Securities and Exchange Board of India (Sebi) in two orders passed on Friday evening found credit ratings agencies or CRAs lapsing and lacking in conduct when they rated the Non Convertible Debentures or NCDs of Infrastructure Leasing and Financial Services Ltd (IL&FS).
In a rare instance the regulator levied a penalty of ₹25 lakh each on three rating agencies ICRA ltd, India Ratings & Research and Care Ratings Ltd for not exercising due-diligence and lapsing on their duties to investors by not taking timely rating actions.
Spokesperson of the two rating agencies did not immediately revert to request for comments from Mint. Mint could not reach spokesperson of India Ratings till press time.
It is rare as in the past Sebi for every deficiencies in conduct of rating agencies had either increased regulatory compliances or allowed them to settle the issue via consent. Sebi in past three years has changed the regulations governing CRAs atleast six times.
Sebi in the case of IL&FS ratings infact rejected their settlement applications on 3 July 2019 which would have otherwise allowed the CRAs to settle the lapses against a fee without admission of guilt.
The matter pertains to September 2018 when IL&FS had defaulted on its debt obligations, triggering a liquidity crisis in the financial services market. The default has left a ₹99,354 crore hole in the financial systems, which is the amount owed by IL&FS and its subsidiaries.
India Ratings & Research, ICRA, and Credit Analysis and Research Ltd (CARE), had given IL&FS the highest rating of AAA, even when its subsidiary, IL&FS Transport Networks, defaulted in June. There was also an abrupt downgrade in the ratings of bonds sold by IL&FS and related entities, after they defaulted on payment obligations in September. Credit rating agencies (CRAs) had downgraded the bonds from high investment grade (AA+ in some cases) to default or junk.
The Sebi orders have found the rating agencies guilty of laying excessive reliance on assertions of IL&FS management, not applying independent professional assessment, getting comfort from the parentage. The rating agencies were also found guilty for not noticing disparities in public disclosures made by IL&FS. The agencies did not alter ratings despite deteriorating financial conditions of the group such as stress in balance sheets, lack of cash flows, inability to monetise assets.
"Noticees (CRAs) continued to assign the highest possible rating (AAA) to the NCDs issued by IL&FS, based mainly on institutional parentage of IL&FS and the assurances given by IL&FS management," Sebi observed in the order.
There was an approach of laxicity and complacency on the part of rating agencies, Sebi added.
Sebi in the order also made a reference to a 22 November 2018 communication from Reserve Bank of India (RBI) to rating agencies where the central bank observed that the rating reliance was more on the commitments provided by the management on gradual reduction of group exposures through monetizing and refinancing of project debts at the underlying Special Purpose Vehicles (SPVs) as well as on access to the shares treasury infrastructure of IL&FS by IL&FS Financial Services (IFIN) which had failed to materialize beneficially.
In their defence the rating agencies said that rating is an opinion and reliance on company for facts is laid down in the regulations. Sebi did not find merits in these arguments.
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