Thu. Oct 29th, 2020

Regulation HK

Financial Regulator

SEBI Quadruples Penalties Against CRAs Over IL&FS Failures

2 min read

In December, SEBI issued INR 2.5 million penalty orders against ICRA, India Ratings & Research and Care Ratings. This has been raised to INR 10 million.

SEBI (Securities and Exchange Board of India) has raised the penalties against three credit rating agencies for due diligence failures and lapses in their duties to investors when they rated debt instruments issued by IL&FS.

IL&FS – India’s largest infrastructure lender – defaulted on its debt obligations in September 2018, leaving a INR 994 billion (USD 14 billion) hole in the financial system and triggering a liquidity crisis in India’s financial services market.

ICRA Ltd, India Ratings & Research and Care Ratings Ltd had rated given IL&FS non-convertible debentures their highest rating of AAA, even after one of its subsidiaries defaulted on payments. The debt instruments were later abruptly downgraded after IL&FS defaulted on its payment obligations, from high investment grade to default or junk.

In December, SEBI issued INR 2.5 million penalty orders against the three credit rating agencies, saying they placed excessive reliance on assertions of the management and institutional parentage of IL&FS, without applying independent professional assessment.

The rating agencies also failed to notice disparities in public disclosures made by IL&FS, and to alter their ratings despite deteriorating financial conditions of the group, including balance sheet stress, low cash flows, and an inability to monetise assets.

SEBI has now enhanced the penalty amounts for all three rating agencies to INR 10 million, saying the adjudicating officer failed to take into account the magnitude of the losses caused to the investors in the earlier penalty amounts.

“Had the noticee 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.

“It is but imperative, to subject the conduct of [credit rating agencies] to tight scrutiny and restore investor confidence by enhancing the penalty.”

Additional reporting from Bloomberg.

Leave a Reply

Your email address will not be published. Required fields are marked *