2020 (8) TMI 427 - HC - SEBI

Credit Rating Rationales - factors required to be considered by ICRA while deciding the rating - praying for a decree of declaration, declaring the Credit Rating Rationales dated 24th April, 2020 and 30th April, 2020 passed by the defendant or any other similar credit rating rationale downgrading the plaintiff s credit rating from BBB (stable outlook) to BBB (negative outlook) as null, void, unenforceable and ineffective - also seeks decree of mandatory injunction directing the defendant to withdraw the said credit rating rationales from the physical as well as electronic records of the defendant including on the world wide web - charge of Violation of rating methodologies or the CRA Regulations or the Master Circular - Whether the defendant-ICRA has a right to publish the rating despite being objected to by the plaintiff/JPL? HELD THAT - Combined reading of SEBI CRA Regulations and RBI Master Circular clearly depict that as far as the initial rating is concerned, if the same is not accepted, then the same will not be published by the Credit Rating Agency however, once an initial credit rating is accepted and published based whereon a party seeks financial facility, during the pendency of the said financial facility, the Credit Rating Agency is mandated to conduct periodic surveillance and even if subsequent rating opined by the Credit Rating Agency during the period of surveillance is not accepted by the party, the same will still be disseminated by press release on the website of the Credit Rating Agency as also intimated to the Stock Exchange/Debenture Trustees. Clause (B) of the agreement between JPL and ICRA clearly defines the scope of work and that once the initial credit rating is assigned and accepted, ICRA shall subject to clause (F) keep the rating under surveillance during the lifetime of the bank facility, that is, such time that any amount is outstanding against it or the sanction remains valid whichever is earlier. Once based on the credit rating a party seeks a bank facility it cannot thereafter want the Credit Rating Agency to not conduct periodic surveillance thereof and in case of a change therein not intimate the same to the concerned agency and the parties duly affected by the said Credit Rating. The interpretation as sought to be given by JPL would be contrary to the public policy and hence cannot be accepted. As per the terms of the agreement between JPL and ICRA as also the CRA Regulations, Master Circular of RBI, the Credit Rating Agency, that is, ICRA was entitled to publish the initial rating once accepted, based whereon JPL took credit facility and thereafter ICRA is mandated to conduct periodic reviews/surveillance of the credit rating and publish the same in the best interest of the provider of the financial facility and the other parties. What are the factors required to be considered by ICRA while deciding the rating and whether those factors have been considered by ICRA or the finding of ICRA is based on erroneous considerations? - Credit rating of the company is based on the futuristic position of the company to clear its debt liability and the same is not dependent merely on the fact that in the preceding year, debts had been cleared. The opinion of ICRA as primarily based on the fact that though in the previous year there were increased repayments of debt, however, the debt liability was still high coupled with the fact that JPL could not procure contract to optimally utilize its power generation and was utilizing power generation only to the extent of 1/3rd and that the primary client of JPL being TANGENDCO, the time for recovery of its dues was increasing as in the past thereby making the liquidity and debt paying capacity of JPL stretched. As opinion of ICRA is rendered after taking into account all positive or negative factors and that it is an opinion rendered by experts in the field, this Court will not, unless the said opinion is perverse, arbitrary and mala fide, interfere in the same as a mathematical calculation of a credit rating is not possible. Therefore, as regards issue No.(ii) is concerned, this Court finds that the rating rationales depend from industry to industry and that ICRA has taken into account the relevant rating rationales, both positive and negative and based thereon rendered the opinion which is plausible on the facts and the said opinion being neither perverse nor arbitrary nor mala fide, this Court will not interfere therein by passing a decree declaring the same to be null and void. Whether this Court can grant a mandatory injunction against ICRA directing it to review its ratings? - ICRA had downgraded the credit rating of JPL in the previous year also from AAA to BBB when neither JPL filed no suit raising objection to the downgrading or to the publishing of the credit rating. Credit rating having been utilized by JPL for receiving the financial facility, till the subsistence of the financial facility, JPL can neither seek setting aside of the said rating unless the same is irrational, arbitrary or mala fide and also cannot seek a decree that the said rating be not disclosed/published - Evidentiary value of opinion of an expert has to be decided on the basis of the credibility of the expert and the relevant facts supporting the opinion. Therefore, the emphasis has to be on the data on the basis of which opinion is formed. Further, if the opinion is intelligible, convincing, and based on reasoning, no decree declaring the said opinion as null and void, unenforceable and ineffective cannot be passed as is prayed by the plaintiff in prayer (a) of para 66 of the suit in respect of the Credit Rating Rationales dated 24th April, 2020 and 30th April, 2020 passed by the defendant. As the impugned Credit Ratings are surveillance ratings even if JPL objects to the same, no mandatory injunction can be granted to the defendant to remove the Grade Rating Rationales from the physical as well as electronic record of the defendant on the worldwide web, much less permanent injunction.

Summary

Issues:
1. Whether the defendant-ICRA has a right to publish the rating despite being objected to by the plaintiff/JPL?
2. What are the factors required to be considered by ICRA while deciding the rating and whether those factors have been considered by ICRA or the finding of ICRA is based on erroneous considerations?
3. In case, the finding of ICRA is based on erroneous factors, whether this Court can grant a mandatory injunction against ICRA directing it to review its ratings?

Issue No. (i): Right to Publish Rating Despite Objection:

The court analyzed the agreement between JPL and ICRA, SEBI CRA Regulations, and the Master Circular from RBI. It concluded that while the initial credit rating requires acceptance by the issuer (JPL) to be published, subsequent ratings under surveillance do not require such acceptance. The CRA Regulations mandate continuous monitoring and dissemination of ratings during the lifetime of the securities, regardless of the issuer's acceptance. The court emphasized that the purpose of this regulation is to protect the interests of the financial facility providers and other stakeholders. The court also noted that the confidentiality clauses cited by JPL do not apply to surveillance ratings. Therefore, ICRA was within its rights to publish the downgraded rating despite JPL's objections.

Issue No. (ii): Factors Considered by ICRA in Rating:

ICRA's rating methodology includes various business, industry, and financial risk drivers. The court noted that ICRA considered multiple factors such as JPL's elongated receivables cycle, modest debt-coverage metrics, elevated debt level, and exposure to power off-take and raw material availability. The court found that ICRA had balanced various competing factors and exercised its independent professional judgment. The court rejected JPL's contention that ICRA's decision was perverse or arbitrary, noting that the reasons for the downgrade, including the inability to secure incremental PPAs and the uncertain receivables from TANGEDCO, were plausible and relevant.

Issue No. (iii): Granting Mandatory Injunction:

The court held that it would not interfere with the expert opinion of a credit rating agency unless it was shown to be perverse, arbitrary, or mala fide. The court found that ICRA's opinion was based on a thorough analysis of relevant factors and was neither perverse nor arbitrary. Consequently, the court declined to grant a mandatory injunction directing ICRA to review its ratings or to remove the downgraded ratings from its records.

Conclusion:

The court dismissed the suit and applications, upholding ICRA's right to publish the downgraded ratings and finding that the factors considered by ICRA were relevant and appropriately balanced. The court emphasized the importance of continuous monitoring and dissemination of credit ratings to protect the interests of financial facility providers and other stakeholders.