The Supreme Court (SC) has dismissed a special leave petition (SLP) filed by the Securities and Exchange Board of India (SEBI) against an order of the Securities Appellate Tribunal (SAT) in the CARE Ratings Ltd matter. In June this year, SAT reduced the penalty imposed by SEBI on CARE Ratings
to Rs10 lakh from Rs1 crore. The case concerns lapses in assigning a credit rating to non-convertible debentures (NCDs) of Reliance Communications Ltd (RCom).
However, a division bench of justice Indira Banerjee and justice JK Maheshwari clarified that the reduction made in the facts and circumstances of the case could not be a precedent in all cases.
Senior counsel Chander Uday Singh, representing SEBI, submitted that the penalty had been reduced from being adequate to a slap on the wrist by the SAT order. He further argued that the respondent is a credit rating agency (CRA), which rates the debt instruments. Based on their rating, the entire public, market, and body of investors make their decisions.
Justice Indira Banerjee said that “SAT has not held against you (SEBI), it has only reduced penalty.”
Mr Singh contended that CRAs, such as Moody’s Investors Service, had downgraded the ratings of NCDs issued by RCom. Yet, for almost six months, CARE Ratings continued to maintain the same ratings. Any lapse or delay in the credibility of information due to a lack of due diligence would put the hard-earned money of innocent investors at risk. Hence, the highest level of due diligence ought to be exercised by CRAs. He also argued that if RCom was not responding, it was all the more reason for CARE Ratings to disclose this fact on its website.
Mr Singh further added that CARE Ratings has already suffered a penalty in the case of IL&FS (Infrastructure Leasing & Financial Services) Ltd, where a penalty of Rs1 crore was imposed for gross negligence and sought time to place the previous case of IL&FS on record.
Advocate Somasekhar Sundaresan, appearing on behalf of CARE Ratings, objected to this placing on record of the IL&FS case, in the current case. He said, “If there is another order, those orders are subject to appeal, they will stand or fall on their merit and they are completely extraneous to decide whether this order is sustainable or not.”
CARE Ratings was publishing credit ratings for NCDs issued by RCom.
RCom had issued NCDs amounting to Rs2,000 crore, which had a tenure of seven years and were to mature in February 2019.
RCom defaulted on the repayment of the principal amount of Rs375 crore and interest of Rs9.7 crore due in February 2017 and March 2017, respectively. The delayed payment was made on 10 April 2017. In May 2017, CARE had downgraded RCom’s rating to ‘BB’ from ‘A-’ and after that to ‘D’.
It was alleged CARE Ratings delayed downgrading the ratings of NCDs issued by RCom.
International credit rating agencies such as Moody’s Investors Service had downgraded the ratings of RCom on 30 November 2016 and 26 January 2017 and Fitch Ratings had also downgraded it in December 2016.
Considering this sequence of events and other factors, SEBI sought comments from CARE Ratings and, after analysing the statements and taking into other factors, a show-cause notice (SCN) was issued in September 2018 alleging violation of Regulation 15(1) and Clauses (3) and (8) of Code of Conduct read with Regulation 13 of the CRA Regulations.
The SCN alleged that there was a failure by CARE Ratings to monitor the ratings and factors affecting the creditworthiness of the RCom on time, resulting in a significant delay in conducting the rating process and downgrading the ratings.
It was also alleged that even after a significant deterioration in the company’s financial results in the third quarter, the appellant did not proactively interact with the company seeking information regarding its financial and operational performance nor obtain a no default statement (NDS).
The rating agency, on its part, had argued that the performance of one quarter was not worth a revision in the ratings, especially when it was entirely due to external risk emanating from market penetrating pricing by a new entrant. It was also contended that RCom was expecting certain funds from the sale of its towers to Brookfield, which would reduce its debt liability. Therefore, a conscious decision was taken to wait for another quarter with regard to the performance RCom.
On 24 July 2020, SEBI imposed an Rs1-crore penalty after it found CARE Ratings had failed to monitor the factors affecting the creditworthiness of Reliance Communications on time. CARE Ratings moved the SAT to challenge the SEBI order.
While reducing the penalty amount in June 2021, SAT had said, “The charge is one of lack of due diligence and it is not a case where ratings were not downgraded. The ratings were downgraded by the appellants but not in a timely manner. There could be a case of carelessness or sluggishness or laxity in the manner in which the downgrading was done by the appellant but it is not a case of oversight.”
SAT had also noted that the same proceedings were also initiated against the bond issuer (RCom), culminating in a settlement under the SEBI Act. RCom had paid a penalty of Rs60 lakh.
