Delhi High Court
Jindal Power Limited vs Icra Limited on 18 August, 2020
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Reserved on: 19th June, 2020
Decided on: 18th August, 2020
+ CS(OS) 128/2020
&
I.A. 3860/2020 (under Order XXXIX Rule 1 and 2 CPC),
I.A.3934/2020 (under Order VII Rule 14 CPC- by plaintiff)
JINDAL POWER LIMITED ..... Plaintiff
Represented by: Mr.Rajiv Nayar, Sr. Advocate with
Mr.Kartik Nayar, Mr.Saket Sikri,
Mr.Rishi Agarwala, Ms.Shruti Arora,
Mr.Ankit Banati, Ms.Priya Singh and
Mr.Manish Kharbanda, Advocate.
versus
ICRA LIMITED ..... Defendant
Represented by: Mr.H.S.Chandhoke, Mr.Prashant
Pakhiddey and Ms.Lakshmi Dwivedi,
Advocates.
CORAM:
HON'BLE MS. JUSTICE MUKTA GUPTA
1. The hearing has been conducted through Video Conferencing.
2. Plaintiff Jindal Power Limited (in short „JPL‟) has filed the present
suit against ICRA Limited, defendant herein, a credit rating agency inter alia
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 and also seeks decree of mandatory injunction
directing the defendant to withdraw the said credit rating rationales from the
CS(OS) 128/2020 Page 1 of 47
physical as well as electronic records of the defendant including on the
world wide web. By the application under Order XXXIX Rule 1 and 2 CPC
the plaintiff seeks an interim injunction in terms of prayers made in the suit.
3. The present suit and the application came up before this Court on 13 th
May, 2020 when summons in the suit were issued returnable before the
learned Joint Register for 15th July, 2020 and in the application notice was
issued returnable for 19th May, 2020.
4. On 19th May, 2020 learned counsel for the defendant entered
appearance and stated that he had already prepared the reply and filed the
same and liberty was granted to the learned counsel for the plaintiff to file
rejoinder and the application was listed on 22nd May, 2020. During the
course of arguments learned counsels for the parties agreed that even in the
suit the parties have to lead no further evidence except the documents filed
and since the arguments in the suit would also be based on the documents
filed by the parties, the arguments be heard for disposal of the suit. Thus,
after hearing learned counsels for the parties on various dates the judgment
in the suit and application was reserved on 19th June, 2020.
5. Case of the plaintiff is that the plaintiff and the defendant entered into
an agreement dated 15th June, 2016 qua the credit rating of the plaintiff
company. Thereafter the defendant was carrying out the credit rating of the
plaintiff company and was bound to follow the SEBI (Credit Rating
Agencies) Regulations, 1999 (in short the CRA Regulations). Despite the
fact that all the parameters for the purposes of rating the plaintiff company,
were same in the present year, as the preceding year, the defendant vide its
communication dated 24th April, 2020 intimated to the plaintiff its proposal
to downgrade the credit rating from BBB+ to BBB. Plaintiff objected to the
CS(OS) 128/2020 Page 2 of 47
same and filed its objections on 26th April, 2020 whereafter the defendant
vide its letter dated 30th April, 2020 communicated that it has reviewed the
credit rating of the plaintiff company and is maintaining the same at BBB.
The defendant also published the downgraded credit rating of the company
on its website.
6. Challenging the two letters of the defendant dated 24th April and 30th
April, 2020, learned counsel for the plaintiff contends that the same are ex-
facie wrong and contrary to the agreement between the parties have been
uploaded on the website of the defendant. The credit rating of a party does
not address any other risk including liquidity risk, market value risk or price
volatility. The credit rating is only for the purposes whether the company is
in a position to clear its debts. A perusal of the parameters of the last
financial year as compared to the present financial year would show that the
long term fund based term loans for the financial year 2020 ending is the
same as financial year 2019, that is, ₹6,863.94 crores. The long term fund
based cash credit, long term non-fund based, short term fund based and
unallocated instruments‟ value also remain the same. The total bank
facilities of the plaintiff company along with the non-convertible debentures
remain the same. As a matter of fact, the current rated amount has reduced
from ₹6,863.94 Crores to ₹6,443.80 crores and the non-convertible
debentures from ₹335.00 crores to ₹56.80 crores as is noted in the letter of
the defendant dated 30th April, 2020. So the two changes are in favour of the
plaintiff and there is no negative rationale permitting downgrading of the
rating.
7. The main business of the plaintiff is with Tamil Nadu Generation and
Distribution Corporation Limited (in short „TANGEDCO‟). The major
CS(OS) 128/2020 Page 3 of 47
reason why the credit rating of the plaintiff company has been shown in the
negative by the defendant in its letter dated 30th April, 2020 is that since
TANGEDCO is stressed, the outstanding dues to be received by the plaintiff
company are uncertain. Learned counsel for the plaintiff submits that
TANGEDCO is a government concern and thus there can be no uncertainty
to receive the outstanding dues. The plaintiff has a letter of credit in its
against TANGEDCO for a sum of ₹120 crores and merely because the
plaintiff has presently not invoked the letter of credit it cannot be held that
the receiving of the outstanding dues by the plaintiff from TANGEDCO is
uncertain.
8. Referring to Clause-G (i) and (ii) of the agreement dated 15th June,
2016 between the parties, learned counsel for the plaintiff stated that once
the plaintiff protested to the downgrading of the credit rating, the defendant
could not have published the same on its website. The plea of the defendant
that sub-clause (i) of Clause-G of the agreement between the parties only
related to the initial rating and not the subsequent ones is palpably incorrect
and without any basis. A perusal of sub-clauses (i) and (ii) of Clause-G
brings out a distinction between the right of publication and the right of
disclosure.
9. Learned counsel for JPL further submits that ICRA has perversely and
irrationally utilized the negative effect of the previous ratings and has added
COVID-19 as a reason to downgrade the credit rating for this year ignoring
the improvements and the positive aspects of JPL‟s situation such as even
during the national lock down when no industry was functional JPL‟s
industry was fully functional and that the financial exposure of JPL in the
previous year has come down drastically for this year. While arriving at a
CS(OS) 128/2020 Page 4 of 47
subjective satisfaction of JPL‟s rating, ICRA has not adopted an objective
criteria nor was ICRA‟s action transparent. ICRA by citing COVID-19
which is irrelevant in the case of JPL as JPL is providing essential services,
downgraded the rating. Reliance is placed on the decision reported as 2016
(7) SCC 703 Cellular Operators Association of India vs. TRAI and the
decision of the Bombay High Court Standard Retail Pvt. Ltd. vs. M/s G.S.
Global Corp. & Ors., Commercial Arbitration Petition (L) No.404/2017
decided on 8th April, 2020).
10. Learned counsel for the defendant/ICRA countering the arguments of
learned counsel for the plaintiff contends that ICRA is a credit rating agency
duly registered with the Securities and Exchange Board of India (SEBI) and
accredited as external credit assessment institution by Reserve Bank of India
(RBI). Thus even if the relationship between JPL and ICRA is based on a
contract and ICRA may not be a statutory body however, it is governed by
CRA Regulations and various circulars issued from time to time by SEBI
and RBI.
11. It is further contended that a rating given by any rating agency is an
independent opinion based on the likelihood of the issuer to reimburse the
principal and pay the interest on its debt obligations on the due dates in the
future. Though rating is in the form of standardized symbols but the same
has to be read in conjunction with the rating rational that is correspondingly
published. Further an outlook is provided with the rating symbol which
indicates the potential/possible direction of the ratings over average time on
the basis of foreseen development prospects. To formulate the opinion the
analyst and the Rating Committee members are required to consider various
factors, which include the credit strengths and credit challenges. The rating
CS(OS) 128/2020 Page 5 of 47
process requires a balance of publishing timely ratings that are predictive of
an issuer‟s credit profile while avoiding precipitous ratings that are prone to
significant reversals and lead to volatile and erratic ratings. Only after
balancing the conflicting factors, the rating committee members who are
independent professionals render their opinion based on their wisdom,
knowledge and past experience and expertise, as a result of which the
element of prognosis is inherent in a rating. Even the highest rated
instrument carries certain degree of credit risks. Thus, a credit rating is a
predictive opinion, dependent on a subjective and discretionary weighing of
complex factors within an established methodology. Though learned counsel
for JPL argues that in terms of Regulation 21 read with Regulation 24(3) and
(4) assignment of a rating is a decision of the Rating Committee, however, it
is nothing more than an opinion as defined under CRA Regulation 2(q).
12. It is contended that ICRA has followed the rating process in
compliance with the regulations and relevant circulars issued by SEBI from
time to time and has not violated any of the rating methodologies or the
CRA Regulations or the Master Circular. ICRA has been rating the
instruments/debt facilities of JPL since 2008. Under the rating agreement
entered into between JPL and ICRA in 2016 based on the initial rating JPL
has already availed/raised funds and thus till the funds have been utilized
and not repaid by JPL, ICRA would be bound to keep periodic
watch/surveillance.
13. The Rating Committee after due deliberation accorded the rating on
24th April, 2020 and on the objection of JPL received, the same was put up
before the Review Committee which comprises of different
members/experts, who also decided to maintain the rating at BBB and
CS(OS) 128/2020 Page 6 of 47
informed the decision to JPL on 30th April, 2020. Subsequent to the
institution of the present suit JPL sought withdrawal of the ratings of the
Non-convertible Debentures (NCDs) since they have been repaid.
Consequently, ICRA withdrew the said ratings and shared the draft rational
for withdrawal with JPL on 19th May, 2020. ICRA also observed that it did
not have information to suggest that the credit risk has changed since the
time the rating was last reviewed, since no protest was received from JPL
subsequent to this withdrawal qua NCDs whereby the rating rational dated
30th April, 2020 was reiterated.
14. On the contentions of the parties, following issues arise for
consideration before this Court:
(i) Whether the defendant-ICRA has a right to publish the
rating despite being objected to by the plaintiff/JPL?
(ii) 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?
(iii) 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?
Findings:
15. Before proceeding with the matter it would be appropriate to note the
relevant portions of the agreement dated 15th June, 2016 arrived at between
the plaintiff and defendant qua the credit rating:
"TERMS OF RATING AGREEMENT
A. Definitions
i. "Agreement" refers to the written terms and conditions
of this agreement, rating requisition form and all
schedules and annexures, each as may be amended,
CS(OS) 128/2020 Page 7 of 47
supplemented or modified from time to time.
ii. "Credit Rating" or "Rating" refers to evaluating the
capabilities of a company to timely meets its debt
obligations expressed in the form of standard symbols or
in any other standardized manner, assigned by ICRA
and used by your Company, to comply with a
requirement specified by the SEBI (Credit Rating
Agencies) Regulations, 1999 and relevant guidelines &
circulars issued by Reserve Bank of India, from time to
time. A Credit Rating does not address any other risk,
including liquidity risk, market value risk, or price
volatility. Any Rating must be construed solely as a
statement of opinion and not a statement of fact. A
Credit Rating is not an offer, invitation, inducement or
recommendation to purchase, sell or hold any securities
or otherwise deal or act in relation to any issue or Bank
Facility(ies), to which this Agreement relates or
otherwise in connection with any associated
transaction, entity, or matter. References in this
Agreement to "rating" or "credit rating" also
encompass any revalidation of Rating and the terms of
this Agreement will apply to any revalidation Rating.
iii. "Rating Fee" refers to the initial fee payable in advance
by your Company to ICRA in consideration for the
Rating to be assigned by ICRA to the Bank Facility and
shall be exclusive of the applicable service tax payable
thereon.
iv. "Surveillance Fee" refers to the fee payable in advance
by your Company to ICRA for the continuous
monitoring of the Rating by ICRA during the lifetime of
the Bank Facility and shall be exclusive of the applicable
service tax payable thereon.
B. Scope of Work and Rating Fee
I. ICRA shall, after due consideration, assign a Rating
(accompanied, if necessary, by an outlook and/or other
indicators) to the said Bank Facility of your Company.
II. Upon acceptance of the Rating or notification of use of
CS(OS) 128/2020 Page 8 of 47
the Rating by your Company to ICRA in the manner set
out in clause D (1) below, ICRA shall subject to clause F
of this Agreement, 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;
III. The initial non-refundable fee payable by your Company
to ICRA for the enhancement is Rs. 9,77,500. This
amount represents the sum of the following: Rating Fee
of Rs. 8,50,000; service tax of Rs. 1,27,500. The annual
Surveillance Fee for the enhancement from the second
year onwards will be Rs, 4,25,000, exclusive of
applicable rates of service tax. The Surveillance Fee,
which becomes chargeable after 12 (twelve) months from
the date of assignment of the initial Rating, will be
payable in advance. It is hereby clarified that
notwithstanding your non-acceptance of the Rating or
failure to notify ICRA of your acceptance/non-
acceptance of the Rating, any use of the Rating by your
Company, in any manner whatsoever, shall constitute
acceptance of such Rating and your Company shall be
obligated to pay Surveillance Fee after ICRA becomes
aware of the use of the Rating. Your Company shall also
reimburse ICRA all travel and out-of-pocket expenses
that it incurs in connection with the Rating process, both
initially and during surveillance. Rating Fee/Surveillance
Fee shall be paid by your Company by way of cheque or
demand draft (DD) or transfer through electronic
medium in favour of ICRA Limited. All Fees as
mentioned herein shall not be refundable under any
circumstances. ICRA reserves the right to revise the
Rating Fee/ Surveillance Fee payable by you under this
Agreement subject to maximum of 0.05% of the Rating
Fee/Surveillance Fee.
C. Disclaimer
I. Disclaimer of advice: We are not: (a) providing an audit
opinion any financial, legal, tax, advisory, consultative
or business services; or (b) advising on structuring,
CS(OS) 128/2020 Page 9 of 47
drafting or negotiating transaction documentation. You
should take independent legal, tax, financial and other
advice when structuring, negotiating and documenting
transactions. You agree that neither a Rating nor any
discussions with ICRA's analysts constitutes advice on
business operations.
II. Disclaimer of warranties: All information, including the
Ratings and other communications, provided by ICRA
relating to you, this Agreement, the facility or the
Transaction is provided "as is" and without
representation or warranty of any kind in particular,
neither ICRA nor its agents make any representation or
warranty, express or implied, as to the accuracy,
timeliness, completeness, merchantability or fitness for
any particular purpose of any such information or
communication.
III. We are an independent rating agency and may
determine, apply and amend our methodologies and
Rating in our sole discretion from time to time.
D. Acceptance/non-acceptance and use of Rating
I. After ICRA has informed your Company of the Rating it
has assigned, your Company shall communicate its
decision to ICRA regarding its acceptance of the Rating
in writing, and intended use of the Rating, in any manner,
within 7 (seven) days of the assignment of the Rating. In
the event your Company fails to notify ICRA of its
decision regarding its acceptance/non-acceptance of the
Rating, such failure shall be treated by ICRA as non
acceptance of the Rating. Notwithstanding the foregoing,
any use by you of the Rating shall be deemed acceptance
of the Rating.
II. During such 7 (seven) days acceptance time period, and
thereafter if the Rating is not accepted by your Company
within the stipulated time, such Rating shall remain
confidential subject to the terms of this Agreement,
including without limitation, clause N (Applicant
Confidentiality for Unpublished ratings). On request, an
unaccepted Rating may be converted to an accepted
CS(OS) 128/2020 Page 10 of 47
Rating, provided such request is made by your Company
within 2 (two) months from the date ICRA first
communicated its Rating decision to you. However,
before such conversion is made, the Rating initially
assigned may have to undergo a revalidation process. No
additional fee would be charged to your Company for the
conversion, unless the Rating initially assigned needs to
undergo a revalidation process. The Rating initially
assigned needs to undergo a revalidation process if
either (i) the size of the Bank Facility or structure of the
Bank Facility has changed before the Rating has been
accepted by your Company, or (ii) the request for
conversion is received by ICRA after 2 (two) months from
the date that ICRA first communicated its Rating decision
to you.
III. In case a Rating is not accepted by your Company within
the stipulated time, or in case of failure of your Company
to notify its acceptance or non-acceptance or use of the
Rating to ICRA as set out in clause D (I) or clause K III
(iv), as the case may be, the assigned Rating shall not be
subject to surveillance and ICRA shall not be responsible
for the continuous monitoring/surveillance of the
assigned Rating.
IV. You will only use each requested Rating for its intended
purpose and will not, for example, represent an issuer
rating as a securities rating.
E. Tenure of Agreement
I. This Agreement shall remain valid till the earlier of the
date that the Rating assigned is withdrawn or the date
that there are no longer any obligations outstanding
under the Bank Facility. This Agreement cannot be
terminated by your Company once it has accepted the
Rating.
II. Notwithstanding the clause E (I) above, the provisions of
clauses L (Warranty), M (Confidentiality); N (Applicant
Confidentiality Unpublished ratings), O
(Indemnification), P (Limitation of Liability), Q
(Warranties with respect to information provided to
CS(OS) 128/2020 Page 11 of 47
ICRA), R (Use of information) and U (IV) shall survive
any termination of the Agreement.
F. Changes in Rating
I. Subject to the terms and conditions of this Agreement,
ICRA will keep the Rating under surveillance until the
earlier of the date that the Rating is withdrawn or the
date that there are no longer any obligations outstanding
under the Bank Facility. Following surveillance, ICRA
may reaffirm, upgrade, downgrade, suspend, or
withdraw the Rating; further, it may assign an outlook,
or change or withdraw the outlook previously assigned;
it may also place the Rating (previously assigned) on
rating watch (with or without specified implications) or
remove it from rating watch.
II. If at any stage during the lifetime of the Bank Facility,
ICRA feels it is unable to carry out continuous
monitoring of the Rating(s) assigned because of a lack of
cooperation by your Company, ICRA will be entitled to
carry out a review of the Rating(s) outstanding on the
basis of the best available information. Further, ICRA
shall also be entitled to disclose such Rating(s) or
changes in the Rating(s) along with the rating
rationale(s) in any manner and to anyone it may decide
without any reference to your Company.
III. At any stage, failure on your part to furnish such
information as ICRA may require from time to time, or
failure to properly answer queries in a timely manner
that may be raised by ICRA or failure on your part to pay
Surveillance Fee as and when due, could result in ICRA
suspending, withdrawing, or revising the Rating
assigned.
IV. At any point, if ICRA is of the opinion that the
circumstances then prevailing justify change, suspension,
or withdrawal of the Rating, or warrant that the Rating
be maintained at the existing level, it shall have the right
to take the appropriate rating action, and such a decision
shall be final and binding on your Company.
CS(OS) 128/2020 Page 12 of 47
V. The Rating is specific to the terms and conditions of the
Bank Facility to be rated as indicated to ICRA by you
and any change in the terms or size of the same would
require revalidation of the Ratings which could result in
a change in the Ratings previously assigned.
G. Dissemination of rating
I. ICRA shall communicate its rating decision in terms of
assignment or change in the Rating to you in writing. The
right to accept and use the initial Rating will rest with
your Company. However, once you have accepted and/or
used the Rating assigned, ICRA shall have the right to
publish the Rating or any change or suspension or
withdrawal of the Rating, the rating rationale, and such
other relevant information employing its regular methods
of dissemination.
II. ICRA reserves the right to disclose the Rating, whether
accepted or not, as and when required by the appropriate
government, statutory, regulatory, judicial and quasi-
judicial authorities, auditors, bodies and/or stock
exchanges where such disclosure is permitted or required
by or under any law in force. In case of allegation of
misstatement by your Company, ICRA shall have the
right to disclose the assigned Rating in public documents
and/or publicity material and/or other forum.
H. Revalidation of the Rating
I. The rating assigned to the Bank Facility of your
Company shall require revalidation if there is any
change in the size or structure of the Bank Facility.
I. Suspension/withdrawal of rating
I. ICRA shall suspend/withdraw the assigned Rating in
accordance with its suspension/withdrawal policy in
force.
II. Suspension may be revoked on receipt of renewal request
from your Company.
III. Subsequent revival of the suspended rating will not be
subject to any acceptance.
M. Confidentiality
CS(OS) 128/2020 Page 13 of 47
I. ICRA's confidentiality: "Confidential Information" means
any information regarding your Company or the Bank
Facility rated by ICRA under this Agreement that ICRA
receives from you, or your respective group companies
or authorized agents in connection with ICRA's services
accompanied by a written notice specifying the
confidential nature of such information. The term
"Confidential Information" does not, however, include (i)
information that is or becomes publicly known other than
by an act of ICRA in contravention of this Agreement;
(ii)information in our possession prior to the execution of
this Agreement; (iii) information that becomes available
to ICRA from a third party; (iv) information developed
independently by ICRA; (v) information that has been
aggregated or transformed in such a way that it is no
longer identifiable as relating to any individual; or (vi)
information that is approved in writing by you for public
disclosure.
ICRA shall retain any Confidential Information and not
disclose the same to third parties outside of ICRA, but
such retained Confidential Information will remain
subject to the confidentiality obligations contained in the
Agreement.
We may, however: (i) disclose Confidential Information
as required by law, regulation, judicial or governmental
order, subpoena or other legal process or requested or
required by any governmental or regulatory authority
including any self-regulatory organization, securities
market or exchange; (ii) publish or otherwise make
publicly available (including by press release) any
rating(s) or any other opinion regarding a particular
Bank Facility, entity or transaction that incorporates
Confidential Information; and (iii) disseminate
aggregated or transformed information as permitted by
the section titled ""Use of information above. You
confirm that, to the best of your knowledge, there are no
third parties whose rights would be adversely affected by
way of such publication or dissemination, ICRA reserves
CS(OS) 128/2020 Page 14 of 47
the right to use, publish, disseminate, or license others to
use, publish or disseminate any information provided by
you or your agents or advisors not deemed Confidential
Information.
II. Applicant confidentiality: You agree to keep the
provisions of this Agreement and any other non-public
information with respect to the related rating(s) disclosed
by ICRA to you confidential and not to disclose such
provisions or information to any person or entity
except:(i) to your group companies, officers, directors,
employees and agents; and (ii) as required by applicable
law, or at the request of any governmental authority
having jurisdiction. You will be responsible for any
failure by any of your group companies, officers,
directors, employees, or agents to comply with these
confidentiality restrictions. If ICRA provides a
revalidation that has not been publicly disclosed by
ICRA, such revalidation must be kept strictly
confidential, and should not be disclosed to any person
or entity without ICRA's prior written consent.
N. Applicant Confidentiality for Unpublished ratings
The following additional confidentiality provisions are
applicable to any unpublished rating or other opinion
delivered by ICRA hereunder, i.e., any rating or other
opinion not disclosed by ICRA to the general public at
the time of delivery by ICRA, including, without
limitation, any Rating during the 7 (seven) days
acceptance period and thereafter in the event that the
Company does not accept the Rating.
For the purpose of this Agreement, "ICRA's Confidential
Information" means any non-public information that
ICRA discloses to either of : (i) you or any of your
agents; or (ii) if different, any relevant entity on which a
rating is requested or whose issuances are requested to
be rated under this Agreement (each, a "Rated Entity")
or its agents. ICRA's Confidential Information includes
any rating and/or other opinion we deliver in connection
with this Agreement that we do not also disclose to the
CS(OS) 128/2020 Page 15 of 47
general public at the time of delivery
You agree to keep ICRA's Confidential Information
confidential and treat it accordingly. You must refrain
from direct or indirect communication or disclosure of
ICRA's Confidential Information to any persons(s) other
than: (i) your employees, officers and directors and those
of any entities that are wholly owned, directly or
indirectly, by your ultimate parent, whose functions
reasonably require them to have knowledge of ICRA's
Confidential Information in order to fulfill their
professional duties as agents of the Rated Entity; and (ii)
your financial and legal advisors, in their capacity as
such with a need to know, for information purposes only
and to whom we owe no duty or responsibility. You will
ensure that all above persons listed in sub clauses 9i)
and 9ii) comply with all of the provisions in this
Agreement and any breach of the same will be deemed to
be a breach of this Agreement by you.
(Emphasis supplied)
Issue No.(i):
16. To canvass that ICRA could not have published the rating learned
counsel for the JPL states that ICRA is not a statutory body and thus, not a
regulator of the JPL. The relationship between JPL and ICRA is based on an
agreement and thus, ICRA is required to abide by the terms of the
agreement. Grievance of the JPL is that while carrying out the ratings,
ICRA assumed the role of a forensic auditor, which it is not vested with.
Despite JPL having objected to the proposed rating rationale of ICRA dated
24th April, 2020 by a detailed representation dated 26nd April, 2020, ICRA
sent a mail on 30th April, 2020 informing that it was maintaining the rating
„BBB‟, thus downgrading the rating of JPL. Clause B(II) of the agreement
between the parties provides that upon acceptance of the rating or
notification of use of rating by JPL to ICRA in the manner set out in Clause
CS(OS) 128/2020 Page 16 of 47
D(I), ICRA shall, subject to Clause F of the agreement, keep the rating
under surveillance during the life time of bank facility.
17. Learned counsel for the JPL contends that JPL having not accepted
the credit rating, ICRA was prohibited from publishing the same in view of
Clause G of the Credit Rating Agreement. Clause G(I) of the agreement
clearly stipulates that only on acceptance of the rating, the same can be
published. Therefore, acceptance of the credit rating by JPL is a sine qua
non for ICRA to publish the rating. Even on 30th April, 2020, JPL refused to
accept the rating and hence, the same could not have been published. In
case acceptance by JPL is not treated as a pre-condition for publishing the
rating by ICRA, then Clause G(I) of the agreement between the parties
would be rendered nugatory. Clause G(II) stipulates that ICRA has a right
to publish the rating as and when required by government authorities or any
other statutory authority. The impugned publication has not been done by
ICRA pursuant to the requirement of any government or statutory authority.
By publishing the credit rating, ICRA has violated Clauses M and N of the
agreement providing for confidentiality. Reliance of ICRA upon Clause D
to defend its action or to plead credit rating binding on JPL is totally
misplaced as Clause D of the agreement is functioned upon
„acceptance/non-acceptance of the credit rating‟ and „use of the credit rating
by the client‟. On a harmonious reading of Clauses D and G of the
agreement, the only conclusion that can be arrived at is that ICRA could
conduct its rating exercise any time and upon declaring its credit rating, it
was upon the JPL to accept or reject the same, which JPL specifically
refused on 30th April, 2020. Consequently, ICRA was not bound to publish
the rating after the same had been refused to be accepted by JPL on 30th
CS(OS) 128/2020 Page 17 of 47
April, 2020. Reliance is placed on the decisions in (1973) 2 SCC 825 Delhi
Development Authority Vs. Durga Chand Kaushish and (1991) 1 SCC 412,
M.O.H.Udman and Ors. Vs. M.O.H. Aslam.
18. Refuting the arguments of learned counsel for JPL, learned counsel
for ICRA submits that on a plain reading of the rating agreement, in
conjunction with CRA regime as also the RBI circular, the only
unambiguous conclusion that can be arrived at is that the publication of the
rating under surveillance is not subject to the acceptance of JPL. Contingent
on the circumstances and consideration of the factors which involve
annulment of prognosis, ICRA has a right to change the ratings and
consequentially bound to publish irrespective of JPL‟s non-acceptance. It is
contended that neither the CRA regime nor the circulars of SEBI/RBI
mandate the consent of the issuer for publication of the rating action under
surveillance. In the event, the initial rating is not accepted by issuer and not
used to raise funds, the rating rationale cannot be disseminated to the
beneficiaries, hence, there can be no requirement to disseminate any changes
in the same as well. However, if the initial rating is accepted by the issuer,
the same is disseminated to the beneficiaries and consequentially, if there is
any change in the rating, the same would also be required to be
disseminated. Thus, the contention of the learned counsel for ICRA is that
only in the first/initial rating, no publication will follow subsequent to the
objection of the issuer, however, once the rating is published, then, the
issuer would have no say in the subsequent ratings as the same affects the
rights of the beneficiaries who have invested pursuant to the credit ratings
initially assigned by ICRA.
19. Learned counsel for defendant further refers to Regulation 15(2) in
CS(OS) 128/2020 Page 18 of 47
this regard which mentions about changes in ratings. Additionally,
Regulation 16 also mentions that all published ratings are subject to
surveillance, meaning thereby "accepted" initial ratings which are published,
have to be monitored‟. The CRA regulations and the Master Circular
provides for option of acceptance by the issuer at the time of initial rating
but not during the course of surveillance. Even as per Clauses 3.3.6 and
3.3.9 of the Master Circular, surveillance of the rating is critical and
dissemination of the rationale has to be completed within the specified time
limit. Further, any delay in the time lines to disclose on the website affects
the beneficiaries. Though time for acceptance by the issuer is provided in
case of initial rating, however, no such time is provided in case of
surveillance which mandates that the rating is to be disseminated within five
working days of the decision of the rating committee. Thus, from the Master
Circular of the SEBI itself, it is evident that the acceptance of the issuer is
not required for dissemination of rationale for cases under surveillance. In
the event of non-publication of the rating, the same may amount to an
indicative rating which is barred by SEBI. The Master Circular of the SEBI
further require publication of the rating irrespective of the non-cooperation
of the issuer including non-payment of fee in terms of Regulation 16(3) read
with Clauses 2.9, 3.3.3 and 3.3.7 of the Master Circular. Publication of the
credit rating and rationale by the credit rating agency in a timely manner
plays a critical role in protection of the interests of the investors in security
markets. Reliance is placed on the decision of Bombay High Court in
E.C.L. Finance Limited Vs. ICRA Ltd. and Another.
20. It is contended by learned counsel for the defendant that as per the
CRA regulations and the circulars issued thereunder, ICRA as a responsible
CS(OS) 128/2020 Page 19 of 47
institute, is expected to pro-actively track all important changes which make
an independent assessment and promptly disseminate timely and accurate
ratings. The primary role of a credit rating agency is to bridge the
information and raise symmetry between the company and shareholders.
While extending loans on credit facilities, banks heavily rely upon the credit
ratings given by the agencies including ICRA and in case the revised ratings
pursuant to the surveillance is not published, the user of the rating will
erroneously be relying upon previous rating which may result in loss to the
said party. Ratings once published cannot be withdrawn without a non
objection certificate from the concerned bank and cannot be suspended.
Reference is made to Clause 3.3 of the Master Circular. After following the
procedures prescribed under the agreement and Master Circular of the SEBI,
publication is carried out in terms of Clauses D, F and G of the rating
agreement. The dissemination of the rating through ICRA‟s website has
been prescribed by the SEBI under Clause 2.5 and 3.3.1 of the Master
Circular. Reliance is placed on the decision of Madras High Court in (2001)
1 BC 52 First Leasing Company of India Vs. ICRA Ltd.
21. A perusal of the agreement between JPL and ICRA clearly indicates
that a rating is sought by a party from the credit rating agency to avail a
bank facility. Only on the credit rating being awarded the credit facility is
granted and since the bank takes into consideration the opinion of the credit
rating agency while granting the credit facility, the agency is duty bound to
fairly continue to assess the credit rating of the party which is called
"surveillance rating" during the lifetime of the credit facility. This fact is
further clarified from clause-B sub-clause (iii) which states that
notwithstanding JPL‟s non-acceptance of the rating or failure to notify
CS(OS) 128/2020 Page 20 of 47
ICRA of its acceptance/non-acceptance, if JPL uses the rating for the
purposes of availing a bank facility, the rating as awarded by ICRA would
be deemed to have been accepted and JPL would be obligated to pay the
surveillance fee.
22. Further, Clause-G (I) provides that ICRA is required to communicate
to JPL its rating decisions in terms of the assignment or change in the rating
in writing and whether to accept the same and use the initial rating will be
upon the company. In case there is no protest and the rating is accepted,
ICRA has a right to publish the rating or any change or suspension or
withdrawal of the rating on its regular methods of dissemination. ICRA
further reserves its right to disclose the rating, whether or not accepted by
JPL as and when required by the government, statutory, regulatory or
judicial or quasi judicial authorities etc.
23. Case of the ICRA is that it is only that only the initial rating can be
accepted or objected to by JPL and subsequent rating cannot be objected to,
once the initial rating is utilized to avail the credit facility. However, even
then it has been reviewed by a Review Committee comprising of other
persons pursuant to the representation of JPL dated 26th April, 2020 and only
after the Review Committee decided to maintain the downgraded rating that
the letter dated 30th April, 2020 was communicated to JPL and the rating put
up on the website.
24. For the purposes of ascertaining whether defendant has followed the
CRA Regulations, it would be relevant to note the relevant provisions
thereof as under:
Monitoring of ratings
15. [(1) Every credit rating agency shall, during the lifetime of
CS(OS) 128/2020 Page 21 of 47
securities rated by it continuously monitor the rating of such
securities, unless the rating is withdrawn, subject to the
provisions of regulation 16(3).]
(2) Every credit rating agency shall disseminate information
regarding newly assigned ratings, and changes in earlier rating
promptly through press releases and websites, and, in the case
of securities issued by listed companies, such information shall
also be provided simultaneously to the concerned regional
stock exchange and to all the stock exchanges where the said
securities are listed.
Procedure for review of rating
16 [(1) Every credit rating agency shall carry out periodic
reviews of all published ratings during the lifetime of the
securities, unless the rating is withdrawn, subject to the
provisions of regulation 16(3).]
[(2) If the client does not co-operate with the credit rating
agency so as to enable the credit rating agency to comply with
its obligations under regulation 15 of these regulations, the
credit rating agency shall carry out the review on the basis of
the best available information or in the manner as specified by
the Board from time to time.
Provided that if owing to such lack of co-operation, a
rating has been based on the best available information, the
credit rating agency shall disclose to the investors the fact that
the rating is so based.]
[(3) A credit rating agency shall not withdraw a rating so long
as the obligations under the security rated by it are
outstanding, except where the company whose security is rated
is wound up or merged or amalgamated with another company,
or as may be specified by the Board from time to time.]
(Emphasis Supplied)
25. A perusal of Regulations 15 and 16 which relates to the monitoring of
the ratings and not initial rating reveals that the Credit Rating Agency is
mandated to continuously monitor the rating unless the same is withdrawn,
CS(OS) 128/2020 Page 22 of 47
subject to the regulation 16(3) and the Agency is also mandated to
disseminate the said information regarding newly assigned ratings through
press releases and websites during the lifetime of securities related.
Regulation 16 further mandates periodic reviews of all published ratings
during the lifetime of the securities, unless the rating is withdrawn. Thus if
the security subsists and is pending all published ratings are bound to be
reviewed periodically even if the client does not cooperate with the Credit
Rating Agency and complies with its regulation. Further the Credit Rating
Agency cannot withdraw a rating as long as the obligations under the
security rated are outstanding unless the company whose security is rated is
wound up or merged or amalgamated with the another company or as may
be specified by SEBI from time to time.
26. Further the Code of Conduct i.e. IOSCO Credit Rating Agency Code
defines "Credit rating action" as „to determine an initial credit rating, an
upgrade of an existing credit rating, a downgrade of an existing credit rating
(including to a default category), an affirmation of an existing credit rating,
or a withdrawal of a credit rating‟. Thus after the initial credit rating is
assigned, the action of the credit rating agency in the form of credit rating
action continues by upgrading or downgrading or maintaining the existing
credit rating or withdrawal of the credit rating.
27. In this regard it would also be relevant to note clauses 2.9, 3.3.3,
3.3.6, 3.3.7 and 3.3.9 of the Master Circular No.SEBI/ HO/ MIRSD/ DOP2/
CIR/P/2018/76 dated 2nd May, 2018 issued by SEBI which provide as under:
2.9 Policy in respect of non-co-operation by the issuer 22
2.9.1. In case of non-cooperation by the issuer (such as
not providing information required for rating,
non-payment of fees for conducting surveillance),
CS(OS) 128/2020 Page 23 of 47
in line with the existing Regulations, the CRA shall
continue to review the instrument, on an ongoing
basis throughout the instrument‟s lifetime, on the
basis of best available information, in accordance
with the rating process and policies set forth in its
Operations Manual/ Internal governing document.
2.9.2. In such cases the credit rating symbol shall be
accompanied by the suffix "ISSUER NOT
COOPERATING" in the same font size. The suffix
shall be explained below and shall read as „Issuer
did not cooperate; based on best available
information‟.23
2.9.3. The rating action(s) in such cases shall be
promptly disclosed through press release(s), which
shall mention, at least, the following:
a. Date of Press Release
b. Details of Instrument
c. Rating Action and Indicative/updated rating
based on best available information
d. A brief write-up on the non-co-operation by
the Issuer/ Borrower and the consistent
follow-up done by the CRA for getting the
information.
e. Hyperlink/ reference to the applicable
"Criteria"
f. Limitations regarding information
availability (shall have a suitable caveat
cautioning the investors/lenders /public)
g. Rating History for last three years
h. Name and contact details of the Rating
Analyst(s)
2.9.4. In case an issuer, having not co-operated with a
CRA in the past, approaches another CRA for
rating, the new CRA shall, in its Press Release,
disclose the aspect of non-co-operation.
3.3 Continuous Disclosures and Reporting
CS(OS) 128/2020 Page 24 of 47
3.3.1 xxx xxx
3.3.2 xxx xxx
3.3.3. The CRA shall also make a reference to SEBI
regarding such suppression of information by the
issuer/ non-cooperation of Issuer with CRA.
Failure to make such reference shall be
considered as aiding and abetting the Issuer in
suppression of material information by the CRA
which would be in contravention of Clause 12 of
Code of Conduct of CRAs and may result in
violation of the provisions of section 12A of the
Securities and Exchange Board of India Act, 1992
and SEBI (Prohibition of Fraudulent and Unfair
Trade Practices relating to Securities Market)
Regulations, 2003 by the CRA.
3.3.6. Timelines of review and Press Releases
a. In order to enable CRAs to disseminate
information on ratings promptly through press
releases as per requirements of Regulation 15 and
16 of SEBI (CRA) Regulations, following is
clarified:
i. Initial Rating:
Scenario Timelines - immediately but
not later than
Acceptance of Rating/ 5 working days of
Appeal for Review of communication of rating by
Rating by the Issuer the CRA to the Issuer
Disclosure of rating as In case rating is not accepted
non-accepted Rating by the Issuer within a month of
communication of rating by
the CRA to the Issuer, the
same shall be disclosed as
Non-Accepted Rating on the
CRA‟s website
Dissemination of Press 2 working days of acceptance
Release on CRA‟s of Rating by the Issuer
website and intimation
of same to Stock
CS(OS) 128/2020 Page 25 of 47
Exchange/ Debenture
Trustee
ii. Periodic Surveillance:
Scenario Timeline - immediately but not
later than
Dissemination of Press 5 working days of Rating
Release on CRA‟s Committee Meeting
website and intimation
of same to Stock
Exchange/ Debenture
Trustee
iii. Dissemination of Press Release on CRA‟s website
and intimation of same to Stock Exchange/
Debenture Trustee in case of event based review:
Scenario Timeline- immediately but
not later than
Intimation from Issuer/ 2 working days of intimation
Debenture Trustee/
Bankers of the Issuer
regarding delay in
servicing debt obligation
Material Events requiring 7 working days of
review (as stated in occurrence of the event.
paragraph 2.4.2)
3.3.7. Disclosures in case of considerable delay in providing
information by the Issuer:
a. As per Regulation 18(2) of SEBI (CRA) Regulations,
1999, the CRA, while covering the analysis of the various
factors justifying the assessment in press release, shall
also disclose the factors constituting a risk.
b. Accordingly, it is further clarified that if the issuer does
not share information sought by the CRA within 7 days of
seeking such information from the Issuer, even after
repeated reminders (within these 7 days) from the CRA,
the CRA shall take appropriate rating action depending
upon the severity of information risk of the issuer.
CS(OS) 128/2020 Page 26 of 47
c. The Press Release in such cases shall mention the efforts
made by the CRA in seeking such information and
limitations regarding such information availability.
3.3.9. Disclosures in case of delay in periodic review
a. Each CRA shall promptly disclose on its website details
of all such ratings where the review became due but was
not completed by the due date, as per the timelines
specified in the CRA‟s Operations Manual/ Internal
governing document. Details disclosed shall include the
name of the issuer, name/ type of instrument, size of the
issue, date of last review, reasons for delay in periodic
review, hyperlink to the last Press Release, etc.
28. As noted above clause 3.3.6 refers to the requirement of CRA
Regulations 15 and 16 and clarifies that the time for acceptance of
rating/appeal for review of the rating by the issuer is five days of
communication of the rating by CRA to the issuer and in case the rating is
not accepted by the issuer within one month of communication of rating, the
same shall be disclosed as non-accepted rating. However, on acceptance of
the rating by the issuer, the same will be disseminated by press release on
Credit Rating Agency‟s website and intimation to the Stock
Exchange/Debenture Trustees within two days. However, in respect to
periodic surveillance there is no provision of a period of one month from the
date of communication wherein the issuer has to accept or not accept the
rating and within five working days of the Rating Committee Meeting the
rating has to be disseminated by press release on Credit Rating Agency‟s
website and duly intimated to stock exchange/debenture trustees. Clause
3.3.9 also provides that despite delay where credit rating is reviewed but not
completed within the due date on completion thereof the same will be
promptly disclosed on the website.
CS(OS) 128/2020 Page 27 of 47
29. Thus the 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.
30. The Madras High Court in First Leasing Company of India vs. ICRA
(supra) acknowledging the right of ICRA to publish the rating in case of
change held:
18. The respondent is required to disseminate information
relating to the ratings and changes to earlier ratings promptly
through press releases and websites, etc.; in order to provide
timely information to the investors as well as the prospective
investors. According to the respondent, for this purpose of
continuous surveillance throughout the life of the instrument
and for regular modes of dissemination to the investors, the
respondent receives a mandate from its clients requesting for
carrying out a credit rating exercise. Through such mandate
the applicant also acknowledged the right of the respondent to
publish the rating and any changes in it. Consequently, the
respondent is required to give a rationale for the rating
assigned to the client who acknowledged that if at any time in
the opinion of the respondent based on any event or change of
event, the rating, assigned to the instrument warrants revision.
It is open to the respondent to make such a revision and to
publish such a review in rating in any manner.
31. Learned counsel for JPL relied upon the decision of the Bombay High
Court in ECL Finance Limited vs. ICRA (supra) however, in the said
decision the relief sought by the petitioner therein was that no rating action
should take place for three months till Covid-19 pandemic subsides and
Covid-19 pandemic be not used as a basis for downgrading. The only relief
granted by the Bombay High Court was that the petitioners therein were
permitted to present their case before the next meeting of the Rating Review
Committee.
32. Reliance of learned counsel for JPL on clauses (M) and (N) of the
Rating Agreement between the JPL and ICRA to contend that publication of
the rational breaches the confidentiality provisions is misconceived. Under
clause (M) ICRA is entitled to publish its opinion and if an information is
used as a part of rating rational, ICRA would be bound to disclose the same.
Also JPL has placed on record no material to show that which piece of
information supplied by JPL was classified as 'confidential' which has been
published by ICRA. Further clause (N) does not pertain to the rating actions
under surveillance and applies to initial rating which if not accepted is
unpublished and based thereon no financial facility is raised.
33. Learned counsel for JPL further relied upon the decisions reported as
1973 (2) SCC 825 Delhi Development Authority vs. Durga Chand Kaushish
(supra) and 1991 (1) SCC 412 M.O.H Udman & Ors. vs. M.O.H Aslam
(supra) to contend that if two constructions of the document are possible, the
one which will not render a provision nugatory has to be adopted and that
the intention of the parties must be gathered from the language used in the
contract. As noted above, 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.
34. In view of the discussion aforesaid this Court is of the considered
opinion that 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.
Issue No.2
35. Learned counsel for JPL contends that rating awarded by ICRA is not
a mere opinion but a decision of the credit rating agency after an objective
exercise for assessing the credit worthiness of a party is conducted. There
are well defined objective parameters required to be followed by all rating
agencies including the defendant. By terming its deliberations as an opinion
ICRA is avoiding scrutiny by this Court. The major rating drivers cited by
ICRA for downgrading the rating of JPL can be classified in four broad
categories, that is, (i) elongated receivables cycle, which results in stretched
liquidity position; (ii) modest debt-coverage metrics; (iii) elevated debt
level; (iv) exposure to power off take and raw material availability. The
decision of ICRA to downgrade the rating is not only perverse but arbitrary
as ICRA has perversely relied upon non-signing of incremental Power
Purchase Agreements (PPAs) and default in payment of TANGEDCO due
to COVID-19 situation.
36. Learned counsel for JPL submits that though in the financial year
2020 there was no incremental signing of PPA by JPL however, its existing
long term PPA of 810 MW continued to be in force. JPL has received
timely payments for its invoices beyond August, 2019. Payments for
February 2020 invoices were due on 8th April, 2020 and the payments for
March, 2020 were due on 4th May, 2020 for a sum of ₹113 crores and ₹118
crores respectively. Due to COVID-19 situation TANGEDCO, resulting in
reduced collection paid 50% of the February, 2020 invoice and verbally
requested JPL not to enforce the letter of credit. While awarding the credit
rating ICRA failed to note the rating drivers in favour of JPL, that is, (i)
additional income of about 430 crores per year from JSPL by way of interest
on loans, w.e.f. the 1st quarter of 2019-2020, which gives a quantum jump to
the loan serviceability by JPL; (ii) new short term PPA of 200 MW with
OPJ Industrial Park at 3.90/kwh; (iii) although repayments increased from
₹497 crores in F.Y.2019 to ₹695 crores in F.Y. 2020 and are increasing to
more than ₹800 crores from F.Y.2021 onwards, plaintiff has already served
repayments of ₹695 crores in F.Y. 2020 which amount would increase to
₹800 crores in F.Y. 2021. Although repayment of principal is getting
increased by ₹105 crores in F.Y. 2021 as compared with F.Y. 2020,
however, due to repayment of ₹695 crores in F.Y. 2020, there will be
reduced interest outgo by ₹75 crores in F.Y. 2021, thus the net increase on
account of debt obligation is only by ₹30 crores; and (iv) out of ₹800 crores
repayment in F.Y. 2021, and post the second moratorium provided by RBI
now the revised repayment for F.Y. 2021 stands at ₹583 crores. The Plaintiff
having already paid ₹56.8 crores to Templeton Mutual Fund towards NCD
repayment, now the balance repayment for the F.Y. 2021 is ₹526.20 crores.
37. Learned counsel for JPL contends that a perusal of the rating drivers
would indicate that JPL was in a better position in 2020, than in the year
2019 and despite being in a better position in the year 2020 the rating of
BBB+ of the year 2019 has been downgraded to BBB, that is, from „stable‟
to „negative outlook‟. Non-convertible debentures of JPL have been in the
year 2020 fully paid up. Further ICRA failed to consider the letter of
TANGEDCO written to JPL stating that it was approaching financial
institutions with respect to payment of dues of JPL. Therefore, the opinion
concerning delay in realization of receivables by JPL was also incorrect.
Though ICRA published an article in Financial Express that there is bound
to be 1% fall in power demand by financial year 2021 due to COVID-19 but
still ICRA downgraded the rating on the ground that there is already a stress
in power sector due to COVID-19. This is also contrary to the fact that
consumption of power sector continued even during lockdown for the reason
the same was an essential service. Reliance is placed by the learned counsel
for JPL on the decisions reported as AIR 1967 SC 295 Barium Chemicals
Ltd. vs. Company Law Board; 1974 (2) SCC 687 M.A. Rasheed vs. State of
Kerala, 1994 Supp (3) SCC 424 S.Ramachandra Raju vs. State of Orissa.
and 2001 (2) SCC 305 Bishwanath Prasad Singh vs. State of Bihar.
38. Refuting the contentions of learned counsel for JPL, learned counsel
for ICRA submits that the relevant factors to be considered to ascertain the
credit worthiness of JPL were duly considered by ICRA. A credit rating
agency is required to keep track of all important changes relating to the
client companies and monitor closely all relevant factors that may affect the
credit worthiness of the issuer and reliance is thus placed on the ICRA
Regulations Code of Conduct-clause-8; Master Circular of SEBI-clause-
2.3.1 and clause 2.3 of IOSCO CRA Code. ICRA‟s risk analysis framework
for thermal power producers requires balancing of various complex factors
such as (i) business risk drivers, which include operating risk such as fuel
availability and pricing risk; demand and tariff risk which includes
consideration of cost competitiveness; counter-party credit risk; competitive
position; past track record; and force majeure risk; (ii) industry risk drivers,
which includes regulatory risk; (iii) financial risk drivers, which includes:
adequacy of future cash flows; profitability; leverage and coverage
indicators; liquidity and financial flexibility; tenure mismatches and risks
relating to interest rates and refinancing; foreign currency related risks; debt
transaction structure; accounting quality and contingent liabilities/off-
balance-sheet exposures in addition to management quality and corporate
governance and parentage. The financial risk assessment is not done in
isolation but in conjunction with the business and industry risks that the
entity is exposed to. Since the prime objective of the rating exercise is to
assess the adequacy of the issuer‟s debt servicing capability, the defendant
draws up projection on the likely financial position of the issuer under
various scenarios. The extent of deterioration of credit profile on account of
pandemic is being considered for all entities but the same is factored into
depending upon their sector and their financial position. The limited
exemption provided by SEBI under its circular dated 30 th March, 2020 to the
rating agencies on non-consideration of pandemic was that discretion was
granted to the credit rating agency to determine whether any default had
occurred on account of pandemic or independent of pandemic and in the
case of default the credit rating of an entity slips down to „D‟ rating.
39. Learned counsel for ICRA further states that the downgrading
published on 30th April, 2020 was based on multiple reasons after balancing
various competing factors, some which strengthened the credit profile,
whereas some weakened the same. Undoubtedly, plaintiff‟s revenue from
TANGEDCO accounted for over 45% of its overall revenues, however,
given a high dependence of revenues and receivables from the state
distribution utilities, JPL faced the risk of an elongated receivable cycle and
due to delays in payments from TANGEDCO, the receivable turnover
period of JPL increased from 121 days in financial year 2018 to 167 days in
financial year 2019 and to 200 days in financial year 2020. Sizeable
amount of funds blocked in the receivables continued to have a bearing on
the Plaintiff‟s liquidity profile, which remained stretched as reflected in
consistently high working capital limit utilization averaging at 93% in nine
months of financial 2020 and over 95% in the third quarter of the financial
year 2020 and 96% as on 1st April, 2020. Further repayments in the earlier
years remained moderate however, increased substantially in the financial
year 2020. Thus the liquidity position which was considered moderate
while awarding the rating rational of July, 2019, was considered stretched in
the rational dated 30th April, 2020. It is the case of ICRA of that all
reasonable factors were considered and no arbitrary factor was considered.
40. From the agreement between the parties, CRA Regulations of SEBI
and master circulars, it is evident that the rating provided by any rating
agency is an independent opinion of an expert body on the likelihood of the
issuer to reimburse the principal and pay the interest on its debt obligations
on the due dates in the future. As per Regulation 2(q) of the CRA
Regulations, to formulate an opinion on the credit rating, the analyst and the
Rating Committee are required to consider various factures, some of which
represent credit strengths and other factors which represent credit
challenges. Consequently, the analysts and the rating committee balance
such conflicting factors and exercise their independent professional
judgment, by relying on, amongst other things, their past experience, to
apply these various factors to the available information, in the specific
context of that point in time and consider likely outcomes.
41. As per ICRA, the rating methodology used for rating the facilities of
JPL were; Corporate Credit Rating Methodology, Rating Methodology for
Thermal Power Producers and Liquidity analysis of the entities in non-
financial sector. The risk analysis framework used by ICRA for thermal
power producers requires balancing of various factors and can be broadly
divided into the following:
(i) Business risk drivers which include operating risk; demand and
tariff risk; counter party credit risk and force majeure risk.
(ii) Industry risk drivers which includes regulatory risk
(iii) Financial risk drivers, which includes adequacy of future cash
flows; profitability; leverage and coverage indicators; liquidity
and financial flexibility; tenure mismatches and risks relating to
interest rates and refinancing; foreign currency-related risks;
debt transaction structure; accounting quality; and contingent
liabilities/off-balance sheet exposures. Some of the other risks
considered are management quality and corporate governance
and parentage.
42. According to ICRA, the reasons to downgrade the ratings of JPL
were:
(i) The ratings downgrade and revision in outlook to
Negative factored continued pressures on Plaintiff‟s debt
coverage metrics and liquidity profile, owing to its
inability to secure incremental long-term/medium-term
power purchase agreements (hereinafter referred to as
"PPAs"), as well as to correct its receivables position.
The off take risks stand heightened as lockdowns due to
Covid-19 have adversely impacted the all-India
electricity demand, in turn affecting its sales in the short-
term/power exchange market. While access to thermal
coal at competitive rates is supporting the Plaintiff‟s
profitability at present, ability to achieve a sustainable
improvement in the plant load factor (hereinafter
referred to as "PLF") remains crucial for an
improvement in debt coverage metrics, considering the
Plaintiff‟s sizeable repayment obligations in the near-
medium term (annual repayments of more than ~Rs 800
crores from FY2021 onwards).
(ii) Of the 810 MW capacity tied-up at present under
medium/long-term PPAs for Plaintiff (out of total 3,400
MW installed capacity), Tamil Nadu Generation and
Distribution Corporation Limited (hereinafter referred to
as "TANGEDCO") accounts for nearly 50%. In
FY2020E, Plaintiff‟s revenues from TANGEDCO
accounted for over 45% of its overall revenues (including
revenues from a medium-term PPA of 200 MW which
expired in August-2019). Given the high dependence of
revenues and receivables from the state distribution
utilities, Plaintiff faces the risk of an elongated
receivable cycle. More specifically, delays in payments
from TANGEDCO resulted in an increase in receivable
turnover period for the Plaintiff from 121 days in FY2018
to 167 days in FY2019 and further to 200 days in
FY2020E. As per the latest position of receivables
shared by the Plaintiff (month-wise dues and payments
received during FY2020), defendant noted that
realisation of energy bills had regularised after August
2019, on implementation of the Government of India‟s
directives of LC-backed power purchases by Discoms.
However, some lags in clearance of bills in the recent
months together with significant amounts blocked
towards past dues continue to constrain Plaintiff‟s
overall receivables position. Sizeable amount of funds
blocked in the receivables continue to have a bearing on
the Plaintiff‟s liquidity profile, which remains stretched,
as reflected in consistently high working capital limit
utilisation averaging at 93% in 9M FY2020 (over 95% in
Q3 FY2020 and 96% as on April 1, 2020).
(iii) In this context, even in the last rating rationale (dated
July 29, 2019), it was duly highlighted that the Stable
outlook on the ratings reflected an expected improvement
in Plaintiff‟s receivables position by the end of FY2020.
Additionally, Defendant had noted a revival in activity in
medium/long-term PPAs in the industry and Plaintiff‟s
favourable positioning in the tenders, which provided
comfort on the Plaintiff‟s ability to secure incremental
PPAs. Plaintiff‟s inability to achieve any of the above
parameters was highlighted in July 2019 as a rating
sensitivity.
(iv) Further, while Plaintiff‟s repayments remained moderate
at Rs.367 crore and Rs.497 crore in FY2018 and
FY2019, respectively, these repayments increased to
Rs.830 crore in FY2020 (Rs.695 crore, excluding the
March 2020 instalment which is under moratorium as
per the RBI‟s Relief Package for Covide-19) and are
estimated at Rs.818 crore in FY2021. Given the sub-
optimal capacity utilisation, Plaintiff‟s debt coverage
metrics have remained modest, as reflected in an interest
coverage ratio (operating profit before depreciation,
interest and tax/interest) of 1.4 times in FY2020E.
Although additional interest income from its parent
company-Jindal Steel & Power Limited (JSPL)
supplements JPL‟s operational cash flows, its sustained
inability to secure additional long/medium-term PPAs for
a major portion of its installed capacity, and persistent
delay in correction of receivables from TANGEDCO,
continues to constrain an improvement in its debt
metrics.
(v) Consequently, the liquidity position, while considered
moderate in the rating rationale dated July, 2019, was
considered as „stretched‟ in the rationale dated April 30,
2020. As per the policy for analysis of liquidity, when
liquidity profile is stretched, the same may counter
balance other factors. The basis for the same is that, "In
some situations, liquidity attains such primacy that it
alone constrains an entity‟s credit rating, as other credit
drivers, even if supportive, become secondary. This
follows from the premise that to succeed in the long term,
an entity first needs to survive the short term. Thus, if an
entity has a precarious liquidity position, given the high
probability of default, it would likely be rated in the low
non-investment grade, regardless of other credit
positives" (emphasis supplied)
43. As against the reasons for ICRA to downgrade the rating of JPL one
of the contentions of JPL is that ICRA failed to consider the SEBI Circular
dated 30th March, 2020 which provided relaxations for compliances under
CRA Regulations, due to the COVID-19 pandemic and moratorium
permitted by the RBI as under:
1. In view of the developments arising due to COVID-19
pandemic and in light of the moratorium permitted by
Reserve Bank of India (RBI) (vide notification no.
RBI/2019-20/186, dated March 27, 2020) on loan
servicing, working capital facilities etc. for three months,
a need for temporary relaxations in compliance by CRAs
is felt. Accordingly, it has been decided to grant
relaxations from the requirements stipulated vide
circulars as under:
2. Recognition of Default
A. Currently, CRAs recognize default based on the
guidance issued vide SEBI circular dated May 3,
2010 and November 1, 2016.
B. In view of the nationwide lockdown and the three
month moratorium/deferment on payment
permitted by RBI, a differentiation in treatment of
default, on a case to case basis, needs to be made
as to whether such default occurred solely due to
the lockdown or loan moratorium.
C. Accordingly, based on its assessment, if the CRA is
of the view that the delay in payment of
interest/principle has arisen solely due to the
lockdown conditions creating temporary
operational challenges in servicing debt, including
due to procedural delays in approval of
moratorium on loans by the lending institutions,
CRAs may not consider the same as a default event
and/or recognize default. Appropriate disclosures
in this regard shall be made in the Press Release.
D. The above shall also be applicable on any
rescheduling in payment of debt obligation done
by the issuer, prior to the due date, with the
approval of the investors/lenders.
E. The above relaxation is extended till the period of
moratorium by the RBI.
3. Extension in timelines for press release and disclosures
on website
A. Considering that the CRAs are dependent on the
issuers and third parties for information collection
which is impaired due to current lockdown,
relaxation from timelines for rating action/issue of
press release by CRAs stipulated vide SEBI
circular dated June 30, 2017 is being granted.
However, CRAs should endeavour to finish the
exercise on a best effort basis. Such cases shall be
put up for ratification by the Rating Sub-
Committee of the Board of CRA.
B. Further, an extension of 30 days is being granted
for making annual and semi-annual disclosures by
CRAs on its website for the period ended March
2020.
4. This circular is issued in exercise of the powers
conferred by Section 11 (1) of Securities and Exchange
Board of India Act, 1992 read with the provisions of
Regulation 20 of SEBI (Credit Rating Agencies)
Regulations, 1999, to protect the interest of investors in
securities and to promote the development of, and to
regulate, the securities market.
44. The present case is not where JPL is defaulting in repayment and that
in terms of SEBI Circular dated 30th March, 2020 ICRA could have
considered whether the default occurred solely due to the lockdown or loan
moratorium. Further while assessing, ICRA was required to ascertain in
terms of Clause-2(C) whether the delay in payment of interest/principal
arose solely due to the lockdown condition creating temporary operational
challenges in servicing debt including due to procedural delays in approval
of the moratorium on the loans by the landing institutions. In the present
case as per JPL itself, since it is in essential services the services or the
consumption of the power of JPL continued and hence due to the lockdown
there was no lockdown in the services of JPL. The delay of repayment of the
dues by TANGEDCO, major service provider of JPL, was not on account of
COVID-19 situation but that being a government agency, the payment by
TANGEDCO due to the reduced collection was upto 50% by February,
2020. The said stretch situation was even prior to the lockdown and thus on
the said stretch situation of the liquidity, the lockdown had no bearing. Thus
if the delay in payment received by JPL was solely on account of lockdown,
JPL would have been entitled to the said relaxation however, the primary
basis of the assessment was that even in the pre-lockdown situation
payments being received by JPL were in stretched situation. Even in the
rating awarded in the year 2019, ICRA clarified that if the receivables of
JPL did not increase, the repayment would be stretched. Admittedly in this
year there was no new agreement entered into by JPL to supply of further
power. Further by clause (3) of the Circular dated 30th March, 2020 issued
by SEBI the extension of time was granted to credit rating such as ICRA to
complete the same in the extended period and issue a press release on the
website thereafter. Hence JPL cannot derive any benefits from the Circular
of SEBI dated 30th March, 2020. As against the plea of SEBI's Circular
dated 30th March, 2020, the reasoning of ICRA to down grade as noted in
para 42 above, inter alia being the inability to secure incremental PPAs and
receivable position from TANGEDCO which a major client of JPL being
uncertain; appear to be plausible and cannot be termed to be arbitrary or
suffering from non-application of mind.
45. After the rating dated 24th April, 2020 was communicated to the JPL,
JPL submitted its detailed representation dated 26nd April, 2020 relevant
portion whereof is as under:
"The entire power sector has seen a lot of stress over the last
few years. A large number of plants had to shut construction
and about 10000MW of power plants have been abandoned.
Another about 30000 MW of installed capacity is suffering due
to lack of PPAs and / or lack of coal FSAs. JPL is one such
plant but inspite of PPAs of only 1000 MW, the plant continues
to perform well and has duly met all its debt obligations
without any single default. The debt levels have been
continuously going down and the EBITDA improving over the
years. The performance of JPL during the year ending March
2020 has been either better or comparable to the previous year
ending on March 2019.
The recent lockdown on account of the covid has added fuel to
fire for this sector and some DISCOMS have served Force
Majure notices and are not drawing power and not paying any
fixed charges. Fortunately, JPL has not been affected and
100% power continues to be despatched to Tamil Nadu and
Kerela and Chattisgarh. Though the lockdown lifting is
uncertain, however, JPL continues to get full payments from
Kerela and atleast 50% from TANGEDCO even during this
difficult time."
46. Thus in the representation/objection, the main plank of submission of
JPL is that the entire power sector is in lot of stress however, as far as JPL is
concerned it is one of the non-defaulting parties and despite lack of PPAs
and/or coal FSAs it still has PPAs for 1000MW. The present assessment
awarding the credit rating to JPL by ICRA is not a comparative rating
between the various power sectors but an individual credit rating of JPL
based whereon JPL took the loan and merely because the entire sector is
stressed would not mean that JPL is not stressed and so the credit rating
should not be downgraded.
47. Though learned counsel for JPL repeatedly stated that JPL is in
possession of letter of credit for a sum of ₹140 crores, however, the fact
remains that it is the case of the JPL itself that based on the oral request of
TANGEDCO, JPL has not encahsed the letter of credit.
48. Learned counsel for JPL has relied upon the table noted herein below
to show that the criteria required to be considered remained unchanged or
had improved in the year 2020 however, still the credit rating was
downgraded. The comparative chart of the criteria is as under:
Positive Aspects in 2019 Negative Aspects in 2019
(i) Increased activity on tenders (i) Inability of Jindal Power
floated for the long/ medium-term Limited (JPL) to secure
power tie-ups in the country over long/ medium-term power
the past one year. (JPL emerged as purchase agreements
the L1 bidder for 515 MW) (PPAs) for two-thirds of
(ii) Favourable steps being taken by its 3,400- MW installed
the Government of India to address capacity
the issue of delayed payments by (ii) Delay in realisation of
various State Electricity receivables from Tamil
DISCOMS. Nadu Generation and
(iii) JPL‟s competitive capital as well Distribution Corporation
as cost-efficient operations Limited (TANGEDCO).
supported by the location of its
plant in proximity to various coal
blocks and linkage for part
capacity, which enables it to
compete effectively on tariffs.
(iv) The Stable outlook reflects ICRA‟s
expectation of comfortable credit
metrics in the near-term, supported
by PPAs in place for ~32% of its
installed capacity, increased
interest income from JSPL, which
is supplementing the company‟s
operational cash flows, and an
expected improvement in
receivables position by the end of
FY2020.
Positive Aspects in 2020 Negative Aspects in 2020
(i) Debt exposure reduced from Rs. Same as 2019
7200 Crs approx. to Rs. 6500.
(ii) The Plaintiff has bid for 420 MW (i) COVID - 19: The off take
and is placed at 2nd rank of risks stand heightened as
preference, the PPAs for which are lockdowns due to Covid-19
likely to be signed soon after the have adversely impacted the
COVID lockdown is lifted. This all-India electricity demand,
would ensure that the power in turn affecting its sales in the
demand is restored back to normal. short-term/ power exchange
(iii) Receivables stand completely market.
secured with the new scheme from
government where State based
distribution utilities have to
provide LC‟s.
(iv)The recent payment by
TANGEDCO of Feb 2020 which
was due by April 4th 2020 was
delayed due to COVID-19 and the
Plaintiff has not encashed the LC
only at the request of the
government. It is to be noted that
the Plaintiff has received 50% of
the receivables and the balance
will be paid shortly.
(v) The past dues from TANGEDCO
have been received as per
settlement of legal cases. The
Plaintiff will also be receiving the
remaining dues after the APTEL
reopens and the final hearing of the
change in law is completed.
49. It is not disputed that as against the installed capacity of JPL of 3,400
MW, JPL has been able to tie up for utilization of the power only to the
extent of 1/3rd nearly more than 1,000 MW and thus 2/3rd of its installed
capacity remains unutilized, hence the two important factors that have
weighed in the opinion of ICRA alsoto downgrade the rating i.e. there is no
incremental increase in PPAs of JPL and that the receivables from
TANGENDCO which is JPL's major client are elongated resulting in a
stretched liquidity, cannot be said to unfounded or irrelevant.
50. As regards the plea of JPL that favourable steps have been taken by
the Government of India to address the issue of delayed payment by various
State Electricity DISCOMS, the impugned order before this Court wherein
the new credit rating was maintained at BBB was issued on 30 th April, 2020
however, the declaration by the Finance Ministry in this regard to extend the
loan of ₹90,000 crores to the power sector under the Atam Nirbhar Scheme
was after the review order dated 30th April, 2020 and a subsequent event
which cannot be utilized to hold the earlier declaration as illegal.
51. Though learned counsel for JPL has also vehemently argued that
repayments have increased in the financial year 2019 from ₹497 crores to
₹690 crores in the financial year 2020 which is likely to be increased by
₹800 crores in the financial year 2021 however, the opinion cannot be
faulted merely on the basis that JPL was able to manage substantial
repayments, as the reason given by ICRA is that despite increase in
repayment obligations of JPL there were still high debt levels and sub-
optimal capacity utilization. As noted above, the 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.
52. Considering the fact that 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.
53. Before concluding it would also be appropriate to note that 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. It is trite law that the 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. Further, 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.
54. Suit and applications are consequently dismissed.
(MUKTA GUPTA)
JUDGE
AUGUST 18, 2020
'vn'
