Sebi enhances penalty on ICRA, CARE over lapses in rating IL&FS

Sebi on 26 December had found these rating agencies guilty of excessively relying on assertions of the IL&FS management, not applying independent professional assessment, getting comfort from the parent company and not noticing disparities in public disclosures made by IL&FS. The Sebi officer imposed a penalty of ₹25 lakh each on ICRA, CARE and India Ratings.

The Sebi board later disapproved of the low quantum of penalty and sent fresh showcause notices to these three rating agencies on 28 January under section 15(I), the Sebi Act. Under this section, 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. After examining the matter, the Sebi board can enhance the quantum of penalty imposed.

The Sebi whole time member in the order passed on Tuesday held that the lapses of rating agencies in rating instruments of IL&FS and ILFS Financial Services (IFIN) 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 (rating agencies) 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," said G. Mahalingam, whole time member, Sebi in the order.

The agencies had assigned IL&FS the highest rating of AAA before the default in September 2018, even though its unit had defaulted in June of that year. 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.

Sebi in its order on Tuesday also held that the impact of the violations committed by the rating agencies is not limited to the monetary loss caused to the investors of Non-Convertible Debentures (NCDs) issued by IL&FS but has had wider and larger ramifications on the investor confidence, the financial sector and the securities markets as a whole.

"In fact, in the case on hand, the default by IL&FS and the steep downgrade by CRAs (rating agencies) in a matter of 43 days has completely changed the risk perception of the corporate bond market," said Sebi in the order.