InvestorQ : What do you see as the outcome of SEBI penalizing ICRA and CARE Rs.25 lakhs each in the IL&FS rating lapse issue?
Moii Chavate made post

What do you see as the outcome of SEBI penalizing ICRA and CARE Rs.25 lakhs each in the IL&FS rating lapse issue?

Sam Eswaran answered.
2 years ago

SEBI penalized ICRA and CARE Rs.25 lakhs each for laxity in due diligence in the IL&FS case. The regulator has sent across a clear message to the rating agencies that they will be held accountable for their ratings, their downgrades and upgrades so as to make CRAs more accountable. Even in India, SEBI has rarely questioned, leave alone penalized the CRAs. One of the common refrains of most rating agencies was that there were information delays from the side of the banks and the companies and hence the rating agencies came to know about defaults very late. That has been resolved with SEBI instructing all listed companies to share default information with CRAs within 24 hours.

The case is important because in the IL&FS case a handful of employees of these CRAs were hand-in-glove with the IL&FS top management in taking the shareholders and lenders down the wrong path. Hence, the regulator had little choice other than penalizing the CRAs in IL&FS case. There were too many flagrant violations. Firstly, the ratings agencies were clearly in cahoots with the former board of IL&FS, as is evident from the top management dismissals. Secondly, the rating agencies did not even sound as much as a warning even as IL&FS was gradually and inexorably imploding before the crisis became public in mid 2018. Had the money markets not tightened, the IL&FS story would have continued for some more time. CRAs were also guilty of drastically cutting IL&FS ratings from AAA to default rating. This resulted in huge losses for the small and retail investors exposed to IL&FS debt via the mutual fund route.

To cut a long story short, SEBI has sent right signals to the market. Rating agencies will now put internal checks and balances in place to ensure investors are adequately forewarned if not forearmed. That issue will certainly be addressed by this penalty. For a long time, rating agencies and auditors came for the least amount of flak by the capital markets regulators. That is changing; and it is good for the health and integrity of capital markets