IL&FS scam: SEBI slaps Rs 25 lakh fine each on ICRA, CARE; flays rating agencies for failing to exercise due diligence

  • The case relates to the default committed by IL&FS and its subsidiary IL&FS Financial Services on their obligations in respect of the commercial paper, ICDs and on interest payments related to NCDs

  • The regulator said it is important to mention that IL&FS is a systematically important non-deposit-accepting core investment company

  • The exposure of IL&FS, at the relevant times, was critical to the financial stability as its share in total exposure of banks to the non-banking financial company sector was fairly high

New Delhi: Markets regulator SEBI on Thursday imposed a penalty of Rs 25 lakh each on rating agencies ICRA and CARE for failing to exercise "due diligence" while assigning credit rating to the non-convertible debentures of IL&FS.

The Securities and Exchange Board of India (SEBI) also said the default by IL&FS occurred due to "lethargic indifference and needless procrastination and laxity" of these rating agencies.

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

 IL&FS scam: SEBI slaps Rs 25 lakh fine each on ICRA, CARE; flays rating agencies for failing to exercise due diligence

Representational image. Reuters.

The regulator undertook an examination with respect to the role of the credit rating agencies (CRAs), including CARE Ratings Ltd and ICRA Ltd, in assigning rating to various NCDs of Infrastructure Leasing and Financial Services (IL&FS).

According to SEBI, IL&FS and its group companies' financial parameters, especially short-term borrowings, debt-equity ratio, current maturities of long-term debt, operating profit, and monetisation of assets, among others, were not as conducive or healthy as assumed by these rating agencies in their rating report or rating rationale.

They failed in conducting independent professional assessment while rating the NCDs of IL&FS and placed undue weightage on institutional parentage.

While assigning credit rating to the NCD of IL&FS, the two entities "failed to exercise proper skill, care and due diligence while discharging its responsibilities as a credit rating agency and violated the provisions of... code of conduct of the CRAs," the regulator said in two separate but similarly worded orders.

Further, they also "failed in exercising independent professional judgment in order to achieve and maintain objectivity and independence while 'rating' IL&FS and its instruments and in closely monitoring all relevant factors that might affect the creditworthiness of the issuers".

The regulator said it is important to mention that IL&FS is a systematically important non-deposit-accepting core investment company. It is in the business of raising and holding public funds.

The exposure of IL&FS, at the relevant times, was critical to the financial stability as its share in total exposure of banks to the non-banking financial company sector was fairly high. There was substantial public interest involved in the affairs of IL&FS considering its importance for financial stability.

Though there is no allegation of any mala fide on the part of these rating agencies, Sebi said the failure by them is blameworthy and serious considering the degree of responsibility bestowed upon it by the statute.

"Further, in the peculiar facts and circumstances of this case, the default has occurred due to lethargic indifference and needless procrastination and laxity of the noticee," the regulator said.

Accordingly, the SEBI has slapped a fine of Rs 25 lakh each on CARE and ICRA.

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Updated Date: Dec 27, 2019 11:01:34 IST