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2015 DIGILAW 97 (MAD)

Slo Industries Limited v. Union of India

2015-01-08

M.M.SUNDRESH, SANJAY KISHAN KAUL

body2015
Order The Hon'ble Chief Justice The petitioner is engaged in the business of manufacturing and trading of iron and steel commodities and by the present petition, seeks to raise the issue of the necessity for a policy to regulate the manner in which Credit Rating Agencies assign ratings to customers, which has a direct impact on the ability of the borrowing company to raise loans from banks and financial institutions. 2. We may note at the inception itself that though initially there was a dual prayer made including of declaring Section 10 of the Credit In formation Companies (Regulation) Act, 2005 as void, the said relief was not pressed as recorded in our order dated 05.09.2014. 3. It is the submission of the learned senior counsel for the petitioner that the Reserve Bank of India (RBI)/the second respondent seeks to shift the burden for such regulations on Securities and Exchange Board of India (SEBI)/the fourth respondent and there are no regulations governing the subject matter. Learned senior counsel has referred to para 12 of the counter-affidavit filed by the SEBI / fourth respondent to contend that the SEBI's stand is that framing of necessary policy to regulate the manner in which Credit Rating Agencies assign ratings to the borrowers from banks, does not even fall under SEBI regulatory jurisdiction. 4. Learned counsel for the Reserve Bank of India has, however, drawn our attention to the averments made in its counter-affidavit to contend that it accredits Credit Rating Agencies for the limited purpose of bank loan ratings to enable banks to use their ratings for capital adequacy purposes and thus, it would not be correct to contend that RBI has washed its hands off the issue. What has actually been stated is that since Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 ('Regulations' for short) already existed for securities, it was deemed appropriate to apply the regulations even for the purposes of rating for entities seeking to secure loan from different bank and financial institutions. In this behalf, we consider it appropriate to reproduce para 9 and para 25, which read as under: "9. I state that banks in India presently come under Standardised Approach (SA) for capital computation under Basel III Capital Adequacy Framework. In this behalf, we consider it appropriate to reproduce para 9 and para 25, which read as under: "9. I state that banks in India presently come under Standardised Approach (SA) for capital computation under Basel III Capital Adequacy Framework. Under this approach, banks use ratings assigned by accredited External Credit Assessment Institutions (ECAIs) for assigning risk weights for computation of their credit risk capital for corporate exposures (fund based and non-fund based). The basic approach of Capital Adequacy Framework is that a bank should have sufficient capital to provide a stable resource to absorb unexpected losses arising from the risks in its business. A higher capital adequacy may lead to a more resilient banking system and a stable financial system. A stable financial system is a pre-requisite for sustained economic development of any country. Moreover, the extent Capital Adequacy Framework is based on the Basel III International standards. The regulations on Capital Adequacy Framework are issued by the Reserve bank under the statutory powers vested in it by the provisions of the Banking Regulations Act, 1949, in the interest of stability of the banking system of the country. These guidelines are not issued under the Credit Information Companies (Regulations) Act, 2005. The Reserve bank accredits Credit Rating Agencies for the limited purpose of Bank Loan Ratings to enable banks to use their ratings for capital adequacy purposes under Basel III Capital Adequacy Framework. For lending and investment decisions, the Reserve Bank has mandated banks to have their own credit risk assessment framework. In terms of the said guidelines, banks may put in an internal Credit Rating Framework (CRF), which may be used for individual credit selection, pricing, portfolio-level analysis, surveillance and monitoring et. The Reserve Bank had advised banks to have documents of investment policy, loan policy, loan recovery policy etc., prepared and duly vetted by their Boards of Directors. Banks are required to take credit related decisions based on their internal assessment of the commercial viability of the loan within their Board approved policies and Board regulatory guidelines. Further, even in case of large corporate exposures, the Reserve Bank has not made it mandatory for borrowers to seek external ratings. Banks may at their discretion require borrowers to obtain external credit ratings to complement their own internal credit risk assessment. Further, even in case of large corporate exposures, the Reserve Bank has not made it mandatory for borrowers to seek external ratings. Banks may at their discretion require borrowers to obtain external credit ratings to complement their own internal credit risk assessment. In view of what is stated above, there is no substance in the above writ petition and the same is liable to be dismissed in limini. ................................ 25. Further, it is submitted that the general superintendence and regulation of credit rating agencies are carried out by SEBI under Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999. The regulations issued by SEBI cover various aspects viz., registration of rating agencies, fit and proper criteria for rating agencies, rating process and methodology and its records, transparency and disclosures avoidance of conflict of interest, code of conduct, etc. The Reserve Bank accredits CRAs for the limited purpose of Bank Loan Ratings to enable banks to use their ratings for capital adequacy purposes under Basel III Capital Adequacy Framework." 5. It has also been pointed out that there is an annual review of accreditation of these Credit Rating Agencies by the RBI itself as a measure of check and balance and the relevent averments in para 27 reads as under: "27. ... In addition to the detailed assessment at the time of accreditation, the Reserve Bank also conducts an annual review of accreditation of credit rating agencies to assess their eligibility for continued accreditation under Basel III framework. During the review exercise, the Reserve Bank evaluates the processes as well as the outcomes at portfolio level. The cumulative default rates of rated portfolio of individual rating agency is evaluated in comparison with the benchmark cumulative default rates proposed under the Basel III framework." 6. It is further pointed out that there has to be a play insofar as the exact methodology adopted by any Credit Rating Agency is concerned and that six such agencies were accredited by the RBI. A borrower has the option, in fact, to approach any one or more than one of the agencies for obtaining its credit rating. 7. It is further pointed out that there has to be a play insofar as the exact methodology adopted by any Credit Rating Agency is concerned and that six such agencies were accredited by the RBI. A borrower has the option, in fact, to approach any one or more than one of the agencies for obtaining its credit rating. 7. The aforesaid, thus, shows that it is not as if the matter has been left unattended, but has received the attention of the RBI, which has accredited the agencies and has made the Regulations applicable ipso facto, since that task had already been carried out under the Regulations of how a rating has to be arrived at. Thus, what is good for securities has also been found good for the loans to be availed from banks and financial institutions. 8. It is trite to say that it is not the function of this Court to get into the economic policy and regulation framework and once the matter has received the attention of the concerned authorities, who have made applicable certain regulations to the matter in issue, nothing more is required. 9. We are, thus, of the view that no directions are required to be passed in the present petition, which stands closed. No costs. Consequently, M.P.No.1 of 2014 also stands closed.