IL&FS Case: SEBI Raises Penalty To Rs 1 Crore Each On ICRA, CARE, India Ratings
The crisis at diversified IL&FS, whose board was superseded by the government, came to light in September 2018 and since then, the company as well as related entities have come under the regulatory lens.
The regulator, in December 2019, imposed a fine of Rs 25 lakh each ICRA, CARE Ratings and India Ratings and Research Co. in the matter saying the default by IL&FS occurred due to "lethargic indifference and needless procrastination and laxity" of these rating agencies. While the regulator came down heavily on the rating agencies with sharp observations but it was felt that the same was not reflected in penalty, according to several experts.
SEBI examined the order passed by Adjudicating Officer and observed that the penalty levied by them appeared to be erroneous and not commensurate with the overall impact these violations had on the market.
In view of the same, the competent authority granted approval to review the officer’s order and accordingly the regulator issued show cause notices to rating agencies, "calling upon the reasons why the penalty amount should not be enhanced".
The case relates to the default by IL&FS and its subsidiary IL&FS Financial Services on their obligations in respect of commercial paper, inter-corporate deposits as well as on interest payments related to non-convertible debentures .
In three separate orders on Tuesday, SEBI said that the lapses on the side of ICRA, CARE and India Ratings while rating the securities of IL&FS and its subsidiary IL&FS Financial Services have resulted in real and severe financial loss to investors.
The regulator, further, said it has shaken 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," SEBI noted.
SEBI said IL&FS is a "systemically important" Non-Deposit Accepting Core Investment Company registered with RBI and lends and invests in IL&FS Group Companies and IL&FS operated through more than 250 subsidiaries which in turn operated in wide range of sectors including engineering and construction, financial services, transportation, energy etc.
While there are other companies also engaged in engineering and construction, the scale, diversity of operations and business model of the IL&FS group makes it a kind of a unique company with no real comparable peers in India, it added. IL&FS was a big conglomerate with significant borrowings and as observed from the balance sheet of IL&FS for the year ended March 31, 2018, it had a consolidated borrowing of over Rs 91,000 crore.
According to the regulator, NCDs, which were given the highest rating by the rating agencies and which continued till August, 2018, were abruptly downgraded to default grade in September, 2018.
SEBI said the default by IL&FS and its steep downgrade by the rating agencies in a matter of 25-40 days has completely changed the risk perception of the corporate bond market. As on the date of downgrading the ratings of NCDs and CPs of IL&FS and IFIN to 'D' on September 17, 2018, the outstanding amount of securities so rated by ICRA, India Ratings and CARE amounted to Rs 11,725 crore, Rs 16,270 crore and Rs 20,942 crore, respectively, SEBI noted.
Justifying the reasons for enhancing the amount of penalty, SEBI said the role of a CRA (credit rating agency) is that of a financial 'gatekeeper' and any inaccuracy in the rating processes adopted by the CRA has significant negative impact on the securities market. It, further, said the impact of the violations committed by the rating agencies is not limited to the monetary loss caused to the investors of 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.
According to the regulator, the adjudicating officer has failed to give due weightage to the magnitude of the loss caused to the investors, despite the same being a specified parameter under the SEBI Act.
Imposition of lighter penalties on these rating agencies, tends to create a disadvantage for the other CRAs who may have complied with the law. "The Board needs to safeguard market integrity, and when scams of this size occur, which questions and challenges the regulatory and supervisory framework put in place with respect to CRAs, it is but imperative, to subject the conduct of CRAs to tight scrutiny and restore investor confidence by enhancing the penalty," SEBI said.
While assigning a credit rating to the NCDs of IL&FS, the three entities failed to exercise proper skill, care, and due diligence while discharging its responsibilities as a credit rating agency and violated the provisions of code of conduct of the CRAs, the regulator noted. Accordingly, the Securities and Exchange Board of India has imposed the penalty of Rs 1 crore each on the three rating agencies.