IL&FS scam: SEBI slaps Rs 25 lakh fine each on ICRA, CARE; flays rating agencies for failing to exercise due diligence

The Securities and Exchange Board of India (SEBI) also said the default by ILand FS occurred due to 'lethargic indifference and needless procrastination and laxity' of these rating agencies. New Delhi Markets regulator SEBI on Thursday imposed a penalty of Rs 2500000 each on rating agencies ICRA and CARE for failing to exercise "due diligence" while assigning credit rating to the non-convertible debentures of ILand FS. The Securities and Exchange Board of India (SEBI) also said the default by ILand FS occurred due to "lethargic indifference and needless procrastination and laxity" of these rating agencies. The case relates to the default committed by ILand FS and its subsidiary ILand FS Financial Services on their obligations in respect of the commercial paper, inter-corporate deposits (ICDs), as well as on interest payments related to the non-convertible debentures (NCDs). The regulator undertook an examination with respect to the role of the credit rating agencies (CRAs), including CARE Ratings Limited and ICRA Limited in assigning rating to various NCDs of Infrastructure Leasing and Financial Services (ILand FS). According to SEBI, ILand FS and its group companies' financial parameters, especially short-term borrowings, debt-equity ratio, current maturities of long-term debt, operating profit, and monetisation of assets, among others, were not as conducive or healthy as assumed by these rating agencies in their rating report or rating rationale. They failed in conducting independent professional assessment while rating the NCDs of ILand FS and placed undue weightage on institutional parentage. While assigning credit rating to the NCD of ILand FS, the two entities "failed to exercise proper skill, care and due diligence while discharging its responsibilities as a credit rating agency and violated the provisions of... code of conduct of the CRAs," the regulator said in two separate but similarly worded orders. Further, they also "failed in exercising independent professional judgment in order to achieve and maintain objectivity and independence while 'rating' ILand FS and its instruments and in closely monitoring all relevant factors that might affect the creditworthiness of the issuers". The regulator said it is important to mention that ILand FS is a systematically important non-deposit-accepting core investment company. It is in the business of raising and holding public funds. The exposure of ILand FS, at the relevant times, was critical to the financial stability as its share in total exposure of banks to the non-banking financial company sector was fairly high. There was substantial public interest involved in the affairs of ILand FS considering its importance for financial stability. Though there is no allegation of any mala fide on the part of these rating agencies, Sebi said the failure by them is blameworthy and serious considering the degree of responsibility bestowed upon it by the statute. "Further, in the peculiar facts and circumstances of this case, the default has occurred due to lethargic indifference and needless procrastination and laxity of the noticee," the regulator said. Accordingly, the SEBI has slapped a fine of Rs 2500000 each on CARE and ICRA.