Buyers beware, intermediaries be scared

In a recent landmark judgment, the State Consumer Disputes Redressal Commission, Chandigarh, ruled that market intermediaries, such as debenture trustees and credit intermediaries, can and will be held accountable for any financial losses faced by investors due to the complacency or negligence of the intermediaries. This is a seminal ruling that potentially reshapes the entirety of India’s financial ecosystem, clearly safeguarding the interests of naïve investors like me and you, who could perhaps fall prey to all the varnish that is dished out in the name of product selling. A mere disclaimer that the ‘Investments are subject to market risk’ does not absolve the credit rating agencies or any intermediaries, who tend to gloss over major developments only to ensure their commission. To extrapolate the caveat emptor doctrine, which essentially applies to the sale of goods, would be ludicrous and subvert the other sacrosanct aspects of law like ‘good faith and factual transparency’ that underpin ‘commercial market contracts’. 

The verdict arose from the case of Chandigarh resident Jyoti Khemka, who haemorrhaged money after investing in Dewan Housing Finance Corporation Limited (DHFL) debentures after the company defaulted in 2019. A market intermediary plays an important role and acts as a lighthouse, directing the flow of investments from an investor who ploughs his/her hard-earned money only to seek a decent return; therefore, it is imperative that the intermediary recognises its own responsibilities and pays for any loss incurred by the investor directly or indirectly attributable. We, as lawyers, could have a field day debating the ‘foisting of liability on the intermediary’ on the grounds of ‘whether the negligence was a proximate cause’ or ‘whether a reasonable duty of care was employed’ but as an ethicist, I would strongly assert that it is an ‘unfair practice for an intermediary to keep silent’ when the investor should have been sounded out of a possible impending financial debacle.

In 2016, Khemka invested Rs3.42 lakh in DHFL’s non-convertible debentures, having faith in its ‘AAA’ rating as well as the security that was supposed to be provided under the protection of catalyst trusteeship. However, despite early warning signs issued in 2018, CARE Rating as well as Brickwork Ratings continued to retain their top-tier rating of ‘AAA’, only to eventually plunge to a ‘D’ grade rating in early 2019, only a few months before default. Due to DHFL’s failing to redeem the debentures in August 2019, Khemka was left with only a partial recovery of her investment, which amounted to Rs1.68 lakh. This amount was also recovered through the insolvency process. 

Upon facing such financial loss, Khemka decided to approach the consumer forum to seek redressal on the grounds of ‘deficiency of service’. To her dismay, the district forum dismissed the case in 2023. On her appeal, this decision was overturned by the State Commission on 31 July, 2025. The verdict clearly upheld the principle that intermediaries can be held accountable for investor losses if they occur as a direct result of negligence of the intermediaries like the trustee and rating agencies accountable.

The commission regarded catalyst trusteeship to be negligent and held that it did not act in the capacity expected from it as a debenture trustee. Debenture trustees are, in fact expected to keep an eye on covenants, demand improvement measures when companies showcase a sense of liability and, if necessary, even enforce security to protect the investors. Catalyst trusteeship’s callousness amounted to a breach of trust and service as ruled by the commission. Fiduciary duty is owed to the investor just as a lawyer to a client or a doctor to a patient. It is not long before the Supreme Court or any of the High Courts declare such personal investment contracts to be an uberrimae fidei contract, meaning ‘of utmost good faith’. Importantly, the commission called out the rating agencies as well and held that their role is of equal value within the ecosystem. 

Reiterating the importance of ratings, it was clearly conveyed that an AAA rating is not just a label but a signal that beckons thousands of retail investors. The sudden gravitational fall from ‘AAA’ to ‘D’ reflects a failure to ensure timely surveillance and a lack of adequate communication regarding possible risks. Regardless of the fact that ratings are essentially opinions – one cannot forget that these ratings are derived through a rigorous evaluation and analysis. This ruling is truly significant because not only does it focus on blaming the defaulter, but it also enhances the scope of accountability, leading to those who are supposed to be the builders of trust between corporations and investors. 

I often participate in debates on national TV channels, and one such show was in Hindi – Consumer Awareness, anchored by Kavita Thapliyal on ET Swadesh (a Channel of Times Network). This topic was taken up by her, where I, along with other experts, was happy to express that this decision would go a long way in expanding the scope of ‘corporate liability’. By proving that intermediaries can be held liable, the commission has enforced a cardinal principle: corporate clarity is not a choice, but a mandatory duty owed by every party that is involved. 

Market intermediaries like trustees, auditors and even rating agencies are expected to be conscience keepers within the market. Explicit disclosure of details, clear communication and time-to-time reporting must become the new norm. Yet, the most important implication of the judgment is that the retail investors now have a precedent to cite in order to seek redressal through legal pathways, when their financial losses are a direct consequence of intermediary negligence. 

It is a broadly known fact that markets run on trust. Whether it be a trustee’s name on a debenture certificate or a rating symbol, it comes with a responsibility, and it serves as a promise to the investors of vigilance, authority, and guarantee. If this promise is broken, it won’t be long before the market collapses. The commission’s verdict serves as a stark reminder that there is no room for nonfeasance within the market, especially when thousands of investors are putting their trust and, above all, their hard-earned money in companies, relying on these intermediaries. More recently, the Supreme Court has cured a legislative anomaly of a 2002 amendment to the earlier Consumer Protection Act, 1986 by stating that the interim orders passed between 15 March 2003 and 20 July 2020, like final orders, have the force of law just as a decree of a civil court. Applying the principles of statutory interpretation, it held that this was a casus omissus (a case omitted or not provided for) and that the court can fill in the legislative hiatus by applying purposive construction to uphold the objectives of the statute. This clearly demonstrates that the Supreme Court is all for the consumer and any beneficial legislation, such as the Consumer Protection Act, 2019, should be given the widest possible interpretation to benefit the consumer and rein in the errant parties for ‘deficiency of service’, as the commission did in the case of the victimised investor. 

In an age where short-term profit is quite honestly prioritised over market integrity, this judgment serves as a wake-up call and reasserts that conscientious behaviour is of paramount value, which lays the foundation for a resilient market boom, where the ‘investor is king’. As Potter Stewart, the great American Supreme Court judge says, ‘ethics is knowing the difference between what you have a right to do and what is right to do’. 

The author is a corporate lawyer and president, Council for Fair Business Practices