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Supreme Court dismisses SEBI SLP against the order of Securities Appellate Tribunal lowering penalty levied on credit rating agency

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The Supreme Court today has dismissed a Special Leave Petition filed by the Securities and Exchange Board of India (SEBI) against the order of the Securities Appellate Tribunal, Mumbai, whereby the Tribunal had reduced the penalty imposed on CARE Ratings Ltd from Rs 1 crore to Rs 10 lakhs for violating Regulation 15(1) and Clauses 3 and 8 of the Code of Conduct for Credit Rating Agencies under the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999.

A Division Bench of Justice Indira Banerjee and Justice J.K. Maheshwari clarified that the reduction made in the facts and circumstances of the case cannot be a precedent in all cases.

Senior Advocate Chander Uday Singh, appearing on the behalf of SEBI, submitted that the penalty has been reduced from being effective to a slap on the wrist, he further argued that the respondents are a Credit Rating Agency (CRA), who rate the Debt Instruments, on the basis of their rating the entire public, market and body of investors make their decisions.

Justice Indira Banerjee: ‘SAT has not held against you (SEBI), it has only reduced penalty.’

Singh further argued that CRAs, such as Moody’s Investors Service, had downgraded the ratings of Non-Convertible Debenture issued by Reliance Communication Ltd (Rcom) 6 months before CARE Ratings Ltd. He further added if Rcom was not responding, it was all the more reason for CARE Ratings Ltd to disclose this fact on their website.

Singh further submitted CARE Ratings have suffered a penalty in the case of IL&FS ltd, where a penalty of Rs 1 crore imposed for Gross Negligence and sought time to place the case of IL&FS on record.

Advocate Somasekhar Sundaresan, appearing on the behalf of CARE Ratings Ltd, objected to the placing on record the case of IL&FS, involving CARE Ratings stating: “If there is another order, those orders are subject to appeal, they will stand or fall on their own merit and they are completely extraneous to decision whether this order is sustainable or not.”

CARE Ratings Ltd is a Credit Rating Agency that began operations in 1993. CARE Ratings were publishing credit ratings for Non-Convertible Debentures issued by Reliance Communication Ltd (Rcom) amounting to Rs 2000 crore which had tenure of 7 years and were to mature in February 2019.

It was alleged CARE Ratings delayed downgrading the ratings of Non-Convertible Debenture issued by Rcom on May 22, 2017 the rating was downgraded by 2 notches to BB from A-, on May 30, 2017 the rating was downgraded 6 notches to D.

International credit rating agencies such as Moody’s Investors Service had downgraded the ratings of RCom on November 30, 2016 and January 26, 2017 and Fitch Ratings had also downgraded it in December 2016.

Moody’s Investors Service had downgraded the ratings of Non-Convertible Debenture issued by Reliance Communication ltd (Rcom) 6 months before CARE Rating.

On September 7, 2018, the SEBI issued a show cause notice, alleging violation by the appellant of Regulation 15(1) and Clauses (3) and (8) of Code of Conduct read with Regulation 13 of the CRA Regulations.

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The show cause notice alleged that there was failure on the part of CARE Ratings Ltd to monitor the ratings and factors affecting the credit worthiness of the company in a timely manner, resulting in a significant delay in conducting the rating process and downgrading the said ratings. It was further alleged, even after significant deterioration in the financial results in the third quarter of the company, CARE Ratings Ltd did not proactively interact with the company seeking information regarding its financial operational performance nor took steps to obtain a No Default Statement.

On July 24, 2020, the SEBI Adjudicating Officer passed an order, imposing a penalty of Rs 1 crore for violating Regulation 15(1) and Clauses 3 and 8 of the Code of Conduct for Credit Rating Agencies under the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999.

The Securities Appellate Tribunal, Mumbai on June 9, 2021 affirmed the order of SEBI, with regard to the violation committed, but reduced the penalty from Rs 1 crore to Rs 10 lakh. The Tribunal held, “It was a case of lack of due diligence for not having acted in a timely manner. We are of the opinion that the maximum penalty of Rs 1 crore is highly excessive, harsh and arbitrary and does not commensurate with the violations.”

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