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2012 (12) TMI 888

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..... rating agencies for the said instruments and both of them in their own way have rated making gradation. Earlier respondent No.1 presently sole defendant graded AA, but this time the moment respondent No.1 sounded that this time the rating might be down graded to A+, the plaintiff terminated the two contracts alleging breach of obligation arising out therefrom and further not adhering to the norms and guidelines issued by SEBI. It is the case of the appellant-plaintiff that the moment contract was terminated the respondent No.1 attempted to publish such mala fide and arbitrary rating in the print and electronic media. Thus it is opined that without intending to bind this finding at the time of final hearing of the application before the Trial Judge that the plaintiff has to establish prima facie in a suit of this nature under the contract the first respondent has committed breach of obligation exists in favour of the appellant and lawful termination. It is not an ordinary contract governed by Indian Contract Act. Here once the contract is entered into the rating agents are bound to discharge their obligation in terms of the agreements conforming to relevant provision of the above re .....

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..... March, 2012. Learned Trial Judge has not only entertained the said application of respondent No.2 but also in effect discharged the interim order passed earlier. Hence the appeal. 2. It appears from the papers that the suit was filed by the appellant herein against the first respondent who was appointed credit rating agents by and under two written agreements dated 22nd February, 2010 and 6th October, 2010 respectively claiming declaratory reliefs that above agreements duly and validly terminated by the plaintiff; declaration that the credit rating done by the first defendant grading the plaintiff's financial instruments from AA to A+ after termination of the agreement is invalid and is of no effect, and decree for perpetual injunction from giving effect to the credit rating by way of downgrading of the plaintiff's instruments after termination of the contract. Bereft of all the details made in the plaint the substance of the cause of action is that the first respondent after having been engaged in the credit rating agency, in complete breach of various provision of Regulation and circular issued by the second respondent the first respondent is not employing appropriate methodolo .....

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..... been kept pending. The second respondent at whose instance order was discharged has not been able to show any legal right for getting aforesaid order vacated. While vacating the learned Trial Judge has committed error asking the appellant to approach the respondent No.2 for resolving the dispute under the provision of regulation 29(2)(c) of the Securities and Exchange Board of India (Credit Ratings Agencies) Regulations 1999 (hereinafter referred to as the said 'Regulation'). The said order is bad as no chance was given to counter the application of the respondent No.2. Mr. Sarkar in order to restore earlier interim order has submitted prima facie case in the manner as follows:- The contract between the appellant and the first respondent was discharged in view of the breach committed by the sole defendant. The respondent No.1 committed breach of obligation arising out of the said agreement by not disclosing methodology of the rating of the petitioner's instruments. The said contract specifically provides that the defendant will disclose to the appellant-petitioner the methods of dissemination. He has drawn our attention to the third schedule relating to the Code of Conduct for .....

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..... and this has to be discharged and in case of breach his client is to face the penal measure that may be taken by the second respondent. In this connection he has drawn our attention to Regulations 14(c), 14 (e), 15, 16(1), 16(2), 16(3) and 13 to establish its statutory obligations vis- -vis its contractual obligation with its client. The credit rating has to be done by his client under the Regulations irrespective of termination of contracts. According to him it is statutory obligation towards the investors and also the public at large. 6. He has also reminded us the balance of convenience and irreparable injury while discharging the interim order passed earlier. He contends that balance of convenience is wholly in favour of the respondents and against the appellant for not passing any order in the appeal. He has drawn our attention to Ground No. XXXIII in the Memorandum of Appeal wherein it is specifically stated that even after virtual publication of rating in various newspapers by the respondent No.1, the investors in the concerned financial instruments of the appellant continued their investments, indicating the quality and stability of the said financial instruments and jus .....

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..... inary terms of the contract stands modified by statutory dictates in this case. The obligations to rate the securities throughout their lifetime survives even after any termination of contract as recognized by the said regulations. He further submits that once the rating agency is engaged it has to discharge duty in relation to the engagement under the provision of the regulations. He contends that the learned Trial Judge therefore considering the facts and circumstances of this case and considering the obligation of the appellant existing in favour of the investor consequently the member of the public under the regulation has rightly discharged. Moreover the learned Trial Judge has rightly asked the appellant-plaintiff in view of the provision of regulation 29(4) of the said Regulations can investigate into any complaint regarding the correctness of rating done by any agency. 9. We have heard the learned counsel for the parties. While hearing the application for grant of interim relief in connection with the appeal we clearly made the learned counsel clear that hearing of the application would be hearing of the appeal itself. We are thus to decide the appeal and application by t .....

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..... ie opinion without intending to bind this finding at the time of final hearing of the application before the learned Trial Judge that the plaintiff has to establish prima facie in a suit of this nature under the contract the first respondent has committed breach of obligation exists in favour of the appellant and lawful termination. In our view it is not an ordinary contract governed by Indian Contract Act. Here once the contract is entered into as rightly contended by both Mr. Jayanta Kumar Mitra and Mr. Hirak Kumar Mitra the rating agents are bound to discharge their obligation in terms of the agreements conforming to relevant provision of the above regulations which have got statutory force. It is settled position of law that irrespective of the terms of the contract whether express or implied between two parties the provisions of law cannot be defeated. 13. We have seen Regulation 13 of the Regulation which provides that every credit rating agency shall abide by the Code of Conduct contained in the Third Schedule. 14. Regulation 15 of the said Regulation obliges credit rating agency as follows: Every credit rating agency shall, during the lifetime of securities rated by i .....

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..... nt the Court is concerned with the balance of convenience weighing both side prima facie case and counter-case. We unhesitatingly accept the logic of the learned Trial Judge as balance of convenience is in favour of discharge of the interim order. However we accept the argument of Mr. Sarkar that Regulation 29(2)(c) of the Regulation is not the complete mechanism for adjudication of the dispute. But aforesaid clause particularly Regulation 29 clause (c) without any ambiguity empowers the respondent No.2 to investigate into the complaint received from the client in connection with any matter having bearing on act and omission of the credit rating agency. Whether the rate done by the respondent No.1 following Code of Conduct and norms and guidelines and basing on materials supplied by the plaintiff is bona fide or not as alleged by the plaintiff can always be looked into. 16. Therefore, we slightly modify interim order to the effect that in terms of the above section SEBI will look into the complaint whether it has been done following norms and also information and material supplied by the plaintiff bona fide or not. For this purpose notice for making enquiry shall be given to appe .....

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