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Credit Rating Agency can’t discharge ‘Public Functions’ as it is not characterized as ‘State’: Madras HC dismisses Writ Petition [Read Judgment]

Credit Rating Agency - Public Functions - Writ Petition - Taxscan

The Madras High Court while dismissing the writ petition against India Rating and Research Pvt. Ltd. held that the Credit Rating Agency can not discharge ‘Public Functions’ as it is not characterized as ‘State’.

The petitioner, Mahasemam Trust is a registered public trust. Its activities include micro-financing women Self Help Groups. It is a Non-Banking Finance Company (NBFC). The petitioner is a client of the respondent, India Rating and Research Pvt. Ltd. which is a credit rating agency.

The rating agency has downgraded the petitioner’s bank loans’ rating to ‘IND BB+’ from ‘IND BBB-‘. The petitioner has been availing term loans from various banks and has fixed ambitious targets for the coming year. The petitioner’s track record of repayment is claimed to be very good.

Following the COVID-19 pandemic outbreak, the Reserve Bank of India has announced a moratorium for the period upto 31st May, 2020 vide Circular dated March 27, 2020. Pursuant thereto, the petitioner has also granted the benefit of moratorium to all the joint liability Self Help Groups, in order to enable them to tide over the economic fallout arising out of the pandemic disruption.

The SEBI has also issued a policy Circular setting out relaxation norms. According to the petitioner, the  India Rating and Research Pvt. Ltd. has downgraded the petitioner’s rating disregarding the said Circular. Since this will have a direct bearing on the capacity of the petitioner to raise loans from the banking institutions, this writ petition came to be filed.

The petitioner argued that the Credit Rating Agencies discharge public functions and therefore they are clearly amenable to Writ jurisdiction. Though the dispute between the parties may appear to be contractual in nature, in substance, it throws up questions of public law.

The single-judge bench of Justice G.R. Swamynathan clarified that rating is an exercise that is carried out by financial analysts and professionals. The Writ Court should not assume jurisdiction in matters which are better handled by experts.

However, it is not as if the petitioner is without remedy. There is provision for in-house appeal. It is certainly not akin to appealing from caesar to caesar’s wife. In any event, in view of clause 29(2)(c), the petitioner can definitely complain before SEBI against the impugned action of the third respondent.

Therefore, the court held that the India Rating and Research Pvt. Ltd. is a private body and not a “State” within the meaning of Article 12 of the Constitution by rating its clients, the respondent is not discharging any public function; the subject matter involves analysis by financial experts and the petitioner is having effective alternative remedies, I dismiss this writ petition as not maintainable.

The court further clarified that the petitioner is at liberty to avail the in-house remedy available to them or move the Securities and Exchange Board of India (SEBI) directly by filing a complaint against the respondent, India Rating and Research Pvt. Ltd.

The Madras High Court while dismissing the writ petition against India Rating and Research Pvt. Ltd. held that the Credit Rating Agency can not discharge ‘Public Functions’ as it is not characterized as ‘State’.

The petitioner, Mahasemam Trust is a registered public trust. Its activities include micro-financing women Self Help Groups. It is a Non-Banking Finance Company (NBFC). The petitioner is a client of the respondent, India Rating and Research Pvt. Ltd. which is a credit rating agency.

The rating agency has downgraded the petitioner’s bank loans’ rating to ‘IND BB+’ from ‘IND BBB-‘. The petitioner has been availing term loans from various banks and has fixed ambitious targets for the coming year. The petitioner’s track record of repayment is claimed to be very good.

Following the COVID-19 pandemic outbreak, the Reserve Bank of India has announced a moratorium for the period up to 31st May, 2020 vide Circular dated March 27, 2020. Pursuant thereto, the petitioner has also granted the benefit of moratorium to all the joint liability Self Help Groups, in order to enable them to tide over the economic fallout arising out of the pandemic disruption.

The SEBI has also issued a policy Circular setting out relaxation norms. According to the petitioner, the  India Rating and Research Pvt. Ltd. has downgraded the petitioner’s rating disregarding the said Circular. Since this will have a direct bearing on the capacity of the petitioner to raise loans from the banking institutions, this writ petition came to be filed.

The petitioner argued that the Credit Rating Agencies discharge public functions and therefore they are clearly amenable to Writ jurisdiction. Though the dispute between the parties may appear to be contractual in nature, in substance, it throws up questions of public law.

The single-judge bench of Justice G.R. Swamynathan clarified that rating is an exercise that is carried out by financial analysts and professionals. The Writ Court should not assume jurisdiction in matters which are better handled by experts.

However, it is not as if the petitioner is without remedy. There is provision for in-house appeal. It is certainly not akin to appealing from caesar to caesar’s wife. In any event, in view of clause 29(2)(c), the petitioner can definitely complain before SEBI against the impugned action of the third respondent.

Therefore, the court held that the India Rating and Research Pvt. Ltd. is a private body and not a “State” within the meaning of Article 12 of the Constitution by rating its clients, the respondent is not discharging any public function; the subject matter involves analysis by financial experts and the petitioner is having effective alternative remedies, I dismiss this writ petition as not maintainable.

The court further clarified that the petitioner is at liberty to avail the in-house remedy available to them or move the Securities and Exchange Board of India (SEBI) directly by filing a complaint against the respondent, India Rating and Research Pvt. Ltd.

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