While the regulator came down heavily on the rating agencies with sharp observations but it was felt that the same was not reflected in penalty, several experts said.
Sebi examined the order passed by Adjudicating Officer (AO) and observed that the penalty levied by AO appeared to be erroneous and not commensurate with the overall impact these violations had on the market.
In view of the same, the competent authority granted approval to review the AO order and accordingly the regulator issued show cause notices (SCNs) to rating agencies, "calling upon the reasons why the penalty amount should not be enhanced".
In two separate orders on Tuesday, Sebi said that the lapses on the side of ICRA and CARE while rating the securities of IL&FS and its subsidiary IL&FS Financial Services (IFIN) have resulted in real and severe financial loss to investors.
The regulator, further, said it has shaken the investors' faith in the reliability of credit ratings in the context of the corporate debt market.
"Had the noticee downgraded the ratings at the appropriate time and thereby forewarned the investors, the impact of the default on investors who invested in AAA rated instruments, could not have been this severe," Sebi noted.
The case relates to the default by IL&FS and its subsidiary IL&FS Financial Services on their obligations in respect of commercial paper (CP), inter-corporate deposits (ICDs) as well as on interest payments related to non-convertible debentures (NCDs).
Justifying the reasons for enhancing the amount of penalty, Sebi said the role of a CRA (credit rating agency) is that of a financial 'gatekeeper' and any inaccuracy in the rating processes adopted by the CRA has significant negative impact on the securities market.
As on the date of downgrading the ratings of NCDs and CPs of IL&FS and IFIN to 'D' on September 17, 2018, the outstanding amount of securities so rated by ICRA and CARE amounted to Rs 11,725 crore and Rs 20,942 crore, respectively, Sebi noted.
Sebi said the default by IL&FS and its steep downgrade by the rating agencies in a matter of 30-40 days has completely changed the risk perception of the corporate bond market.
It further said the impact of the violations committed by the rating agencies is not limited to the monetary loss caused to the investors of NCDs issued by IL&FS but has had wider and larger ramifications on the investor confidence, the financial sector and the securities markets as a whole.
According to the regulator, AO has failed to give due weightage to the magnitude of the loss caused to the investors, despite the same being a specified parameter under the Sebi Act.
Imposition of lighter penalties on these rating agencies tends to create a disadvantage for the other CRAs who may have complied with the law.
"The Board needs to safeguard market integrity, and when scams of this size occur, which questions and challenges the regulatory and supervisory framework put in place with respect to CRAs, it is but imperative, to subject the conduct of CRAs to tight scrutiny and restore investor confidence by enhancing the penalty," Sebi said.
Accordingly, the Securities and Exchange Board of India (Sebi) has imposed the penalty of Rs 1 crore each on the two rating agencies.
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