The Securities Appellant Tribunal (SAT) has reduced the penalty imposed by Sebi on CARE Ratings to Rs 10 lakh from Rs 1 crore in a case related to lapses in assigning credit rating to non-convertible debentures of Reliance Communications (RCom). The tribunal has affirmed the regulator's order with regard to the violation by CARE Ratings under the provisions of the Sebi Act and the CRA (Credit Rating Agency) rule.
However, the penalty has been reduced from Rs 1 crore to Rs 10 lakh, according to a SAT order dated June 9. "It was a case of lack of due diligence for not having acted in a timely manner... we are of the opinion that the maximum penalty of Rs 1 crore is highly excessive, harsh and arbitrary and does not commensurate with the violation," SAT said.
Further, the tribunal said the charge is one of lack of due diligence and it is not a case where ratings were not downgraded. The ratings were downgraded by CARE Ratings but not in a timely manner. "There could be a case of carelessness or sluggishness or laxity in the manner in which the downgrading was done by the appellant (CARE Ratings) but it is not a case of oversight," SAT noted.
The tribunal's ruling comes after CARE Ratings challenged the order passed by Sebi in July 2020 wherein the regulator had slapped the Rs 1 crore-fine on the rating agency in connection with lapses in assigning credit rating to RCom's NCDs (Non-Convertible Debentures). The case relates to default by RCom on the repayment of principal amount of Rs 375 crore and interest of Rs 9.7 crore that were due in February 2017 and March 2017, respectively.
In May 2017, CARE Ratings downgraded the ratings assigned to the NCDs issued by RCom to default. Sebi had found that CARE Ratings had failed to monitor the factors affecting the creditworthiness of RCom in a timely manner, resulting in a significant delay in conducting the rating process and downgrading the rating.
The rating agency had failed to initiate a review of its earlier ratings assigned to RCom even after the publication of third quarter of FY17 results, as per the Sebi order. The results showed a major decline in cash accruals affecting its credit profile and major development in the telecommunications industry with the entry of Reliance Jio denting the profit margins of all other players in the market, the regulator had said in its order.