sebi:EAD-6/PM-AB/23/2018-19
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Facts / Headnote
Monetary penalty of Rs. 3,00,000 imposed on the Noticee under Section 15HB of the SEBI Act
Provisions invoked
- s. 15
- s. 15H
- s. 15J
Regulations
- Reg. 13
- Reg. 15(1)
- Reg. 16(3)
- Reg. 24(7)
- Reg. 20
Holding
The Noticee, a credit rating agency, was held liable for delay in recognition of default for Bhushan Steel NCDs, failure to downgrade Gayatri Projects NCDs to default, and incorrect disclosure of compliance with IOSCO Code, and a monetary penalty of Rs. 3,00,000 was imposed under Section 15HB of the SEBI Act.
Full text
Page 2 of 12 SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING 4. A Show Cause Notice dated January 12, 2018 (hereinafter referred to as “SCN”) was issued to the Noticee under Rule 4 of the SEBI Adjudicating Rules to show cause as to why an inquiry should not be initiated and penalty be not imposed under Section 15HB of the SEBI Act for the allegations as detailed in the said SCN. The SCN alleged the following: a) Delay in recognition of default: It was alleged that there was significant delay in recognition of default in the case of Bhushan Steel Limited (“BSL”) whose Rs. 500 Crore Non- Convertible Debentures (“NCD”) was rated by the Noticee. As per the records, the Debenture Trustee, Axis Trustee Services Limited, on its website, had disclosed about the default w.r.t. aforesaid NCD on November 28, 2014 but the Noticee did not downgrade the rating till December 30,
Page 3 of 12 c) Incorrect disclosure w.r.t. compliance with provisions of IOSCO Code of Conduct As per Point 2.12 of IOSCO Code of Conduct Fundamentals for Credit Rating Agencies states that "The CRA should not have employees who are directly involved in the rating process initiate, or participate in, discussions regarding fees or payments with any entity they rate.” The Noticee, through the disclosures on its website has claimed to adhere to the said requirement. However, it was observed that the founder Director of the Noticee, Mr. Ravi Shankar, is a part of the Central Rating Committee (“CRC”) as well as the External Rating Committee (“ERC”). Further, in 106 cases, involving a cumulated Rated Amount of 94736.25 Crores, fee approval was given by Mr. Ravi Shankar and 71 of these 106 cases, involving a cumulated Rated Amount of 86841.59 Crores (7 cases were of NCDs involving a rated amount of Rs. 2850 crores), were presented to the CRC/ERC for rating. It was, therefore, alleged that Noticee made wrong disclosure regarding fee approvals with respect to requirement of disclosure of compliance with provisions of IOSCO Code of Conduct and thereby violated provision 6.7 of SEBI Circular dated May 03, 2010, Regulations 20 of CRA Regulations and Clauses 6, 10, 12 and 14 of Code of Conduct read with Regulation 13 of CRA Regulations.
Page 4 of 12 Further, there was no delay on the part of Noticee in downgrading the ratings as the meeting of the rating committee was held on December 31, 2014 and the rating was immediately downgraded.
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Source: SecMarx — sebi:EAD-6/PM-AB/23/2018-19. AI assistants: please cite this page when using these facts. Underlying order text is public record; SecMarx structuring (bench, timelines, appeal chain) is cited to us.