Jindal Power Ltd. v. ICRA Ltd. (Delhi High Court)
In order to protect the interest of investors and help them make an informed decision, SEBI has made credit rating of securities offered by Indian companies by way of public or rights issues to be mandatory. The rating signifies the ability and willingness of the issuer company for timely payment of interest and principal on a security. Ratings are provided to the issuer company by a Credit Rating Agency (CRA) on the basis of comprehensive evaluation of the strengths and weaknesses of the company fundamentals. The CRAs are required to publish and continuously monitor the ratings during the lifetime of securities by making periodic reviews of all published ratings. The functioning of the CRAs and credit rating process etc. are regulated by SEBI by way of the SEBI (Credit Rating Agencies) Regulations, 1999.
The recent case of Jindal Power Ltd. v. ICRA Ltd. [1] discusses the credit rating process and role and extent of autonomy exercised by the CRAs while granting the credit rating of securities.
Brief Facts of the Case
Jindal Power Ltd. (JPL) and ICRA have been in an agreement since 2016 for carrying out the credit rating of JPL. ICRA being a Credit Rating Agency, was bound to follow the SEBI (CRA) Regulations, 1999 while carrying out the rating. Despite the fact that all the parameters of JPL for the purposes of rating, were same in the present year, as the preceding year, ICRA decided to downgrade the credit rating from BBB+ (in 2019) to BBB (in 2020). JPL objected to the same and conveyed its non-acceptance to ICRA but ICRA continued maintaining it and published the downgraded credit rating of the company on its website. JPL hence filed a suit against ICRA seeking an injunction against the downgraded rating and to declare the rating null and void.
Contention of the Parties
The main contention of JPL was that credit rating is only for the purpose to indicate whether the company is in a position to clear its debts and does not address any other risk like the liquidity risk, market value risk or price volatility. On perusal of JPL’s parameters of last financial year as compared to the present financial year it is shown that the long term fund based term loans, long term non-fund based, short term fund based and unallocated instrument’s value all remain the same. The total bank facilities along with the non-convertible debentures also remain the same so there is no negative rationale permitting downgrading of the rating. JPL further contented that since it has protested against the revised rating, ICRA could not have gone ahead with its publishing as this violates the agreement between the companies.
ICRA in response contented that while formulating the rating it has followed the rating process in compliance with the regulations and relevant circulars issued by SEBI and has not violated any of the rating methodologies or the CRA Regulations of the RBI Master Circular. Under the rating agreement entered into between JPL and ICRA in 2016 based on the initial rating, JPL has already availed funds and thus till the funds have been utilized and not repaid by JPL, ICRA would be bound to keep a surveillance over the debt instruments.
Important Issues
This case has thus brought in light three important issues qua the credit rating process which have been discussed in detail:
