TaxTMI 
TaxTMI 
2022 (3) TMI 1658
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....g agency (hereinafter referred to as "CRA") registered with the respondent SEBI under Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 (hereinafter referred to as "CRA Regulations"). A joint inspection of the appellant was conducted by SEBI as well as the Reserve Bank of India (RBI) in the month of November 2018. The inspection period was from April 1, 2017 to September 30, 2018. During the inspection, inter-alia, it was found that the appellant violated the provisions of Code of Conduct for CRA's, SEBI Circulars dated June 30, 2017, dated November 1, 2016, dated June 6, 2018, and March 1, 2012. Various deficiencies / lacunae were found as detailed in the order. After issuing show cause notice, the adjudication proceeding was initiated in which the impugned order is passed. 3. We have heard Mr. Somasekhar Sundaresan, the learned counsel with Mr. Abhishek Venkatraman, Ms. Savani Gupte, Mr. Ajay Kumar, the learned counsel for the appellant and Mr. Gaurav Joshi, the learned senior counsel with Mr. Manish Chhangani, Mr. Ravi Shekar Pandey, Ms. Samreen Fatima, the learned counsel for the respondent. The details of the alleged violations and our fin....
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....s in the process of development of the technology platform and, therefore, for want of any specific provisions making technology platform mandatory the appellant cannot be found fault for the same. 7. Having heard both the sides, in our view, the order of the learned AO, in this regard cannot be sustained. During the relevant period, there was no mandate that the surveillance system should be in the form of technology platform. It appears that during the inspection the appellant simply claimed to have such a technology platform but failed to demonstrate the same. In view of the same the order as regard this default cannot be sustained. B. Delay in recognition of default of Non-Convertible Debentures (NCDs) of Diamond Power Infrastructure Ltd. (DPIL) 8. The appellant had rated Non-Convertible Debentures (hereinafter referred to as "NCDs") of Diamond Power Infrastructure Ltd. (hereinafter referred to as "DPIL") aggregating to Rs. 2752.94 crores. The allegations are that in the month of April 2016, the appellant had delayed the recognition of default of these NCDs. The appellant in April 2016, rated the NCDs as "BWR BB-". This rating would indicate that there was a mo....
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....he market was aware of DPIL's financial trouble. 11. Upon hearing both the sides, however in our opinion, the appellant did not remain vigilant in this regard. Not only, the appellant remained silent when SDR came into existence, but DPIL as well as the Debenture Trustee did not response to the email of the appellant but also Bank of Baroda, one of the DPIL's banker specifically intimated the appellant that account of DPIL classified as NPA. Still the appellant remained unmoved and relied on some oral alleged information from the Exim Bank that the account of the DPIL was "standard". The event of defaults are required to be recognized instantly; due diligence is required to be shown according to the CRA Regulations. Non-cooperation from the issuer and the Debenture Trustee should have immediately made the appellant alert of the situation. Above all when one of the banker of DPIL has cautiously in writing informed the appellant about the default, still the appellant did not move allegedly on the basis of certain oral responses from another bank. 12. The learned senior counsel for the respondent SEBI submitted that as per the RBI circular dated August 30, 2018, the bank is requ....
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....lant sought information from the issuer and thereafter published a press release maintaining the rating "BB" with "issuer not co-operating" dated March 14, 2018. The learned AO, therefore, concluded that the appellant should have carried out the review much earlier and, thus, violated the provisions of Regulations 15(1) and 24(7) of the CRA Regulations and clause 1.B of the SEBI circular dated June 30, 2017. 16. Regulations 15(1) and 24(7) of the CRA Regulations provides as under :- "15(1). Every credit rating agency shall, during the lifetime of securities rated by it continuously monitor the rating of such securities, unless the rating is withdrawn, subject to the provisions of Regulation 16(3)." "24(2)(7). Every credit rating agency shall, in all cases, follow a proper rating process. (7) Every credit rating agency, shall, while rating a security, exercise due diligence in order to ensure that the rating given by the credit rating agency is fair and appropriate." 17. Upon hearing both the sides, in our view, the finding of the learned AO cannot be upheld. The facts on record would show that while the appellant had already downgraded the NCDs to n....
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.... would not be applicable. In our view, SEBI's circular of 2018 was not applicable to the NCDs whose life remained only less than two years at the time of issuing of the circular. Therefore, withdrawal of rating by the appellant of these instruments would not be violation of the said circular. The circular specifically had no retrospective operation and, therefore, no fault can be found in this regard. The charge in this regard therefore fails. 20. Another charge under the same episode was that the appellant had not rated the NCDs at the time of withdrawal. The learned counsel for the appellant submitted that it was a bonafide human error and immediate steps were taken by the noticee and the appellant amended the standard form of agreements to incorporate such a condition as per guidelines issued by SEBI. The violation on this count therefore is an admitted fact, D. Failure to recognize default in NCDs ratings of Essel Group entities (hereinafter referred to as "Essel") 21. Some promoters had pledged the equity shares of Zee Entertainment Enterprises Ltd. (hereinafter referred to as "ZEEL") in issue of NCDs of Essel. However, around end of January 2019, there was a fall ....
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....ency to identify risks and inform the stakeholders in a timely manner. However, by not reviewing the rating, the appellant failed to show the actual picture and, therefore, in terms of the above provisions the violation had occurred. The appellant submitted that whether there should be a multi-notch or single multi downgrade is a matter left to the discretion of the rating agency since it renders an opinion and that cannot be assailed lightly merely because SEBI believed a different view is possible. Only if the rating is arbitrary and/or of a such a nature that no reasonable person would have arrived at the same, then and then only the rating agency can be blamed. In the present case, according to the appellant, because it took the decision bonafide not to treat the NCDs as a default for various factors like the satisfactory operation and financial performance of ZEEL; performance of the other companies of the Essel group; the promoters had the ability to monetize their stake in ZEEL for repaying the debt and neither the lender nor the debenture trustee disclosed that there was a default. It was further reasoned that a lender's decision to reschedule the term of repayment canno....
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....inted out that there was no clear internal stipulation or various assumptions like discount factor used to arrive at net present value, valuation of securities to be taken as collateral, etc. The inspection report had therefore recommended that the appellant may consider suitable policy stipulations in this regard. In the show cause notice, it was alleged that the methodology furnished by noticee as regards SO rating was sketchy in nature and lacked clarity on the various critical parameters. The appellant allegedly did not independently assess the enforceability, revocability and other important aspects of the underlying assurance while undertaking rating of SO. Further, it was alleged that the appellant awarded the top rating grades in respect of 12 SOs though in some cases there was default in the own credit obligations of the support providers to bank at some point of time or the other during the preceeding two years of the inspection. It was, therefore, alleged that there was violation on the part of the appellant in evaluating the strength of the support providers in a diligent manner. Table of parameters not being examined was also provided. Further, it was pointed out th....