RCom NCD rating: SC upholds SAT order on Sebi penalty on Care Ratings

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September 07, 2021 2:45 AM

A Bench led by Justice Indira Banerjee, while dismissing Sebi’s appeal, said the reduction made in the facts and circumstances of the case cannot be a precedent in other cases.

The digital financial ecosystem is still an area where regulation is evolving and, therefore, the conversation must move beyond the purely self-congratulatory.The digital financial ecosystem is still an area where regulation is evolving and, therefore, the conversation must move beyond the purely self-congratulatory.

The Supreme Court on Monday upheld the Securities Appellate Tribunal (SAT)’s order that reduced the penalty imposed by Sebi on Care Ratings from Rs 1 crore to Rs 10 lakh in a case related to lapses in assigning credit rating to non-convertible debentures of Reliance Communications. However, The SC clarified the reduction of the penalty amount cannot be a precedent for other cases.

A Bench led by Justice Indira Banerjee, while dismissing Sebi’s appeal, said the reduction made in the facts and circumstances of the case cannot be a precedent in other cases.

Sebi had imposed the penalty on CARE Ratings 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. The SAT had in June approved the Sebi’s order with regard to the violation committed, but reduced the penalty, holding “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”.

Senior counsel CU Singh, appearing for Sebi, said the penalty amount could not have been reduced as credit rating agencies are the ones who give their ratings and on the basis of that investors make their decisions. He said Care Ratings had earlier suffered penalty in IL&FS cases as well and sought a week’s time to place it on record.

Singh told the SC that other credit rating agencies had downgraded the ratings of non-convertible debentures issued by RCom six months before Care Ratings, but it continued to maintain the ratings. Any lapse or delay in the credibility of information due to lack of due diligence would put hard earned money of innocent investors at risk. Hence, the highest level of due diligence ought to be exercised by credit rating agencies.

Senior counsel Somasekhar Sundaresan, appearing on the behalf of Care, opposed placing on record the case of IL&FS, involving Care Ratings. “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 decision whether this order is sustainable or not,” he argued.

The case relates to default by RCom on repayment of principal amount of Rs 375 crore and interest of Rs 9.7 crore that were due in February 2017 and March 2017, respectively.

Sebi had found that Care Ratings had failed to monitor the factors affecting the creditworthiness of RCom in a timely manner, resulting in a significant delay in conducting the rating process and downgrading the rating.

The rating agency had failed to initiate a review of its earlier ratings assigned to RCom even after the publication of third quarter of FY17 results, Sebi said.

In May 2017, CARE Ratings downgraded the ratings assigned to the NCDs issued by RCom to default. The results showed a major decline in cash accruals affecting its credit profile and major development in the telecommunications industry with the entry of Reliance Jio, denting the profit margins of all other players in the market, the regulator had said in its order.

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