Sebi fines rating agencies in IL&FS case
SEBI FOUND THE RATING AGENCIES GUILTY OF LAYING EXCESSIVE RELIANCE ON ASSERTIONS OF IL&FS MANAGEMENT
MUMBAI: The Securities and Exchange Board of India (Sebi) on Thursday fined rating agencies Icra Ltd, CARE Ratings Ltd and India Ratings & Research ₹25 lakh each for failing to exercise due diligence and for lapses in their duty to investors by not taking timely action when they rated the non-convertible debentures or NCDs of Infrastructure Leasing and Financial Services Ltd (IL&FS).
Spokespeople for the two rating agencies did not immediately respond to requests for comments from Mint. Mint was not able to reach out to India Ratings for comment till press time.
Such punitive actions are rare, as Sebi has responded to previous deficiencies in the conduct of rating agencies by either increasing regulatory compliances or allowing them to settle the issue via consent. Over the past three years, Sebi has changed the regulations governing credit rating agencies, or CRAs, at least six times.
In the case of IL&FS’ ratings, however, Sebi rejected the rating companies’ settlement applications on July 3, 2019, which will otherwise have allowed the CRAs to settle the lapses against a fee without admission of guilt.
The matter pertains to September 2018 when IL&FS defaulted on its debt obligations, triggering a liquidity crisis in the financial services market. The default by IL&FS and its subsidiaries left a ₹99,354 crore hole in the financial systems.
India Ratings, Icra, and Credit Analysis and Research Ltd (CARE), gave 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. CRAs had downgraded the bonds from high investment grade (AA+ in some cases) to default or junk.
The Sebi orders on Thursday found the rating agencies guilty of laying excessive reliance on assertions of IL&FS management, not applying independent professional assessment, and taking comfort from the company’s parentage. The rating agencies were also found guilty of failing to notice 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, and inability to monetize 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 laxity and complacency on the part of the rating agencies, Sebi added.