Considering the heavy financial losses to investors because of the rating default default committed in rating Infrastructure Leasing & Financial Services (IL&FS) and its subsidiary company IL&FS Financial Services Ltd (IFIN), market regulator Securities and Exchange Board of India (SEBI) has increased its penalty to Rs. 1 crore on India Ratings and Research Pvt Ltd....
Considering the heavy financial losses to investors because of the rating default default committed in rating Infrastructure Leasing & Financial Services (IL&FS) and its subsidiary company IL&FS Financial Services Ltd (IFIN), market regulator Securities and Exchange Board of India (SEBI) has increased its penalty to Rs. 1 crore on India Ratings and Research Pvt Ltd. (IRRPL).
G Mahalingam, whole time member of SEBI passed three separate orders, which state, "I find that the lapses on the side of the notice (IRRPL), while rating the securities of IL&FS and IFIN have resulted in real and severe financial loss to investors. It has shaken up the investors' faith in the reliability of credit ratings in the context of the corporate debt market. Had the noticee downgraded the ratings at the appropriate time and thereby forewarned the investors, the impact of the default on investors who invested in AAA rated instruments, could not have been this severe. Considering the above, I am convinced that the case merits imposition of exemplary penalty provided under Section 15HB of the SEBI Act."
The order stated that the order of the Adjudicating Officer (AO) dated 26 December 2019 was erroneous to the extent it was detrimental to the interests of securities market, hereby impose a monetary penalty of Rs. 1 crore upon the noticee under Section 15HB of the SEBI Act.
Mr. Mahalingam further stated, "I note that substantial public interest was involved in the securities issued by IL&FS and the credit ratings thereon, which were relied upon by the investors to make investment decisions. However, the failure of the Noticee (IRRPL) to exercise adequate due diligence with respect to the assessment of the mounting credit risks of IL & FS in the light of its stressed balance sheet position and in turn, the failure to review and modify the ratings on time, so as to alert the market in advance, has resulted in abrupt downgrading of rating of these securities just before the default. In any case, a CRA cannot be heard to contend that its accuracy in ratings should not be relied upon by Institutional Investors."
In December 2019, the Adjudicating Officer (AO) had found that the Credit Ratings Agencies (CRAs), while assigning their credit ratings to the non-convertible debentures (NCDs) of IL&FS, failed to exercise proper skill, care and due diligence while discharging their responsibilities as a CRA and thereby violated the provisions of Regulation 24(7) and clauses 4 and 8 of the code of conduct of the CRAs, read with Regulation 13 of the SEBI (CRA) Regulations, and had hence imposed a penalty of Rs. 25 lakhs.
Until July 2018, India's credit rating companies had put out investment grade ratings on billions of dollars of corporate debt raised by the IL&FS group and its subsidiaries. It was observed by SEBI that IL&FS had defaulted on its obligations in respect of the CP and ICDs which were due for payment on September 14, 2018.
A Show Cause Notice (SCN) was issued January 28, 2020 under Section 15-I (3) of the SEBI Act, calling upon the IRRPL to show cause as to why enhanced penalty should not be imposed in terms of Section 15HB of the SEBI Act, 1992, for violation of the provisions of Regulations 13 and 24(7) and Clauses 4 and 8 of the Code of Conduct stipulated in Schedule III of CRA Regulations. The SCN, inter-alia, alleged that IRRPL failed to anticipate the mounting credit risks of the issuer and place the ratings accordingly to alert the market in advance, resulting in losses to investors and observed that the AO Order is erroneous and not in the interest of securities market. Accordingly, it was proposed to pass an order enhancing the quantum of penalty.