Courts Update Supreme Court dismisses SEBI SLP against the order of...

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

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New Delhi Sept 6(ILNS): The Supreme Court today dismissed a Special Leave Petition filed by SEBI against the order of 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 comprised of Justice Indira Banerjee and Justice J.K Maheshwari however clarified the reduction made in the facts and circumstances of the case cannot be precedent in all cases.

Arguments Advanced:

Securities and Exchange Board of India (SEBI):

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: “Securities Appellate Tribunal has not held against you (SEBI), it has only reduced the penalty amount.”

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 Rating ltd. He further added, if Rcom was not responding, it was all the more reason for CARE Rating ltd to disclose this fact on their website.

Senior Advocate, Singh further submitted that CARE Rating ltd has suffered a penalty in the case of IL&FS ltd, where a penalty of Rs. 1 Crore was imposed for Gross Negligence and sought time to place the case of IL&FS ltd on record.

CARE Rating ltd:

Advocate Somasekhar Sundaresan, appearing on behalf of care Rating ltd, objected to the placing on record the case of IL&FS, involving CARE Rating ltd 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 decide whether this order is sustainable or not.”

Background:

CARE Ratings ltd. is a Credit Rating Agency that started operation in 1993. CARE Ratings ltd. was publishing Credit Ratings for Non-Convertible Debenture issued by Reliance Communication Ltd (Rcom) amounting to Rs. 2000 crore which had a tenure of 7 years and was to mature in February 2019.

It was alleged CARE Rating ltd 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 ltd.

On September 7, 2018, the Securities and Exchange Board of India (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.

The show-cause notice alleged that there was a failure on the part of CARE Rating ltd to monitor the ratings and factors affecting the creditworthiness 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 a significant deterioration in the financial results in the third quarter of the Company, CARE Rating 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, Adjudicating Officer of the Securities and Exchange Board of India passed an order, imposing a monetary 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.

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 lakhs. The Securities Appellate 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,” held the SAT, Mumbai./ILNS/SR/KR/SNG

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