2012 (12) TMI 888 - HC - Companies Law

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 ... Appointment of credit rating agents - non disclosure of methodology of rating of the petitioner's instruments - breach of obligation committed by respondent No.1 - whether the Trial Judge without adding, or allowing, the second respondent to intervene in the suit, is justified in discharging effectively, earlier interim order - Held that:- It appears from the records that no such notice was given to SEBI, and SEBI itself came forward with the application on which the impugned judgment and order was passed. Thus from initial perception of the learned Trial Judge it is clear that SEBI is required to be heard at the interlocutory stage. While overruling the submission of Mr. Sarkar, Advocate appearing for the appellant Trial Judge has jurisdiction to vary, modify or discharge the interim order passed earlier even without formally adding second respondent as it is affected by the interim order in exercise of inherent power on the principle that action of the Court does not unjustly injure or affects anyone else. Admittedly the plaintiff-appellant have engaged two rating agencies for the said instruments and both of them in their own way have rated making gradation. Earlier respondent No.1 presently sole defendant graded AA, but this time the moment respondent No.1 sounded that this time the rating might be down graded to A+, the plaintiff terminated the two contracts alleging breach of obligation arising out therefrom and further not adhering to the norms and guidelines issued by SEBI. It is the case of the appellant-plaintiff that the moment contract was terminated the respondent No.1 attempted to publish such mala fide and arbitrary rating in the print and electronic media. Thus it is opined that without intending to bind this finding at the time of final hearing of the application before the Trial Judge that the plaintiff has to establish prima facie in a suit of this nature under the contract the first respondent has committed breach of obligation exists in favour of the appellant and lawful termination. It is not an ordinary contract governed by Indian Contract Act. Here once the contract is entered into the rating agents are bound to discharge their obligation in terms of the agreements conforming to relevant provision of the above regulations which have got statutory force. Keeping in view the aforesaid statutory obligation and having given considerable thought the balance of convenience overwhelmingly lies in favour of discharge of interim order, as it appears prima facie that the appellant of its own showing has said that in spite of proposed rating by way of downgrading does not affect its business on the other hand if the respondent No.1 is not allowed to discharge his duty under the statute it has to face the legal consequences. At this stage vacating interim order is quite justified. Moreover, admittedly another credit rating agency has been employed of international repute as per assertion of the appellant, therefore at present the appellant cannot have any reason of being affected or suffered irreparable injury. Unhesitatingly accept the logic of the learned Trial Judge as balance of convenience is in favour of discharge of the interim order. Regulation 29 clause (c) without any ambiguity empowers the respondent No.2 to investigate into the complaint received from the client in connection with any matter having bearing on act and omission of the credit rating agency - slightly modify interim order to the effect that in terms of the above section SEBI will look into the complaint whether it has been done following norms and also information and material supplied by the plaintiff bona fide or not. For this purpose notice for making enquiry shall be given to appellant who will be prejudiced. On enquiry if it is found that rating is done conforming the guidelines issued by it, and also the Code of Conduct in the said regulation then the respondent No.1 would be free to publish. 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.