Delhi HC stays interim relief for Indiabulls on NCD payouts

Mumbai: A two-judge bench of the Delhi High Court on Wednesday stayed the interim relief given to Indiabulls Housing Finance from paying dues to investors who hold non-convertible debentures (NCDs) of the company, a development expected to have a wide-ranging impact on NCD issuers and debt mutual funds.

The ruling effectively means that borrowers will no longer be able to unilaterally defer payments to mutual funds. It also means that mutual funds, one of the biggest holders of NCDs, will be able to initiate coercive action against NCD issuers in case of delayed payments.

Indiabulls had moved the Delhi High Court in mid-April seeking relief from meeting its NCD obligations since it was unable to recover dues from its borrowers since the Reserve Bank of India (RBI) had imposed a moratorium on loan repayments.

The court granted interim relief to Indiabulls on April 21. This was challenged by market regulator Sebi and the Association of Mutual Funds in India (AMFI). The final hearing in the case has been scheduled for May 4.

“While the courts are conscious of challenges faced by the economy and by the public at large on account of the pandemic, it has shown erudition and circumspection in considering requests for moratoriums from repayment obligations,” said Shankh Sengupta, partner at law firm Trilegal, who is representing AMFI in the case. The mutual fund lobby was also represented by advocate Somasekhar Sundaresan.

Experts say the judgement will bring some respite to debt mutual funds who are facing intense pressure due to redemptions and drying up of liquidity in the debt markets. Some NCD issuers have been lobbying with Sebi to provide them a moratorium on the lines of what RBI did for bank loans.

“Mutual funds manage third party retail money and it may set a dangerous precedent to generally allow all the borrowers to not make the payouts on NCDs on account of moratorium,” said Tejesh Chitlangi, partner, IC Universal Legal.

To be sure, NCD issuers can still postpone their payment obligations to mutual funds, however they will have to take the fund houses into confidence while doing so.

Last week, Sebi issued a circular saying MFs could give some relief to NCD issuers on a case-to-case basis.