Indian regulations mandate that companies raising debt appoint a so-called “debenture trustee” to protect the interests of investors. The trustees charge a fee from the companies issuing the debt and make independent due-diligence checks on them.
The three under investigation – SBICAP Trustee Company, Axis Trustee and IDBI Trusteeship – are among the leaders in the business in India overseeing hundreds of billions of dollars by rendering trustee services for not just debt securities, but also real estate and other investment funds.
The Competition Commission of India (CCI) in a confidential December order stated the Trustees Association of India – a body where the trio are founding members – last year “substantially” increased the fee for assisting companies raising debt and prevented members from going below a floor price, thereby hurting competition.
The association has launched a court challenge in Mumbai that seeks to quash the antitrust investigation directive it has termed “illegal” and “capricious”, according to court filings. The lawsuit will be heard on Thursday.
The antitrust probe and the impending court hearing, details of which have not been previously reported, could have ramifications on India’s nearly $500 billion corporate debt market by altering costs and affecting the way trustees operate.
A finding of cartelisation could lead to a fine of up to three times the profit in each year the fee was fixed by the trustees, or 10% of annual revenue for the period of violation, whichever is more.
SBICAP Trustee and IDBI Trusteeship didn’t respond to requests for comment. Axis Trustee, which is listed as President of the Trustee Association in documents, also didn’t respond.
The CCI, which does not publicly disclose its cartel probes that are underway, did not respond to an email seeking comment.
COMPLAINT BY BORROWER
The antitrust case was triggered by a complaint from Indian gold financing company Muthoot Finance. When it wanted to raise debt in August last year, Muthoot received a costing proposal which was 300% higher than previous rates.
The documents showed that when Muthoot protested, IDBI said in an August email “the new pricing structure is decided by the Trustee Association”, adding that “any deviation by us in quoting the price would lead to adverse repercussion on us”.
The CCI, while ordering its investigation, noted: “Such collective decision making by the association … affects competition in the markets.”
In February it asked the trustee association to submit their meeting records and explain its role in fixing a minimum fee structure, one document showed.
The trustee association has defended itself in the court filings by saying the higher fee was justified as their cost burden had gone up over the years due to enhanced regulatory compliance requirements.
It said it had informed the market regulator SEBI last year that the pricing structure will be decided by trustees, but it “will not be below the benchmark floor price”.
The group said that the matter, by law, can only be investigated by a “specialised sectoral regulator”, in this case SEBI.
SEBI, already “provides enough checks and balances to deal with any price rigging (cartelisation),” it argued.
Before approaching the antitrust body, Muthoot also lodged a complaint against the trustees with SEBI, which is still being reviewed, the documents stated.
SEBI and Muthoot did not respond to Reuters queries.