CARE, Crisil didn’t follow due process in Amtek Auto case: Sebi

Mumbai: India’s market regulator has sent show-cause notices to two ratings agencies, alleging that they did not follow due process and had failed in monitoring the ratings of JP Morgan’s credit opportunity fund and Amtek Auto Ltd, said two people with direct knowledge of the development.

The Securities and Exchange Board of India (Sebi) has started hearing officials from Crisil Ltd and Credit Analysis and Research Ltd (CARE), the two said on condition of anonymity.

Sebi launched a probe in the aftermath of a redemption crisis faced by JP Morgan India Treasury Fund and JP Morgan India Short Term Income Fund in August 2015. The crisis was brought on by a sharp downgrade and withdrawal of ratings on the bonds of Amtek Auto, which was on the verge of defaulting on Rs800 crore in bond repayments.

A Sebi spokesperson did not respond to an email seeking comment.

“As the matter is presently under the regulatory and legal ambit, we would like to refrain from making any comments on this issue,” a Crisil spokesperson said in an emailed response. A CARE spokesperson declined to comment.

Sebi completed its investigation in 2016 and issued the show-cause notices early this year.

The regulator has alleged that CARE failed to place the ratings of the company on credit watch and suspended ratings without downgrading them first, said one of the two people cited earlier.

“At times, companies stop cooperating with ratings agencies and do not disclose information that helps them arrive at the correct ratings. In such circumstances the agency is required to interact with debenture trustees and banks regarding the conduct of the issuer,” said the second person. “In this case CARE Ratings failed to do so. Additionally, it considered standalone instead of consolidated financials of Amtek Auto and downgraded the rating by only one notch.”

CARE chose to suspend its rating on Amtek Auto on 7 August 2015. At the time, the agency had given Amtek Auto a rating of AA-, signifying a relatively high degree of safety on timely servicing of financial obligations. Such instruments carry very low credit risk.

In the case of Crisil, the regulator has alleged that the rating agency did not conduct a monthly review of JP Morgan Treasury Fund in March, April, June and July 2015, said the second person. Crisil was supposed to do this according to its own policy to assess the credit quality of bond funds.

The rating agency also did not “consider information in the public domain about securities it did not rate, but were part of the holdings of the mutual fund. Thus, their rating did not reflect the true position of the scheme,” the person said.

Crisil Ltd had assigned the scheme a rating of AAAmfs (the highest portfolio credit quality) in May 2015. Subsequently, Crisil revised the rating in three stages over two months. On 1 September, it downgraded the scheme from AAAmfs to A+mfs. On 29 September, it was downgraded to BBBmfs, which meant an eight-notch decline within a month. Finally, on 15 October, Crisil placed the scheme on “notice of withdrawal”.

“The issue is to analyse whether the rating agencies just rely on the information given by (a) company to arrive at a rating or go deeper into publicly available information and data,” said Shriram Subramanian, founder and managing director of InGovern Research Services Pvt. Ltd, a proxy advisory firm. “The other inherent problem is conflict of interest, where the ratings agencies receive remuneration from the companies they are rating.”

To address concerns over suspension of ratings, Sebi in November last year tightened its regulations.

The amended rules asked ratings agencies to disclose how they rate a company, the rating history and the responsibility of their analysts and sought a detailed explanation in the event of a sudden ratings downgrade.