(File photo)

MUMBAI: Markets regulator Sebi on Thursday fined ratings agencies ICRA and CARE Rs 25 lakh each for their failure to give a proper rating opinion on IL&FS, which eventually led to the lender’s default in September 2018. “(The) default has occurred due to lethargic indifference and needless procrastination and laxity” of the two ratings agencies, Sebi said in the orders.

At the time of the default by IL&FS and several of its subsidiaries, the total debt of the group was about Rs 1 lakh crore. The IL&FS default also led to a crisis in India’s NBFC sector, which is still continuing. IL&FS was majority owned by the government, which to some extent helped it maintain an ‘AAA’ rating, the highest, for years despite its weakening financial position.

The orders also noted that the law does not permit “any allowance to be made for such lethargic indifference and needless procrastination as found in this case. The brazen failure as found in this case, had clearly defeated the purposes of the regulations i.e. investor protection and orderly development of the securities markets. Considering the role and responsibility of the (two ratings agencies) in these regards and important obligations cast upon it under the CRA regulations...the default is grave and the gravity of this matter cannot be ignored”.

In case of ICRA, Sebi found that the agency had downgraded IL&FS several notches — from ‘AAA’, the highest grade, to ‘D’, the lowest one — in less than six months, which is very unusual. It was found that ICRA’s ratings team had depended too much on information provided by IL&FS’s management and less on independent enquiry. Sebi also pointed out that despite discrepancies in publicly published information by IL&FS about its financial health, the ratings agency had failed to notice the decline of the lender.

A similar pattern was observed when CARE gave its ratings opinions on IL&FS as it downgraded the lender from ‘AAA’ to ‘D’ in about four months in 2018. CARE too failed to look at the lender’s actual financial position and continued to give it the highest rating, Sebi said.

Sebi, however, did not find any mala fide on the part of ICRA and CARE in granting erroneous ratings to IL&FS.

