Sebi slaps Rs25 lakh penalty each on ICRA & CARE in IL&FS case

In two separate adjudication orders issued on Thursday, Sebi accused the rating agencies of failure to exercise due diligence, ensure proper care and exercise independent professional judgment in order to achieve and maintain objectivity and independence in the rating process.

The regulator also noted that the default in IL&FS has occurred due to “lethargic indifference and needless procrastination and laxity” of the two credit rating agencies.

“The law does not permit any allowance to be made for such lethargic indifference and needless procrastination as found in this case. The brazen failure as found in this case, had clearly defeated the purposes of the Regulations that is investor protection and orderly development of the securities markets,” the order for CARE Ratings said.

Similarly, in the case of ICRA too the regulator noted that the “brazen failure” had defeated the purpose of regulations. “The exposure of IL&FS, at the relevant times, was critical to the financial stability as its share in total exposure of banks to NBFC sector was fairly high,” the SEBI order said.

The case relates to the default by IL&FS and its subsidiary IL&FS Financial Services on their obligations in respect of the commercial paper, inter-corporate deposits (ICDs), and interest payments related to the non-convertible debentures (NCDs).

Sebi, in his show-cause notice to the rating agencies observed that the rating agencies failed to assess the extent of damage caused by default committed by Infrastructure Leasing & Financial Services Limited and its subsidiary company IL&FS Financial Services Ltd (IFIN) on their obligations in respect of the Commercial Paper (CP), inter-corporate deposits (ICD) and also default on interest payments on its nonconvertible debentures(NCDs), 

Sebi undertook an examination with respect to the role of the credit rating agencies (CRAs), including the CRAs in assigning rating to various NCDs of IL&FS. It was observed that IL&FS had defaulted on its obligations in respect of the CP and ICDs which were due for payment on 14 September 2018. 

Subsequently, IL&FS also defaulted in the interest payments on its NCDs on various dates, ie, 17, 21, 26 Sand 29 September 2018. 

Sebi observed that the CRAs had downgraded the ratings of the NCDs issued by IL&FS on various occasions. However, in assigning the ratings at various stages, the CRAs placed excessive reliance on the submissions of the management of IL&FS, the information provided by the management of IL&FS with regard to updates on the status of implementation of various projects / deals / fund raising plans such as signing of agreement, decisions made during its board meetings etc and failed to carry out independent due diligence to ascertain the veracity of the updates provided by the management of IL&FS. The rating agencies also failed to keep track of the various disclosures available on the website of BSE, as made by IL&FS from time to time. 

IL&FS in its notice to the CRAs, on 2 August 2018, had observed that the board of directors of IL&FS, at its meeting on 21 July 2018, approved equity infusion up to Rs4,500 crore by way of rights issue. Further, IL&FS, in the disclosure made to BSE, had disclosed about the resignation of Ravi Parthasarthy and appointment of Bhargava as its non-executive chairman but had not disclosed the approval of the aforesaid equity infusion up to Rs4,500 crore by way of rights issue. 

However, in the disclosure made to BSE with regard to the outcome of the said board meeting, IL&FS had only disclosed information regarding approval of fund raising by way of public issue of secured redeemable NCDs, for an amount not exceeding Rs5,000 crore, of which there was no mention in the aforesaid press release. 

It was alleged that the abovementioned disparity in the disclosures made by IL&FS in its press release and the information submitted to BSE had, prima facie, warranted greater due diligence and care on the part of the CRAs in order to ascertain the veracity of the updates provided by the management of IL&FS to the CRAs. However, the two rating agencies failed to take note of the abovementioned disparity in the disclosures made by IL&FS. 

The regulator examined the role of the credit rating agencies, including CARE Ratings and ICRA, in assigning rating to various NCDs of IL&FS. SEBI noted that a credit rating agency is expected to provide an independent evaluation of the creditworthiness of the debt securities issues.

It also observed that the financial parameters of the IL&FS and its group companies especially, short-term borrowings, debt-equity ratio, current maturities of long-term debt, operating profit, monetisation of assets, were not as conducive or healthy as assumed by the rating agencies.