IL&FS: SEBI May Levy Higher Penalties On Rating Agencies

The Securities & Appellate Tribunal of India (SEBI) has sent fresh notices to rating companies ICRA Ltd, India Ratings and Research Pvt Ltd and Credit Analysis and Research Ltd (CARE) under Section 15(I) of the SEBI Act.

The latest SEBI notices have been sent to the rating companies for failing to warn Infrastructure Leasing and Financial Services Ltd’s (IL&FS) bond investors in time about the scam.

Incidentally, it is a rare instance when SEBI has used its extraordinary powers under Section 15(I) of SEBI Act to review penalties imposed by its adjudicating officer.

In his 26 December 26, 2019 order, the SEBI adjudicating officer had found rating agencies guilty of excessively relying on assurances of the erstwhile IL&FS management, not applying independent professional assessment, getting comfort from the parent company as well as not noticing disparities in public disclosures made by IL&FS.

However, several SEBI board members including SEBI Chairman Ajay Tyagi, felt that the penalty of Rs 25 lakh decided by its adjudicating officer was quite low, after which fresh notices were sent to the rating companies.

By assigning IL&FS the highest rating of ‘AAA’ before the default in September 2018, though its unit had defaulted in June of that year, rating agencies had failed to warn the company’s bond investors.

IL&FS defaulted on a series of debt obligations, triggering a crisis in the shadow banking sector as banks and mutual funds cut their exposure to non-bank lenders.

Incidentally, under Section 15(I), the SEBI board can call for and examine records of proceedings if it considers the orders passed by the adjudicating officer erroneous and not in the interest of securities markets.

Also, after examining the matter, the SEBI board can enhance the quantum of penalty imposed, though such orders cannot be passed without giving the market entities concerned an opportunity to be heard.