IL&FS case: SAT refuses to stay Sebi proceedings in 2nd show-cause notice against Ind-Ra

The Securities and Appellate Tribunal (SAT) has refused to stay the proceedings initiated by Sebi seeking to impose a higher penalty on India Ratings in the IL&FS matter.

Regarding an appeal against Sebi order imposing Rs 25 lakh penalty on India Ratings, the tribunal directed the rating agency to deposit the amount with the regulator within four weeks, which would be subject to the result of the appeal.

In the IL&FS fiasco, the markets regulator had penalised three rating agencies, including India Ratings, for lapses in assigning credit ratings to non-convertible debentures of IL&FS, which had defaulted on repayments.

After imposing a fine of Rs 25 lakh in December 2019, the watchdog issued a second show-cause notice on January 28, 2020 asking India Ratings "to show cause as to why penalty should not be enhanced".

Subsequently, India Ratings approached the tribunal saying that the second show-cause notice should be stayed.

In an order passed on July 1, the tribunal said the regulator has the power to initiate proceedings under the Sebi Act.

"We, further, direct that the proceedings in pursuance to the second show-cause notice dated January 28, 2020 will continue and the respondent (Sebi) will pass appropriate orders after giving an opportunity of hearing to the appellant (India Ratings) either through physical hearing or through video conferencing...," the order said.

However, the tribunal said that any order that is passed by the respondent shall not be given effect to during the pendency of this appeal. With respect to the appeal filed against the Rs 25 lakh penalty, the tribunal directed Sebi to file a reply within four weeks. Three weeks thereafter is allowed to the rating agency to file the rejoinder, it noted.

"The matter would be listed for admission and for final disposal on August 20, 2020. In the meanwhile, we direct the appellant (India Ratings) to deposit a sum of Rs 25 lakh pursuant to the impugned order dated December 26, 2019 before the respondent (Sebi) within four weeks from today which would be subject to the result of the appeal," the tribunal said.

The case relates to the default committed 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).

While passing the order in December, Sebi noted that the exposure of IL&FS at the relevant times was critical to the financial stability as its share in the total exposure of banks to the NBFC (Non-Banking Financial Company) sector was fairly high. There was substantial public interest involved in the affairs of IL&FS considering its importance for financial stability, it had said.

The markets regulator had examined the role of the credit rating agencies in assigning ratings to various NCDs of Infrastructure Leasing and Financial Services (IL&FS).

According to Sebi, IL&FS and its group companies' financial parameters, especially short-term borrowings, debt to equity-ratio, current maturities of long-term debt, operating profit, and monetisation of assets were not as conducive or healthy as assumed by these rating agencies in their reports or rating rationale.

They failed in conducting independent professional assessment while rating the NCDs of IL&FS and placed undue weight on institutional parentage, the regulator had said.

Though there is no allegation of any mala fide intention on the part of these rating agencies, Sebi had said the failure by them is blameworthy and serious considering the degree of responsibility bestowed upon it by the statute.