Market regulator SEBI slaps a fine of INR 1 Crore on CARE Ratings for delay in assigning credit ratings to RCom

The Securities & Exchange Board of India (“SEBI”) found that CARE Ratings Ltd (“CARE Ratings”) was in violation of the provisions of The Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 (“CRA Regulations”), in causing lapses in downgrading the ratings assigned to the Non-Convertible Debentures (“NCDs”) of Reliance Communications (“RCom”), and consequently slapped a fine of INR 1 Crore on the CARE Ratings.

What is CARE Ratings?

· A CARE Ratings is a company that assigns credit ratings.

· The CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations.

Why was CARE Ratings fined?

The case pertains to the default committed by RCom on the repayment of the principal amount of INR 375 Crore and interest amounting to INR 9.7 Crore, which was due in February 2017 and March 2017, respectively.

In May 2017, CARE Ratings downgraded the ratings assigned to non-convertible debentures (NCDs) issued by RCom to “default”. The SEBI observed that CARE Ratings had failed to monitor the factors affecting the creditworthiness of RCom in time, resulting in a significant amount of delay in conducting the rating process and consequently downgrading the rating, as required.

The SEBI further observed that 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. 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.

In addition, CARE Ratings had failed to take steps as prescribed under the norms, when it had not received no-default statement (NDS) for the quarter ended December 31, 2017, from RCom despite its e-mail to the company in January 2017.

The CARE Ratings even failed to follow up with RCom for such NDS, despite the same being a crucial document for conducting review of quarterly financials of an entity. The market regulator said that the CARE Ratings did not take into consideration the ratings downgrade of RCom's debt securities by Fitch and Moody's for conducting a review of its own.

Further, the SEBI noted that CARE Ratings contravened the provisions of CRA Regulations as it had failed to conduct a review despite being adequately triggered by several factors. SEBI observed that this all happened during the same quarter or just immediately thereafter and the agency waited till May 2017 to conduct its first review since assignment of the earlier rating to RCom.

What is no-default statement?

The credit rating agencies have to seek a 'No default statement' from the companies regularly. In which, the company would have to explicitly confirm to the rating agency that it has not delayed on any payment of interest or principal amount in the previous month.

The SEBI observed the following while passing the order:

"Defaults of CARE Ratings Limited constitute contravention...of CRA (credit rating agency) Regulations, which make it liable for penalty,"

Accordingly, the SEBI slapped a penalty of INR1 Crore on the CARE Ratings Ltd.

Conclusion

According to CRA Regulations, the CARE Ratings Ltd. has an option to appeal against the said order before Securities Appellate Tribunal, and thereafter before the Central Government.