In a landmark ruling holding financial intermediaries accountable, the state consumer disputes redressal commission at Chandigarh has directed Catalyst Trusteeship Ltd, along with credit rating agencies CARE Ratings and Brickwork Ratings, to compensate an investor for losses suffered due to the default of Dewan Housing Finance Corporation Ltd (DHFL) on its AAA-rated non-convertible debentures (NCDs).
The consumer commission held all three entities liable for deficiency in service and unfair trade practices, ordering Catalyst Trusteeship to pay Rs204,880 along with interest at 9%pa (per annum) to the complainant, Jyoti Khemka, a Chandigarh-based investor. CARE Ratings and Brickwork Ratings have been directed to pay Rs1 lakh each, with an additional Rs33,000 jointly awarded towards litigation costs.
In an order issued on 31 July 2025, the state commission bench of justice Raj Shekhar Attari (president) and Rajesh K Arya (member) says, "....in the present case, though Catalyst Trusteeship had placed on record notices on record to plead its promptness in taking action but there was no decisive action having been taken by Catalyst Trusteeship to protect or enforce the rights of complainant, the debenture-holder. This delayed response raised serious concerns regarding the trustee's diligence, commitment and compliance with its statutory and contractual duties, as has been observed by the High Court of Bombay. Thus, Catalyst Trusteeship failed to act with the urgency and seriousness the situation demands, thereby undermining the trust and protection debenture-holders are entitled to expect from their trustee. In such circumstances, judicial scrutiny may become necessary to ensure that the interests of the debenture-holders are not irreparably prejudiced due to the rustee's inertia... The failure to initiate enforcement measures, secure the charged assets or communicate timely with stakeholders constitutes a serious breach of trust. The inertia displayed by Catalyst Trusteeship amounts to an abdication of its statutory role, which caused grave and irretrievable harm to the complainant-debenture-holders' interest."
"The conduct of opposite parties no2 and 3 (CARE Ratings and Brickwork Ratings), being credit rating agencies (CRAs), is in flagrant violation of their statutory and fiduciary responsibilities as enshrined under the SEBI (Credit Rating Agencies) Regulations, 1999, particularly Regulation 13, which mandates that CRAs must carry out their functions with due diligence, transparency, and integrity. The abrupt and drastic downgrade of credit ratings, without any contemporaneous abnormal financial developments or material disclosures by the issuer company to justify such a fall, raises a serious question about the analytical rigour and objectivity of the rating exercise. The absence of any cogent explanation or methodology disclosing the rationale behind the rating actions further supports the conclusion of gross negligence on their part," the bench says.
Jyoti Khemka, wife of IAS officer Dr Ashok Khemka, had purchased 342 secured NCDs issued by DHFL in 2016, investing Rs3.42 lakh. These debentures were marketed to retail investors through a public issue that carried ‘AAA’ ratings from both CARE and Brickwork, indicating the highest degree of safety. Catalyst Trusteeship, the appointed debenture trustee, was responsible for monitoring compliance and protecting the interests of debenture-holders.
The NCDs were scheduled to mature on 16 August 2019, with a promised annual interest return. However, as early as 2018, reports began surfacing of DHFL's weakening financial health. Despite the deteriorating situation, the credit rating agencies maintained the top ‘AAA’ grade until February 2019, when the ratings were suddenly downgraded to ‘D’, the lowest possible grade, mere months before maturity.
On the date of maturity, DHFL defaulted on both the principal and the accrued interest, leaving Ms Khemka and other retail investors in the lurch. While she received a partial payment of Rs168,584 during the subsequent proceedings, a significant portion remained unpaid.
Ms Khemka filed a complaint before the district consumer forum in Chandigarh which was initially dismissed in March 2023. She then appealed before the state commission, challenging the earlier dismissal and alleging that the debenture trustee and rating agencies failed in their duty of care toward small investors by continuing to endorse the safety of the investment even after signs of financial distress emerged.
In its defence, Catalyst Trusteeship denied all allegations and argued that it had discharged its responsibilities within the legal framework. CARE Ratings and Brickwork made similar claims, insisting they acted diligently and in accordance with regulatory norms. Piramal Capital Housing Finance Ltd, which later acquired DHFL through insolvency proceedings, also denied any wrongdoing.
The state commission, however, concluded that the sudden and drastic downgrade of the NCDs from ‘AAA’ to ‘D’ pointed to systemic lapses and that the investor had been misled into trusting the safety of the instrument. It held that the services provided by the debenture trustee and the credit rating agencies did not meet the standards expected of them, especially when dealing with public investors relying on expert assessments.
Ms Khemka has also raised concerns over the treatment of retail investors in the broader DHFL insolvency resolution process. In 2021, she filed an interlocutory application before the national company law tribunal (NCLT) in Mumbai, seeking to be heard as an affected debenture-holder. However, the application was never listed for hearing. She alleged that the DHFL administrator was using company funds to defend the credit rating agencies and trustee in ongoing legal proceedings, instead of protecting the interests of fixed deposit (FD) and debenture-holders.
In her earlier petition, Ms Khemka had described the situation as one where bankers and institutional creditors were given priority, while small investors were left to bear the brunt of DHFL’s collapse — despite having relied on audited statements, high credit ratings and regulatory assurances at the time of investment.
This consumer commission ruling now stands as a rare instance of accountability being enforced against credit rating agencies and debenture trustees — intermediaries that often play a pivotal role in building investor confidence but seldom face consequences when things go wrong.
The decision is also significant in the context of India’s shadow banking system, where lapses in governance, transparency and oversight have resulted in major defaults. It underscores the need for greater scrutiny of how AAA ratings are assigned and the responsibilities of trustees in safeguarding investor interests, especially those of retail participants with limited access to financial risk assessment tools.
While the financial compensation awarded may not fully offset the investor’s loss, the ruling sets an important precedent in establishing the principle that intermediaries cannot escape liability when their failures contribute to investor harm.
But... Here is the catch... TruCap is really making all efforts to repay investors money. They have been prompt and professional. Investors don't want to enforce legal proceedings because they trust TruCap. But because of the DHFL ruling, Catalyst is now trying to enforce legal proceedings even though investors are against it.
who have fought out their cases and got their dues back? It is right time to organise similar exercises between all default NCD holders and approach DHFL or Piramal Capital & Housing Finance Ltd (PCHFL) to whom entire corpus of DHFL was transferred. Waiting for some positive comments from other suffered NCD Holders.
- Hemant Shah ,Pune.
Mob.no.9921330963