In a first of its kind in India, the High Court of Calcutta on March
20 2012 passed an interim injunction restraining Fitch Ratings from
publishing a rating downgrade. The downgraded bonds were issued by Srei
Infrastructure Finance Limited in 2010 and amounted to a total of Rs2.5
billion ($48.5 million). In respect of these bonds, Srei approached the
High Court for an injunction, seeking to prevent publication of the
This singular development has wider implications for the securities
market as a whole. The final ruling in this matter may well impinge on
rating agencies' regulatory obligations. These obligations include
constantly monitoring the health of the securities it has rated and
promptly disseminating any change in the rating outlook.
This issue is not entirely unprecedented, at least in Asia. In 2008,
the High Court in Singapore had to grapple with a similar situation.
Allco Commercial Real Estate Investment Trust had sought an injunction
against Moody Investor Services from publishing the downgraded rating of
Allco's bonds. While Allco did temporarily succeed, the injunction was
vacated (although no reasons were given) and Moody was allowed to
publish the downgraded ratings.
In the present case, Srei first proceeded to terminate the agreements
(entered into with Fitch in relation to the ratings). It then sought a
declaration from the court that the downgrade is invalid.
A key issue is whether the courts should be dealing with issues
relating to the functioning of rating agencies and effective
dissemination of ratings. The extant regulations (governing rating
agencies), expressly impose an obligation on rating agencies to
continuously monitor the rating during the tenor of the instruments,
conduct periodic review and publish changes in ratings. In any event, a
rating by its very definition is an opinion.
The main issue then is: as long as the requisite systems and
processes have been followed and the opinion of the rating agency is
tenable; whether a rating agency can be barred from disseminating their
ratings. Should such ratings be viewed any different from a critique
upon any other service or a product?
A related issue that arises from this case is whether the High Court
is the appropriate forum in view of the fact that Fitch is regulated by
the Securities and Exchange Board of India (Sebi). The fact remains that
Sebi has been vested with wide powers to "protect interests of
investors and to promote the development of, and to regulate the
securities market". This allows Sebi to issue such directions as it may
deem necessary (which could even be in the nature of temporary
restraints). Thankfully, the Calcutta High Court has sought the views of
Sebi by issuing it a notice in the matter.
While downgrades (especially in a market downturn) pose serious
concerns for issuers, the bigger question that emerges from the Srei
case is whether anyone other than the regulator should be judging
whether a given view on securities or financials is tenable or not.
Otherwise, the market should be prepared for temporary gag orders from
courts in remote parts of India.
Suprio Bose and Saranya Gopinath