Mumbai: The Securities and Exchange Board of India (Sebi) has enhanced the penalty against three rating agencies- ICRA,CARE and India Ratings and Research to Rs 1 crore each for their lapses in giving credit rating to non- convertible debentures of IL&FS.

“I find that the lapses on the side of the Noticee (India Ratings and Research),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. Had the Noticee 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 whole time member G Mahalingam said in his order. Sebi passed three separate orders on Tuesday in the matter.

Last year, the regulator’s adjudication officer had imposed Rs 25 lakh each against the three credit rating agencies. However, Sebi later decided to review the adjudication officer’s order.

Sebi member justified the enhanced penalty by saying that the role of a CRA is that of a financial ‘gatekeeper’. Any inaccuracy in the rating processes adopted by the rating agency has significant negative impact on the securities market.

As on the date of downgrading the ratings of NCDs ( non – convertible debentures)and CPs (commercial papers) of IL&FS and it’s subsidiary ILFS Financial Services (IFIN)to D on September 18, 2018, the outstanding amount of securities so rated by the Noticee(India Ratings and Research) amounted to Rs.16,270 crore, Sebi said.

“Imposition of penalty should have the objective of deterring the Noticee ( India Ratings) from repeating the violation, and serving as a deterrent to other similarly placed agencies,” Sebi member G Mahalingam said. “The impact of the violations committed by the Noticee is not limited to the monetary loss caused to the investors of NCDs issued by IL&FS but has had wider and larger ramifications on the investor confidence, the financial sector and the securities market as a whole. In fact, in the case on hand, the default by IL&FS and the steep downgrade by CRAs in a matter of 26 days has completely changed the risk perception of the corporate bond market.“

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