appreciable adverse effect on competition (‘AAEC’) in India, by mutually agreeing to increase the fee structure for undertaking trusteeship services and preventing its members from charging a fee below the exorbitantly high pricing structure fixed by OP-1, thereby violating the provisions under Section 3(3) read with Section 3(1) of the Act. Such conduct enabled the members of OP-1 to extract maximum profits from the Informant and similarly placed entities.

11. Lastly, the Informant alleged that OP-1 enjoyed a dominant position by virtue of its structure and membership strength, which enabled it to operate independently of competitive forces in the relevant market. It was alleged that OP-1 had abused its dominant position in contravention of Section 4(2) of the Act by imposing an unfair price in the provision of trusteeship services.

12. Based on the above averments and allegations, the Informant prayed that the Commission direct OP-1 and all its members to discontinue and not re-enter into agreements fixing prices for providing trusteeship services, discontinue the alleged abuse of dominant position, and direct all DTs that are members of OP-1 to offer their services to their clients at the prices offered prior to 31.03.2021 for the next 24 months, with 5% increase for every 12 months from passing of the order. The Informant also filed a separate application seeking interim relief under Section 33 of the Act.

13. The Commission considered the matter in its ordinary meeting held on 06.10.2021 and decided to obtain the response(s) of OPs on the Information. The Commission also allowed the Informant to file its response by way of rejoinder, if any.

14. Subsequently, OP-1 filed its response dated 30.11.2021, stating that it comprises ten (10) registered members. It submitted that the increased defaults by a few financial institutions, which had resulted in a loss of hard-earned monies of investors, including retail investors, and the complications faced by DTs in expeditious enforcement of collateral for debt securities had prompted SEBI to review its regulatory framework for listed/proposed-to-be-listed debt securities, public issue of debt securities and DTs to adequately protect the interest of debenture holders. In furtherance of this objective, on 08.10.2020, a series of amendments were made to the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (‘ILDS Regulations’), the SEBI (Listing Obligations and Disclosure Requirements), 2015 (LODR Regulations) and SEBI (Debenture Trustee) Regulations, 1993 (‘1993 DT Regulations’), to ensure adequate disclosures and strengthen the role of DTs for effective discharge of their role (collectively referred to as the ‘DT Regulation Amendments’).

15. OP-1 further stated that the SEBI had issued following circulars to substantially modify the regulatory framework governing DTs and enhance their roles and responsibilities: (a) Standardisation of the procedure to be followed by DTs in the event of a 'default' by issuers of listed debt securities dated 13.10.2020; (b) Circular on contribution by issuers of listed or proposed-to-be-listed debt securities towards creation of "recovery expense fund" dated 22.10.2020; (c) Creation of security in the issuance of listed debt securities and "due diligence" by DTs as prescribed in the circular dated 03.11.2020; and (d) Monitoring and disclosures by DTs as prescribed in the circular dated 12.11.2020 (collectively ‘DT 2020 Circulars’).

16. OP-1 also stated that these enhanced roles and responsibilities led to a much higher cost burden for the DTs, as they had to: (a) upgrade the skill sets of their existing employees and hire additional employees to discharge their fiduciary role in line with the amended regulatory guidelines; (b) continuously monitor transactions' covenants on an ongoing basis; (c) coordinate with the appointed advisers/professionals/agencies/consultants on a real-time basis in connection with due diligence and periodical monitoring; (d) upgrade their enterprise resource planning (‘ERP’) systems to record and monitor breach in covenants, delay/default in payment/security creating, enabling system-related and system-generated alerts to issuers, debenture holders, rating agencies, etc.

17. The Commission considered the submissions of the Informant and the OPs and was of the opinion that the decision taken by OP-1 setting new pricing structure to be followed by its member debenture trustees, with any deviation therefrom resulting in adverse repercussions for such members, prima facie appears to fall foul of the provisions of Section 3(3)(a) read with Section 3(1) of the Act, whereby any agreement entered into or practice carried on or decision taken by any association of enterprises is presumed to have AAEC. Such collective decision-making by the association in commercial matters, interferes with the independent decision making of concerned economic players, thereby distorting competition in the market.

18. Regarding allegation of abuse of dominance by OP-1, the Commission noted that, as per SEBI’s website, there were 26 DTs as of 29.09.2021. The Commission further observed that given the market structure and number of players operating therein, there are number of entities in the market providing trusteeship services and, as such, the market is fragmented and no single debenture trustee can be said to be dominant. The Commission further noted that OP-1 has only 10 DTs, as its registered members. In any event, the Act does not envisage collective dominance as a form of abuse under Section 4 thereof.

19. Thus, the Commission, vide its order dated 23.12.2021 passed under Section 26(1) of the Act (‘Prima Facie Order’), being of the prima facie view that OPs have contravened the provisions of Section 3(3)(a) read with Section 3(1) of the Act thereof, decided to refer the matter to Director General (‘DG’) for investigation and submission of report within a period of 60 days from the receipt of the order. Further, vide a separate order dated 23.12.2021 passed under Section 33 of the Act, the Commission observed that no case whatsoever has been made out by the Informant which warrants grant of interim relief.

20. In the meanwhile, OP-1 filed an application dated 14.12.2021 seeking a reference by the Commission to SEBI for its opinion in terms of Section 21A of the Act. It was averred in the application that DTs are regulated by SEBI which is a specialised sectoral regulator and the issues involved in the matter fall within the regulatory framework of SEBI. Subsequently, vide letter dated 25.01.2022, addressed to the Commission, SEBI, inter alia, stated that it had received a letter from the Informant alleging potential cartelisation by SEBI-registered DTs in relation to the fees charged by them, and that it was examining the said allegations. Accordingly, SEBI requested the Commission not to proceed in the matter until SEBI conveyed its prima facie findings to the Commission in this regard.

21. The Commission considered the aforesaid application of OP-1 and letter of SEBI in its ordinary meeting held on 08.02.2022 and noted that investigation in the present matter was currently pending before the DG. Further, the Commission observed that the statutory mechanism for inter-regulatory co-ordination in terms of the provisions of Section 21A of the Act was not triggered in the matter and it may not be permissible to halt the investigation in the matter as requested by SEBI. Accordingly, vide separate orders of the same date, the Commission held the application filed by OP-1 seeking reference to SEBI as premature and was of the opinion that no direction/action is required to be passed at this stage on the application moved by OP-1 and the letter of SEBI.

22. Aggrieved with the Prima Facie Order, OPs preferred Writ Petitions (WP Nos. 3781 of 2022, 3791 of 2022, 3842 of 2022 & 3847 of 2022) before the Hon’ble High Court of Bombay inter alia challenging the Prima Facie Order, stating that the Commission had wrongly assumed jurisdiction in the matter and that the jurisdiction in the instant case, is only within the domain of the specialist sectoral regulator i.e., SEBI.

23. In order dated 08.04.2022, Hon’ble Bombay High Court inter alia stated that: