Delhi HC Refuses to Interfere in Credit Rating Unless It Is Arbitrary and Malafide

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Credit Rating of institutions in the market is an important facet of financial dealings of entities. A negative or downgrading of the credit rating of an entity impacts largely concerning their relationship with financial institutions. This case, JINDAL POWER LIMITED V. ICRA LIMITED, examines one such situation of downgrading of the credit rating of an entity.

Brief Facts

The Defendant is a Credit Rating Agency registered under the SEBI (Credit Rating Agency) Regulations, 1999 (“CRA Regulations”). The parties had entered into an agreement qua credit rating. Where after, the Defendant downgraded the rating of the Plaintiff. The Plaintiff filed objections against the downgrading. The Defendant reviewed the rating and maintained its earlier decision. The Plaintiff aggrieved by the downgrading of their credit rating filed a suit against the Defendant. The prayer of the plaintiff is to declare the rating null, void, unenforceable, and ineffective.

Plaintiff’s Arguments

It has been contended that though all the parameters for rating are fulfilled by the Plaintiff, the Defendant has downgraded its rating. Additionally, the perusal of parameters shows that it has remained the same as the previous year. The main reason for downgrading is because of business with Tamil Nadu Generation and Distribution Corporation Limited (“TANGEDCO”). It has been stated that since the TANGEDCO is stressed the receivables by the Plaintiff are uncertain.

However, the Defendant failed to consider that TANGEDCO is a government concern. Hence, there can be no uncertainty. Additionally, as per the agreement, once the downgrading is protested, the same could not have been published. Lastly, the Defendant has not adopted an objective criterion.

Defendant’s Arguments

Per contra, it has been submitted that the Defendants are governed by CRA Regulations and the circular issued by SEBI, though there’s an agreement. The rating is an independent opinion and formulated based on balancing conflicting factors. Additionally, the rating is the decision of the Rating Committee and is an opinion as per Regulation 2(q) of CRA Regulations. Hence, the acceptance by the Plaintiff is irrelevant.

Court’s View

The Court referenced Regulations 15 and 16 of the CRA Regulations in para 24. It noted that the ICRA is required to continuously monitor the rating. It is further mandated to disseminate information. The ICRA is also regulated by the IOSCO Credit Rating Agency Code. The Court then referenced the SEBI Master Circular dated 02.05.2018 and reproduced relevant provisions in para 27. The Court observed that the requirement of acceptance before publishing is mandatory in cases of an initial rating. If communication of acceptance is not made, the ICRA has the right to publish it as a non-accepted rating. However, in the case of periodic surveillance, there is no provision for awaiting acceptance. Therefore, in the case of non-acceptance of the rating, the rating agency is entitled to publish the information.

The Court referenced the Madras High Court decision in the First Leasing Company of India v. ICRA, (2001) 1 BC 52. Therein the Court acknowledged the right of the rating agency to the public the information. The Court compared the Agreement, the Regulations, the Master Circular, and found that the ICRA is entitled to publish initial rating once accepted. However, in the case of periodic surveillance, the rating agency in the interest of the provider of the financial facility is bound to publish information regarding the credit rating.

The second issue relates to the downgrading of the credit rating of the Plaintiff contrary to the SEBI Circular dated 20.03.2020 released in view of the pandemic. In the given circumstances, the rating agency had to determine whether the default occurred due to the lockdown or loan moratorium. The Court observed that the Plaintiff continued performance even in the lockdown, being an essential service. It was found that the assessment by the ICRA was determined based on the pre-lockdown payment situation.

The Court observed that the decision of the ICRA is based not just on the performance of the company in the preceding year. It takes into account future debt payments. Additionally, the court observed that the opinion of the ICRA is based on all positive and negative factors. Hence, unless arbitrary and malafide, the Court refused to interfere in the calculations of the agency.

Court’s Decision

The suit was dismissed on the above-mentioned reasons by the Court. The rating cannot be interfered with unless it is arbitrary and malafide. The rating agency is bound not by the agreement, but by the Regulations and Rules governing it.


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