November 13, 2019

SEBI May Impose Fines Of Upto Rs 1 Crore Under Section 15 HB On Credit Rating Agencies For Their Role In IL&FS Crisis

[ By Bobby Anthony ]


The Securities & Exchange Board of India (SEBI) is likely to pass an order against credit rating agencies ICRA, CARE and India Ratings, within two months for their role in the IL&FS crisis, under Section 15HB.

Incidentally, the SEBI had sent show cause notices to these rating agencies and started adjudication under Section 15HB. Under Section 15HB, the SEBI cannot bar any credit rating agency and can only impose a monetary penalty of Rs 1 lakh to Rs 1 crore.

Earlier, the SEBI had rejected consent applications for all three credit rating agencies, who had rated associate companies of IL&FS.

It may be recalled that the IL&FS Group had enjoyed an “AAA” ranking which is the highest credit rating until August 2018, just before its subsidiary IL&FS Transportation Network (IFIN) Ltd, defaulted on its payment obligations.

IFIN’s non-convertible debentures (NCD) worth Rs 4,800 crore, was first downgraded by CARE on August 16, 2018.

ICRA downgraded it paper on September 8, 2018. However, only a month prior to this, ICRA had reaffirmed its “A1+” rating on its commercial paper but cut the rating on downgrades long terms loans and debenture from AAA to AA+. In its remarks, the rating agency even praised the track record and prudent approach of the management.

In September 2018, after IL&FS defaulted on a Rs 1,000-crore loan from Small Industries Development Bank of India (SIDBI), the IL&FS Group's bonds were sharply downgraded by these credit rating agencies.

Meanwhile, there are indications that the Serious Frauds Investigation Office (SFIO) is likely to finalize action against credit rating agencies shortly and propose similar criminal action against rating agencies like the one it had taken against auditors.

It is likely that even the Enforcement Directorate (ED) could make rating agencies a party to the case in its next charge sheet.

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