CRISIL files consent plea in Amtek Auto case

Sebi issued a show-cause notice to the rating agency in July

Credit rating agency CRISIL has filed a consent application before the Securities and Exchange Board of India (Sebi) in the Amtek Auto rating suspension case.

In July, the markets regulator had issued a show-cause notice to CRISIL and Credit Analysis and Research (CARE) for not following proper process while evaluating the Amtek Auto debentures. 

In August 2015, the automaker had defaulted on a repayment obligation worth Rs 800 crore, triggering a redemption crisis at JPMorgan Mutual Fund, which has exposure to its debentures through two debt schemes — JPMorgan India Treasury Fund and JPMorgan India Short Term Income Fund.

It is alleged that the rating agencies suspended ratings of Amtek Auto without first downgrading or keeping the company on “credit watch”. It is also alleged that CRISIL did not conduct proper audits of the JPMorgan schemes.

Under the consent mechanism, an alleged wrongdoer can settle any pending matter with Sebi without admitting or denying the guilt by accepting a penal action.

“We have been in constant dialogue and communication with Sebi in this matter and have submitted our response to them based on our external legal advice,” said a CRISIL spokesperson in an email response to a query sent.

Downgrading or suspension of ratings is a contention issue as companies often stop cooperating with the rating agencies, forcing them to suspend their coverage.

Experts say the rating agency should be able to settle the issue as its charge of lapse in monitoring is not that stringent.

“It is consentable as it is related to monitoring and disclosure of certain information. But, only tightening the norms for credit rating agencies would not be sufficient to avoid repeat of such an instance in the future,” said Sandeep Parekh, founder of Finsec Law Advisors. 

According to Parekh, companies are equally responsible for not providing full and accurate information. 

Citing deferment of loan default disclosure, Parekh said the regulator should also define “default”, as all kinds of financial credit could not be considered as a loan default. 

CRISIL, Icra and CARE are among the major agencies that assign credit ratings to issuers of debt instruments. 

The Amtek Auto case was the first time Sebi had pulled up rating agencies. In fact, this episode also forced Sebi to tighten the rules pertaining to credit rating agencies. 

According to the new norms, if an agency decides to drop the credit rating of a company on account of insufficient information or non-payment of fees, the same needs to be disclosed in the public domain, while suspending the rating. Further, credit rating agencies have to proactively monitor the financial health, including share price movement, of companies to provide timely and accurate ratings on their debts.

One of the major arguments in the Amtek Auto case was it didn’t provide adequate information to credit rating agencies to monitor its performance. Sebi is also of the view that rating agencies should act on early signs of warning in order to help investors.

In the Amtek Auto case, it was alleged that the rating agencies didn’t review the information available in the public domain. CRISIL had assigned the particular JPMorgan schemes the highest rating in May 2015. Between May and September 2015, the rating was revised thrice. Finally, on October 15, CRISIL put the ratings on “notice of withdrawal”.

NEW GUIDELINES FOR CREDIT RATING AGENCIES

• If credit rating agencies decide to suspend/downgrade ratings, the same needs to be disclosed in the public domain
• They have to proactively monitor the financial health, including share price movement of the company
• Rating agencies would have to seek “no default statement” from the issuer at the end of each month
• Disclosure report by credit rating agencies would include key financial indicators of the issuer for the last and current financial years 
• The move follows several instances like that of Amtek Auto’s where rating agencies did not take cognisance of delays in servicing debt obligations by issuers they rate, even though the information had already been discounted by the market