Stock market regulator Securities and Exchange Board of India (SEBI) has imposed a fine of Rs 25 lakh on each of three leading credit rating agencies for their failure to carry out proper due diligence when assigning credit ratings to the troubled Infrastructure & Leasing Finance Services (IL & FS).
SEBI fined India Ratings and Research Pvt Ltd, ICRA Ltd and Care Ratings for their failure to carry out independent due diligence to ascertain the veracity of updates provided by the management of IL & FS.
The exposure of IL & FS at the relevant times was critical to the financial stability as its share in total exposure of banks to non-banking financial companies (NBFCs) sector was fairly high, said SEBI. There was substantial public interest involved in the affairs of the IL & FS considering its importance for financial stability.
SEBI said the failure of rating agencies is blameworthy and serious, considering the degree of responsibility bestowed upon them by the statute. "Further, in the peculiar facts and circumstances of this case, the default occurred due to lethargic indifference and needless procrastination and laxity."
The brazen failure had clearly defeated the purposes of the regulations, that is investor protection and orderly development of the securities markets, SEBI added.
IL & FS, one of India's biggest NBFCs, started defaulting on some of its debt last year. The government took control of the IL & FS board as it considered necessary to protect the country's financial system and markets from potential collapse.
The shockwaves from a series of IL & FS defaults triggered big declines in debt and equity prices at other shadow lenders.
SEBI said that in the event of failure to pay the amount of penalty within 45 days, recovery proceedings will be initiated against the rating agencies under section 28A of the SEBI Act 1992 for the realisation of penalty along with interest by attachment and sale of their movable and immovable properties.
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