Money & Banking

IL&FS fiasco: SEBI hikes penalty on CARE, ICRA to ₹1 cr each

Our Bureau Mumbai | Updated on September 23, 2020 Published on September 23, 2020

Penalty levied erroneous... not commensurate with the overall impact these violations had on the market: SEBI

SEBI has hiked its penalty to ₹1 crore from the earlier ₹25 lakh on credit rating agencies ICRA and CARE for their lapses in assigning ratings to the non-convertible debentures of IL&FS, which later defaulted in payments. The IL&FS fiasco came to light in 2018 after which SEBI undertook an examination of the rating agencies.

SEBI said it had examined the order passed by its Adjudicating Officer (AO) and observed that the penalty levied was “erroneous and not commensurate with the overall impact these violations had on the market”.

In view of the same, the competent authority granted approval to review the AO order and accordingly the regulator issued show cause notices (SCNs) to rating agencies, “calling upon the reasons why the penalty amount should not be enhanced,” SEBI said.

According to SEBI, the AO had not considered the nature of work of a credit rating agency, the rating process, the relevant expertise of a credit rating agency and the professionals involved, and the limitations to its role and thus has failed to construe the implications on ‘orderly and healthy growth of securities market’ in its correct perspective.

SEBI’s harsh directions against the rating agencies did not match its penalty, the regulator felt.

“The Board needs to safeguard market integrity, and when scams of this size occur, which questions and challenges the regulatory and supervisory framework put in place with respect to CRAs, it is but imperative, to subject the conduct of CRAs to tight scrutiny and restore investor confidence by enhancing the penalty,” SEBI said.

SEBI said that the lapses by ICRA and CARE, while rating the securities of IL&FS and its subsidiary IL&FS Financial Services (IFIN), have resulted in real and severe financial loss to investors and affected their faith in the reliability of credit ratings in the debt market.

“Had the noticee (CARE and ICRA) downgraded the ratings at the appropriate time and thereby forewarned the investors, the impact of the default on investors who invested in AAA rated instruments, could not have been this severe,” SEBI said.

IL&FS and its subsidiary IL&FS Financial Services had defaulted on their obligations on commercial paper (CP), inter-corporate deposits (ICDs) and interest payments on non-convertible debentures (NCDs).

Justifying the reasons for enhancing the amount of penalty, SEBI said, “The role of a credit rating agency is that of a financial 'gatekeeper' and any inaccuracy in the rating processes adopted has a significant negative impact on the securities market.

As on the date of downgrading the ratings of NCDs and CPs of IL&FS and IFIN to ‘D’ on September 17, 2018, the outstanding amount of securities so rated by ICRA and CARE amounted to ₹11,725 crore and ₹20,942 crore, respectively, SEBI noted.

SEBI said the default by IL&FS and its steep downgrade by the rating agencies in a matter of 30-40 days had completely changed the risk perception of the corporate bond market.

The IL&FS board was later superseded by the government.

“The impact of the violations committed by the rating agencies is not limited to the monetary loss caused to the investors of NCDs issued by IL&FS but has had wider and larger ramifications on investor confidence, the financial sector and the securities markets as a whole,” said SEBI.

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Published on September 23, 2020
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