IL&FS crisis fallout: SEBI takes a dim view of role of credit rating agencies, may fine them only Rs 1 crore

In order to send across a message to the credit rating agencies after the implosion of IL&FS, the Securities and Exchange Board of India may pass an order against them in the next two months.

The markets regulator can only impose a maximum monetary penalty of Rs 1 crore against ICRA, CARE and India Ratings under the section in which action has been taken.

"SEBI has initiated action against credit rating agencies under Section 15HB but can only impose monetary penalty," a source told Moneycontrol.

SEBI had sent show-cause notices to rating agencies and started adjudication under Section 15HB. Under this section, SEBI cannot bar any credit rating agency and can only impose a monetary penalty of Rs 1 lakh to Rs 1 crore.

SEBI had rejected consent applications for all three credit rating agencies, who had rated associate companies of IL&FS. Last year, SEBI had issued show-cause notices to ICRA, CARE and India Ratings after the IL&FS mess surfaced.

"Rating agencies ICRA and CARE have already sent their MDs on indefinite holidays and India Ratings has already suspended some of its officials. On the other side, we have already strengthened the rules of credit rating agencies. You have to understand that, most of the time rating agency does not get the proper information from lenders or from a client which also create problem to do the rating. However, certainly in this case rating agencies are on the wrong foot on which department is taking action," a source told Moneycontrol.

A lawyer who deals in securities law, told Moneycontrol: "SEBI has rejected consent applications of rating agencies but penalising them under Section 15HB is almost similar to consent application."

Another lawyer, on condition of anonymity, told Moneycontrol  that SEBI should make cases against individuals involved in wrongdoings in IL&FS case.

"Taking action only against rating companies, especially when directors are foreigners, will not fullfill any objective," he said.

In its primary investigation, SFIO found many instances of quid pro quo and roundtripping.

The group was enjoying "AAA" - the highest credit rating - until August 2018, just before one of its subsidiaries, IL&FS Transportation Network Ltd, defaulted on its payment obligations.

Non-Convertible Debenture of IFIN worth Rs 4,800 crore was first downgraded by CARE on August 16, 2018. ICRA downgraded the paper on September 8, 2018. Strangely, just a month back, ICRA had reaffirmed its "A1+" rating on commercial paper but cut the rating on downgrades long terms loans and debenture from AAA to AA positive. In its remarks, the rating agency praised the track record and prudent approach of the management.

In September last year, after IL&FS defaulted on a Rs 1,000-crore loan from Small Industries Development Bank of India (SIDBI), the group's bonds were sharply downgraded by these credit rating agencies.

SFIO may also finalise action against credit rating agencies in the next two months’ time period and propose a criminal action rating agency as similar as they had taken against auditors.

Enforcement Directorate may also make rating agencies a party to the case in their next chargesheet, which is expected to be filed next year.