Sebi considers penalty hike on rating agencies for lapses in IL&FS case

Markets regulator Sebi is considering to increase penalty on rating agencies in connection with lapses on their parts in assigning credit ratings to non-convertible debentures of IL&FS, officials said on Monday.

The crisis at diversified IL&FS, whose board was superseded by the government, came to light September 2018 and since then, the company as well as related entities have come under the regulatory lens.

Sebi in December 2019 slapped a penalty of Rs 25 lakh each on ICRA Ltd, CARE Ratings Ltd and India Ratings & Research Pvt Ltd and had said the default by IL&FS occurred due to "lethargic indifference and needless procrastination and laxity" of the rating agencies.

While the regulator came down heavily on the rating agencies with sharp observations but it was felt that the same was not reflected in penalty, officials said.

They believe that the fine imposed by the Securities and Exchange Board of India (Sebi) on these rating agencies was quite low given the seriousness of the lapses on their part following which fresh notices were sent to them.

In a filing to stock exchanges on Monday, CARE said it has received the show cause notice (SCN) from Sebi, "calling upon the reasons why the penalty amount should not be enhanced. This SCN is being reviewed by the company".

Similarly, ICRA on Friday said it received a show cause notice for enhancement of penalty amount. However, it could not be ascertained whether India Ratings also received similar notice from the markets regulator.

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

Sebi, in its order, had noted that the exposure of IL&FS at the relevant times was critical to the financial stability as its share in the total exposure of banks to the NBFC (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.

The markets regulator had examined the role of the credit rating agencies, including ICRA, CARE and India Ratings, in assigning a 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-to-equity ratio, current maturities of long-term debt, operating profit, and monetisation of assets were not as conducive or healthy as assumed by these rating agencies in their reports or rating rationale.

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

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