Sebi, on Tuesday increased the penalty amount to 1 crore each on three rating agencies, ICRA, CARE and India Ratings, in connection with over-dependence on statements submitted by IL&FS which lead to lapses on their parts while assigning credit rating to the non-convertible debentures (NCDs) of IL&FS. In December 2019, Sebi had imposed a fine of 25 lakh each on the three rating agencies - ICRA, CARE Ratings and India Ratings and Research in the matter.

The crisis at diversified IL&FS, whose board was superseded by the government, uncovered in September 2018 and since then, the company as well as related entities have come under the regulatory lens.


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, according to several experts. Sebi examined the order passed by Adjudicating Officer (AO) and observed that the penalty levied by AO appeared to be erroneous and not commensurate with the overall impact these violations had on the market. In view of the same, the competent authority granted approval to review the AO order and accordingly the regulator issued show cause notices to rating agencies, "calling upon the reasons why the penalty amount should not be enhanced".

The case relates to the default 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).

In three separate orders on Tuesday, the market regulator said that the lapses on the side of ICRA, CARE and India Ratings while rating the securities of IL&FS and its subsidiary IL&FS Financial Services (IFIN) have resulted in severe financial loss to investors.

"Lapses on the side of the the three credit rating agencies, while rating the securities of IL&FS and IFIN have resulted in real and severe financial loss to investors. It has shaken up the investors’ faith in the reliability of credit ratings in the context of the corporate debt market," said Sebi in the notice.

The regulator, further added ,"Had these agencies 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 IL&FS is a "systemically important" Non-Deposit Accepting Core Investment Company registered with RBI and lends and invests in IL&FS Group Companies and IL&FS operated through more than 250 subsidiaries which in turn operated in wide range of sectors including engineering and construction, financial services, transportation, energy etc.

While there are other companies also engaged in engineering and construction, the scale, diversity of operations and business model of the IL&FS group makes it a kind of a unique company with no real comparable peers in India, it added. IL&FS was a big conglomerate with significant borrowings and as observed from the balance sheet of IL&FS for the year ended March 31, 2018, it had a consolidated borrowing of over 91,000 crore.

According to the regulator, NCDs, which were given the highest rating by the rating agencies and which continued till August 2018, were abruptly downgraded to default grade in September, 2018. Sebi said the default by IL&FS and its steep downgrade by the rating agencies in a matter of 25-40 days has completely changed the risk perception of the corporate bond market.

As on the date of downgrading the ratings of NCDs and CPs of IL&FS and IFIN to 'D' on September 17, 2018, the outstanding amount of securities so rated by ICRA, India Ratings and CARE amounted to 11,725 crore, 16,270 crore and 20,942 crore, respectively, Sebi noted.

In the circulkar, Sebi said that the role of a CRA (credit rating agency) is that of a financial 'gatekeeper' and any inaccuracy in the rating processes adopted by the CRA has significant negative impact on the securities market.