SEBI Probe Finds 3 Rating Agencies Guilty in IL&FS Case, Fines Rs 25 Lakh Each

New Delhi: After more than a year of probe, market regulator Securities and Exchange Board of India (SEBI) on December 26, found three credit rating agencies (CRAs) guilty of their conduct while rating the debt instruments of the crisis-hit Infrastructure Leasing and Financial Services (IL&FS) before mid-2018 and levied a penalty of Rs 25 lakh each.

The market regulator found that the CRAs -- ICRA Ltd, India Ratings & Research and Care Ratings Ltd -- had not exercised their duties while rating IL&FS and its subsidiaries, which had exponentially increase its borrowings. It was only after IL&FS started defaulting on its debt obligations last year that the CRAs drastically downgraded its ratings.

The IL&FS group had a consolidated debt of over Rs 90,000 crore and as financial irregularities inside the group started emerging, the Central government in October last year appointed a new board, with Uday Kotak as Chairman, replacing the earlier management. The new board has been working on resolution of IL&FS entities. Earlier in December, Kotak had reiterated that the resolution would recover 50% of the overall dues of IL&FS.

On account of defaults committed by IL&FS and its IL&FS Financial Services (IFIN) on their obligations in respect of the commercial paper, inter-corporate deposits and also default on interest payments on its non-convertible debentures, SEBI observed that the rating agencies had given “over-reliance on the statements made by the Management of IL&FS”.

It was revealed that the ratings were placed under “Rating Watch Negative” only in August 24, 2018, and severe downgrading was given before the period despite deterioration in IL&FS entities liquidity conditions.

Stating that there was laxity and complacency on the part of the agencies SEBI noted: “CRAs continued to assign the highest possible rating (AAA) to the NCDs issued by IL&FS, based mainly on institutional parentage of IL&FS and the assurances given by IL&FS management.”

All the three CRAs were found to have given positive ratings till mid-2018 despite several warnings by IL&FS statutory auditors.

In July this year, SEBI had rejected the CRAs’ settlement applications which would have otherwise allowed them to settle the lapses against a fee without admission of guilt.

The collapse of IL&FS has sent shockwaves across non-banking financial companies in the country, which has cautioned the entire banking system. After IL&FS, financial irregularities in Dewan Housing Finance Corporation Ltd and India Bulls have also come to light.

Several government agencies, including the Serious Fraud Investigation Office, SEBI and Reserve Bank of India are probing the financial irregularities committed by the previous top management of IL&FS.