TaxTMI 
TaxTMI 
2020 (8) TMI 427
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...., unenforceable and ineffective and also seeks decree of mandatory injunction directing the defendant to withdraw the said credit rating rationales from the physical as well as electronic records of the defendant including on the world wide web. By the application under Order XXXIX Rule 1 and 2 CPC the plaintiff seeks an interim injunction in terms of prayers made in the suit. 3. The present suit and the application came up before this Court on 13th May, 2020 when summons in the suit were issued returnable before the learned Joint Register for 15th July, 2020 and in the application notice was issued returnable for 19th May, 2020. 4. On 19th May, 2020 learned counsel for the defendant entered appearance and stated that he had already prepared the reply and filed the same and liberty was granted to the learned counsel for the plaintiff to file rejoinder and the application was listed on 22nd May, 2020. During the course of arguments learned counsels for the parties agreed that even in the suit the parties have to lead no further evidence except the documents filed and since the arguments in the suit would also be based on the documents filed by the parties, the arguments be hea....
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...., 2020. So the two changes are in favour of the plaintiff and there is no negative rationale permitting downgrading of the rating. 7. The main business of the plaintiff is with Tamil Nadu Generation and Distribution Corporation Limited (in short 'TANGEDCO'). The major reason why the credit rating of the plaintiff company has been shown in the negative by the defendant in its letter dated 30th April, 2020 is that since TANGEDCO is stressed, the outstanding dues to be received by the plaintiff company are uncertain. Learned counsel for the plaintiff submits that TANGEDCO is a government concern and thus there can be no uncertainty to receive the outstanding dues. The plaintiff has a letter of credit in its against TANGEDCO for a sum of Rs.120 crores and merely because the plaintiff has presently not invoked the letter of credit it cannot be held that the receiving of the outstanding dues by the plaintiff from TANGEDCO is uncertain. 8. Referring to Clause-G (i) and (ii) of the agreement dated 15th June, 2016 between the parties, learned counsel for the plaintiff stated that once the plaintiff protested to the downgrading of the credit rating, the defendant could not have publish....
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....g symbol which indicates the potential/possible direction of the ratings over average time on the basis of foreseen development prospects. To formulate the opinion the analyst and the Rating Committee members are required to consider various factors, which include the credit strengths and credit challenges. The rating process requires a balance of publishing timely ratings that are predictive of an issuer's credit profile while avoiding precipitous ratings that are prone to significant reversals and lead to volatile and erratic ratings. Only after balancing the conflicting factors, the rating committee members who are independent professionals render their opinion based on their wisdom, knowledge and past experience and expertise, as a result of which the element of prognosis is inherent in a rating. Even the highest rated instrument carries certain degree of credit risks. Thus, a credit rating is a predictive opinion, dependent on a subjective and discretionary weighing of complex factors within an established methodology. Though learned counsel for JPL argues that in terms of Regulation 21 read with Regulation 24(3) and (4) assignment of a rating is a decision of the Rating Commi....
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....S OF RATING AGREEMENT A. Definitions i. "Agreement" refers to the written terms and conditions of this agreement, rating requisition form and all schedules and annexures, each as may be amended, supplemented or modified from time to time. ii. "Credit Rating" or "Rating" refers to evaluating the capabilities of a company to timely meets its debt obligations expressed in the form of standard symbols or in any other standardized manner, assigned by ICRA and used by your Company, to comply with a requirement specified by the SEBI (Credit Rating Agencies) Regulations, 1999 and relevant guidelines & circulars issued by Reserve Bank of India, from time to time. A Credit Rating does not address any other risk, including liquidity risk, market value risk, or price volatility. Any Rating must be construed solely as a statement of opinion and not a statement of fact. A Credit Rating is not an offer, invitation, inducement or recommendation to purchase, sell or hold any securities or otherwise deal or act in relation to any issue or Bank Facility(ies), to which this Agreement relates or otherwise in connection with any associated transaction, entity, or matter. Refer....
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....ue or demand draft (DD) or transfer through electronic medium in favour of ICRA Limited. All Fees as mentioned herein shall not be refundable under any circumstances. ICRA reserves the right to revise the Rating Fee/ Surveillance Fee payable by you under this Agreement subject to maximum of 0.05% of the Rating Fee/Surveillance Fee. C. Disclaimer I. Disclaimer of advice: We are not: (a) providing an audit opinion any financial, legal, tax, advisory, consultative or business services; or (b) advising on structuring, drafting or negotiating transaction documentation. You should take independent legal, tax, financial and other advice when structuring, negotiating and documenting transactions. You agree that neither a Rating nor any discussions with ICRA's analysts constitutes advice on business operations. II. Disclaimer of warranties: All information, including the Ratings and other communications, provided by ICRA relating to you, this Agreement, the facility or the Transaction is provided "as is" and without representation or warranty of any kind in particular, neither ICRA nor its agents make any representation or warranty, express o....
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....bject to surveillance and ICRA shall not be responsible for the continuous monitoring/surveillance of the assigned Rating. IV. You will only use each requested Rating for its intended purpose and will not, for example, represent an issuer rating as a securities rating. E. Tenure of Agreement I. This Agreement shall remain valid till the earlier of the date that the Rating assigned is withdrawn or the date that there are no longer any obligations outstanding under the Bank Facility. This Agreement cannot be terminated by your Company once it has accepted the Rating. II. Notwithstanding the clause E (I) above, the provisions of clauses L (Warranty), M (Confidentiality); N (Applicant Confidentiality Unpublished ratings), O (Indemnification), P (Limitation of Liability), Q (Warranties with respect to information provided to ICRA), R (Use of information) and U (IV) shall survive any termination of the Agreement. F. Changes in Rating I. Subject to the terms and conditions of this Agreement, ICRA will keep the Rating under surveillance until the earlier of the date that the Rating is withdrawn or the date that there are no longer any o....
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.... reserves the right to disclose the Rating, whether accepted or not, as and when required by the appropriate government, statutory, regulatory, judicial and quasi-judicial authorities, auditors, bodies and/or stock exchanges where such disclosure is permitted or required by or under any law in force. In case of allegation of misstatement by your Company, ICRA shall have the right to disclose the assigned Rating in public documents and/or publicity material and/or other forum. H. Revalidation of the Rating I. The rating assigned to the Bank Facility of your Company shall require revalidation if there is any change in the size or structure of the Bank Facility. I. Suspension/withdrawal of rating I. ICRA shall suspend/withdraw the assigned Rating in accordance with its suspension/withdrawal policy in force. II. Suspension may be revoked on receipt of renewal request from your Company. III. Subsequent revival of the suspended rating will not be subject to any acceptance. M. Confidentiality I. ICRA's confidentiality: "Confidential Information" means any information regarding your Company or the Bank Facility rat....
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....n or entity except: (i) to your group companies, officers, directors, employees and agents; and (ii) as required by applicable law, or at the request of any governmental authority having jurisdiction. You will be responsible for any failure by any of your group companies, officers, directors, employees, or agents to comply with these confidentiality restrictions. If ICRA provides a revalidation that has not been publicly disclosed by ICRA, such revalidation must be kept strictly confidential, and should not be disclosed to any person or entity without ICRA's prior written consent. N. Applicant Confidentiality for Unpublished ratings The following additional confidentiality provisions are applicable to any unpublished rating or other opinion delivered by ICRA hereunder, i.e., any rating or other opinion not disclosed by ICRA to the general public at the time of delivery by ICRA, including, without limitation, any Rating during the 7 (seven) days acceptance period and thereafter in the event that the Company does not accept the Rating. For the purpose of this Agreement, "ICRA's Confidential Information" means any non-public informa....
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....p the rating under surveillance during the life time of bank facility. 17. Learned counsel for the JPL contends that JPL having not accepted the credit rating, ICRA was prohibited from publishing the same in view of Clause G of the Credit Rating Agreement. Clause G(I) of the agreement clearly stipulates that only on acceptance of the rating, the same can be published. Therefore, acceptance of the credit rating by JPL is a sine qua non for ICRA to publish the rating. Even on 30th April, 2020, JPL refused to accept the rating and hence, the same could not have been published. In case acceptance by JPL is not treated as a pre-condition for publishing the rating by ICRA, then Clause G(I) of the agreement between the parties would be rendered nugatory. Clause G(II) stipulates that ICRA has a right to publish the rating as and when required by government authorities or any other statutory authority. The impugned publication has not been done by ICRA pursuant to the requirement of any government or statutory authority. By publishing the credit rating, ICRA has violated Clauses M and N of the agreement providing for confidentiality. Reliance of ICRA upon Clause D to defend its action or....
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....sel for defendant further refers to Regulation 15(2) in this regard which mentions about changes in ratings. Additionally, Regulation 16 also mentions that all published ratings are subject to surveillance, meaning thereby "accepted" initial ratings which are published, have to be monitored'. The CRA regulations and the Master Circular provides for option of acceptance by the issuer at the time of initial rating but not during the course of surveillance. Even as per Clauses 3.3.6 and 3.3.9 of the Master Circular, surveillance of the rating is critical and dissemination of the rationale has to be completed within the specified time limit. Further, any delay in the time lines to disclose on the website affects the beneficiaries. Though time for acceptance by the issuer is provided in case of initial rating, however, no such time is provided in case of surveillance which mandates that the rating is to be disseminated within five working days of the decision of the rating committee. Thus, from the Master Circular of the SEBI itself, it is evident that the acceptance of the issuer is not required for dissemination of rationale for cases under surveillance. In the event of non-publicatio....
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....to assess the credit rating of the party which is called "surveillance rating" during the lifetime of the credit facility. This fact is further clarified from clause-B sub-clause (iii) which states that notwithstanding JPL's non-acceptance of the rating or failure to notify ICRA of its acceptance/non-acceptance, if JPL uses the rating for the purposes of availing a bank facility, the rating as awarded by ICRA would be deemed to have been accepted and JPL would be obligated to pay the surveillance fee. 22. Further, Clause-G (I) provides that ICRA is required to communicate to JPL its rating decisions in terms of the assignment or change in the rating in writing and whether to accept the same and use the initial rating will be upon the company. In case there is no protest and the rating is accepted, ICRA has a right to publish the rating or any change or suspension or withdrawal of the rating on its regular methods of dissemination. ICRA further reserves its right to disclose the rating, whether or not accepted by JPL as and when required by the government, statutory, regulatory or judicial or quasi judicial authorities etc. 23. Case of the ICRA is that it is only that only the....
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....y, or as may be specified by the Board from time to time.] (Emphasis Supplied) 25. A perusal of Regulations 15 and 16 which relates to the monitoring of the ratings and not initial rating reveals that the Credit Rating Agency is mandated to continuously monitor the rating unless the same is withdrawn, subject to the regulation 16(3) and the Agency is also mandated to disseminate the said information regarding newly assigned ratings through press releases and websites during the lifetime of securities related. Regulation 16 further mandates periodic reviews of all published ratings during the lifetime of the securities, unless the rating is withdrawn. Thus if the security subsists and is pending all published ratings are bound to be reviewed periodically even if the client does not cooperate with the Credit Rating Agency and complies with its regulation. Further the Credit Rating Agency cannot withdraw a rating as long as the obligations under the security rated are outstanding unless the company whose security is rated is wound up or merged or amalgamated with the another company or as may be specified by SEBI from time to time. 26. Further the Code of Conduct i.e. IOSCO C....
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....st, approaches another CRA for rating, the new CRA shall, in its Press Release, disclose the aspect of non-co-operation. 3.3 Continuous Disclosures and Reporting 3.3.1 xxx xxx 3.3.2 xxx xxx 3.3.3 The CRA shall also make a reference to SEBI regarding such suppression of information by the issuer/ non-cooperation of Issuer with CRA. Failure to make such reference shall be considered as aiding and abetting the Issuer in suppression of material information by the CRA which would be in contravention of Clause 12 of Code of Conduct of CRAs and may result in violation of the provisions of section 12A of the Securities and Exchange Board of India Act, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 by the CRA. 3.3.6. Timelines of review and Press Releases a. In order to enable CRAs to disseminate information on ratings promptly through press releases as per requirements of Regulation 15 and 16 of SEBI (CRA) Regulations, following is clarified: i. Initial Rating: Scenario Timelines - immediately but not later than Acceptance of Rating/ Appe....
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....ines specified in the CRA's Operations Manual/ Internal governing document. Details disclosed shall include the name of the issuer, name/ type of instrument, size of the issue, date of last review, reasons for delay in periodic review, hyperlink to the last Press Release, etc. 28. As noted above clause 3.3.6 refers to the requirement of CRA Regulations 15 and 16 and clarifies that the time for acceptance of rating/appeal for review of the rating by the issuer is five days of communication of the rating by CRA to the issuer and in case the rating is not accepted by the issuer within one month of communication of rating, the same shall be disclosed as non-accepted rating. However, on acceptance of the rating by the issuer, the same will be disseminated by press release on Credit Rating Agency's website and intimation to the Stock Exchange/Debenture Trustees within two days. However, in respect to periodic surveillance there is no provision of a period of one month from the date of communication wherein the issuer has to accept or not accept the rating and within five working days of the Rating Committee Meeting the rating has to be disseminated by press release on Credit Rating Ag....
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....ner therein was that no rating action should take place for three months till Covid-19 pandemic subsides and Covid-19 pandemic be not used as a basis for downgrading. The only relief granted by the Bombay High Court was that the petitioners therein were permitted to present their case before the next meeting of the Rating Review Committee. 32. Reliance of learned counsel for JPL on clauses (M) and (N) of the Rating Agreement between the JPL and ICRA to contend that publication of the rational breaches the confidentiality provisions is misconceived. Under clause (M) ICRA is entitled to publish its opinion and if an information is used as a part of rating rational, ICRA would be bound to disclose the same. Also JPL has placed on record no material to show that which piece of information supplied by JPL was classified as 'confidential' which has been published by ICRA. Further clause (N) does not pertain to the rating actions under surveillance and applies to initial rating which if not accepted is unpublished and based thereon no financial facility is raised. 33. Learned counsel for JPL further relied upon the decisions reported as 1973 (2) SCC 825 Delhi Development Aut....
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.... (iv) exposure to power off take and raw material availability. The decision of ICRA to downgrade the rating is not only perverse but arbitrary as ICRA has perversely relied upon non-signing of incremental Power Purchase Agreements (PPAs) and default in payment of TANGEDCO due to COVID-19 situation. 36. Learned counsel for JPL submits that though in the financial year 2020 there was no incremental signing of PPA by JPL however, its existing long term PPA of 810 MW continued to be in force. JPL has received timely payments for its invoices beyond August, 2019. Payments for February 2020 invoices were due on 8th April, 2020 and the payments for March, 2020 were due on 4th May, 2020 for a sum of Rs.113 crores and Rs.118 crores respectively. Due to COVID-19 situation TANGEDCO, resulting in reduced collection paid 50% of the February, 2020 invoice and verbally requested JPL not to enforce the letter of credit. While awarding the credit rating ICRA failed to note the rating drivers in favour of JPL, that is, (i) additional income of about 430 crores per year from JSPL by way of interest on loans, w.e.f. the 1st quarter of 2019-2020, which gives a quantum jump to the loan service....
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....har. 38. Refuting the contentions of learned counsel for JPL, learned counsel for ICRA submits that the relevant factors to be considered to ascertain the credit worthiness of JPL were duly considered by ICRA. A credit rating agency is required to keep track of all important changes relating to the client companies and monitor closely all relevant factors that may affect the credit worthiness of the issuer and reliance is thus placed on the ICRA Regulations Code of Conduct-clause-8; Master Circular of SEBI-clause-2.3.1 and clause 2.3 of IOSCO CRA Code. ICRA's risk analysis framework for thermal power producers requires balancing of various complex factors such as (i) business risk drivers, which include operating risk such as fuel availability and pricing risk; demand and tariff risk which includes consideration of cost competitiveness; counter-party credit risk; competitive position; past track record; and force majeure risk; (ii) industry risk drivers, which includes regulatory risk; (iii) financial risk drivers, which includes: adequacy of future cash flows; profitability; leverage and coverage indicators; liquidity and financial flexibility; tenure mismatches and risks relat....
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....red moderate while awarding the rating rational of July, 2019, was considered stretched in the rational dated 30th April, 2020. It is the case of ICRA of that all reasonable factors were considered and no arbitrary factor was considered. 40. From the agreement between the parties, CRA Regulations of SEBI and master circulars, it is evident that the rating provided by any rating agency is an independent opinion of an expert body on the likelihood of the issuer to reimburse the principal and pay the interest on its debt obligations on the due dates in the future. As per Regulation 2(q) of the CRA Regulations, to formulate an opinion on the credit rating, the analyst and the Rating Committee are required to consider various factures, some of which represent credit strengths and other factors which represent credit challenges. Consequently, the analysts and the rating committee balance such conflicting factors and exercise their independent professional judgment, by relying on, amongst other things, their past experience, to apply these various factors to the available information, in the specific context of that point in time and consider likely outcomes. 41. As per ICRA, the ra....
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....ver 45% of its overall revenues (including revenues from a medium-term PPA of 200 MW which expired in August-2019). Given the high dependence of revenues and receivables from the state distribution utilities, Plaintiff faces the risk of an elongated receivable cycle. More specifically, delays in payments from TANGEDCO resulted in an increase in receivable turnover period for the Plaintiff from 121 days in FY2018 to 167 days in FY2019 and further to 200 days in FY2020E. As per the latest position of receivables shared by the Plaintiff (month-wise dues and payments received during FY2020), defendant noted that realisation of energy bills had regularised after August 2019, on implementation of the Government of India's directives of LC-backed power purchases by Discoms. However, some lags in clearance of bills in the recent months together with significant amounts blocked towards past dues continue to constrain Plaintiff's overall receivables position. Sizeable amount of funds blocked in the receivables continue to have a bearing on the Plaintiff's liquidity profile, which remains stretched, as reflected in consistently high working capital limit utilisation averaging at 93% in 9M FY2....
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.... regardless of other credit positives" (emphasis supplied) 43. As against the reasons for ICRA to downgrade the rating of JPL one of the contentions of JPL is that ICRA failed to consider the SEBI Circular dated 30th March, 2020 which provided relaxations for compliances under CRA Regulations, due to the COVID-19 pandemic and moratorium permitted by the RBI as under: 1. In view of the developments arising due to COVID-19 pandemic and in light of the moratorium permitted by Reserve Bank of India (RBI) (vide notification no. RBI/2019-20/186, dated March 27, 2020) on loan servicing, working capital facilities etc. for three months, a need for temporary relaxations in compliance by CRAs is felt. Accordingly, it has been decided to grant relaxations from the requirements stipulated vide circulars as under: 2. Recognition of Default A. Currently, CRAs recognize default based on the guidance issued vide SEBI circular dated May 3, 2010 and November 1, 2016. B. In view of the nationwide lockdown and the three month moratorium/deferment on payment permitted by RBI, a differentiation in treatment of default, on a case to case basis, needs to be made as t....
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....cedural delays in approval of the moratorium on the loans by the landing institutions. In the present case as per JPL itself, since it is in essential services the services or the consumption of the power of JPL continued and hence due to the lockdown there was no lockdown in the services of JPL. The delay of repayment of the dues by TANGEDCO, major service provider of JPL, was not on account of COVID-19 situation but that being a government agency, the payment by TANGEDCO due to the reduced collection was upto 50% by February, 2020. The said stretch situation was even prior to the lockdown and thus on the said stretch situation of the liquidity, the lockdown had no bearing. Thus if the delay in payment received by JPL was solely on account of lockdown, JPL would have been entitled to the said relaxation however, the primary basis of the assessment was that even in the pre-lockdown situation payments being received by JPL were in stretched situation. Even in the rating awarded in the year 2019, ICRA clarified that if the receivables of JPL did not increase, the repayment would be stretched. Admittedly in this year there was no new agreement entered into by JPL to supply of further ....
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....ICRA is not a comparative rating between the various power sectors but an individual credit rating of JPL based whereon JPL took the loan and merely because the entire sector is stressed would not mean that JPL is not stressed and so the credit rating should not be downgraded. 47. Though learned counsel for JPL repeatedly stated that JPL is in possession of letter of credit for a sum of Rs.140 crores, however, the fact remains that it is the case of the JPL itself that based on the oral request of TANGEDCO, JPL has not encahsed the letter of credit. 48. Learned counsel for JPL has relied upon the table noted herein below to show that the criteria required to be considered remained unchanged or had improved in the year 2020 however, still the credit rating was downgraded. The comparative chart of the criteria is as under: Positive Aspects in 2019 Negative Aspects in 2019 (i) Increased activity on tenders floated for the long/ medium-term power tie-ups in the country over the past one year. (JPL emerged as the L1 bidder for 515 MW) (i) Inability of Jindal Power Limited (JPL) to secure long/ medium-term power purchase agreements (PPAs) for two-thirds of its 3,400- MW....
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....nce the two important factors that have weighed in the opinion of ICRA alsoto downgrade the rating i.e. there is no incremental increase in PPAs of JPL and that the receivables from TANGENDCO which is JPL's major client are elongated resulting in a stretched liquidity, cannot be said to unfounded or irrelevant. 50. As regards the plea of JPL that favourable steps have been taken by the Government of India to address the issue of delayed payment by various State Electricity DISCOMS, the impugned order before this Court wherein the new credit rating was maintained at BBB was issued on 30th April, 2020 however, the declaration by the Finance Ministry in this regard to extend the loan of Rs.90,000 crores to the power sector under the Atam Nirbhar Scheme was after the review order dated 30th April, 2020 and a subsequent event which cannot be utilized to hold the earlier declaration as illegal. 51. Though learned counsel for JPL has also vehemently argued that repayments have increased in the financial year 2019 from Rs.497 crores to Rs.690 crores in the financial year 2020 which is likely to be increased by Rs.800 crores in the financial year 2021 however, the opinion cannot b....