Court allows investor notification re rating, SEBI probe upheld, publication barred, appeal disposed

The court upheld the discharge of the interim order, directing SEBI to investigate the complaint regarding the rating's compliance with guidelines and bona fides. SEBI was instructed to complete the investigation within a fortnight, and until then, the publication of the rating was prohibited. The court allowed the appellant to inform investors that the rating was done pursuant to the court's order, not under the terminated agreement. The appeal was disposed of with no order as to costs.

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Issues Involved:
1. Validity of the termination of agreements by the appellant.
2. Legality of the credit rating downgrade by the first respondent.
3. Jurisdiction and authority of SEBI in the dispute.
4. Appropriateness of the interim order and its discharge by the Trial Judge.
5. Balance of convenience and irreparable injury considerations.

Detailed Analysis:

1. Validity of the Termination of Agreements by the Appellant:
The appellant claimed that the agreements with the first respondent, a credit rating agency, were validly terminated due to the respondent's breach of various provisions of the contract and SEBI guidelines. The appellant argued that the first respondent did not employ appropriate methodology and failed to assess relevant information regarding the appellant's performance, leading to an arbitrary downgrade of the credit rating. The appellant also engaged another credit rating agency, CARE, which allegedly complied with the contractual obligations and provided a proper rating.

2. Legality of the Credit Rating Downgrade by the First Respondent:
The appellant sought declaratory reliefs to invalidate the credit rating downgrade from AA to A+ by the first respondent, claiming it was done in bad faith and as a retaliatory measure following the termination notice. The appellant argued that the downgrade was arbitrary and not in line with the standards applied by other rating agencies, which had provided higher ratings. The first respondent, however, contended that its obligations extended beyond the contractual terms to include statutory duties towards investors and the public, as mandated by SEBI regulations.

3. Jurisdiction and Authority of SEBI in the Dispute:
The second respondent, SEBI, intervened, asserting its statutory duty to protect investors under Sections 11(1) and 11(2) of the SEBI Act, 1992. SEBI argued that the credit rating agency must continue to publish and review ratings throughout the lifetime of the securities, irrespective of the termination of the contract. SEBI highlighted that the regulations oblige the agency to rate securities even without cooperation from the issuer, marking such ratings as "Unsolicited" if necessary. SEBI's intervention was deemed necessary by the Trial Judge, who noted that SEBI should have been notified about the suit and interim order.

4. Appropriateness of the Interim Order and Its Discharge by the Trial Judge:
The Trial Judge initially granted an interim order restraining the first respondent from publishing the downgraded rating. However, upon SEBI's application, the Trial Judge discharged the interim order, emphasizing the statutory obligations of the credit rating agency under SEBI regulations. The appellant argued that the interim order should not have been vacated without formally adding SEBI as a party and without giving the appellant an opportunity to counter SEBI's application. The Trial Judge justified the discharge of the interim order, considering the statutory obligations and public interest.

5. Balance of Convenience and Irreparable Injury Considerations:
The court assessed the balance of convenience and irreparable injury, concluding that the balance of convenience favored discharging the interim order. It was noted that the appellant's business was not adversely affected by the proposed downgrade, as investors continued their investments. On the other hand, preventing the first respondent from publishing the rating could lead to legal consequences under SEBI regulations. The court found that allowing the publication of the rating, subject to SEBI's investigation, was justified to avoid penal measures against the first respondent.

Conclusion:
The court upheld the discharge of the interim order, directing SEBI to investigate the complaint regarding the rating's compliance with guidelines and bona fides. SEBI was instructed to complete the investigation within a fortnight, and until then, the publication of the rating was prohibited. The court allowed the appellant to inform investors that the rating was done pursuant to the court's order, not under the terminated agreement. The appeal was disposed of with no order as to costs.

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