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SREI Infrastructure Finance Ltd. v/s Fitch Ratings India Pvt. Ltd. & Another

    G.A. 2156 of 2012, APOT 380 of 2012 & CS 111 of 2012 (Original Side)
    Decided On, 17 September 2012
    At, High Court of Judicature at Calcutta
    For the Appearing Parties: --------

Judgment Text
K.J. Sengupta, J.

The instant appeal has been preferred against the judgment and order dated 26th July 2012 passed by the learned Single Judge in the aforesaid suit on the application made by the second respondent who made the above application seeking to intervene in the suit and also for addition of party and then discharge of the interim order passed earlier by the learned Trial Judge in the same suit on 22nd March, 2012. Learned Trial Judge has not only entertained the said application of respondent No.2 but also in effect discharged the interim order passed earlier. Hence the appeal.

It appears from the papers that the suit was filed by the appellant herein against the first respondent who was appointed credit rating agents by and under two written agreements dated 22nd February, 2010 and 6th October, 2010 respectively claiming declaratory reliefs that above agreements duly and validly terminated by the plaintiff; declaration that the credit rating done by the first defendant grading the plaintiff’s financial instruments from AA to A+ after termination of the agreement is invalid and is of no effect, and decree for perpetual injunction from giving effect to the credit rating by way of downgrading of the plaintiff’s instruments after termination of the contract. Bereft of all the details made in the plaint the substance of the cause of action is that the first respondent after having been engaged in the credit rating agency, in complete breach of various provision of Regulation and circular issued by the second respondent the first respondent is not employing appropriate methodology and further is not assessing the relevant information with regard to the appellant’s performance during the financial year 2011-12. As such the appellant terminated the agreements for rating it’s financial instruments namely unsecured subordinated debenture bonds in tier II of the value of Rs.200 crores and value of Rs.50 crores. For these two instruments the appellants engaged apart from the first respondent another credit rating agent namely CARE. According to the appellant the CARE has duly discharged its obligation in terms of the agreement applying the appropriate methodology and assessing the information supplied by the appellant rated and graded properly whereas the appellant in complete breach of the agreement and also that of the guidelines issued by the SEBI arbitrarily baselessly downgraded the credit rating.

It appears from the records that learned Trial Judge being satisfied with the urgency of this case and having assessed the prima facie case made out at the ad interim stage passed an order on 22nd March, 2012 on the application of the appellant. By the said order the learned Trial Judge restrained respondent No.1 from publishing the credit rating of the plaintiff said to have been done by the first respondent. As it appears from the records that on the concession made by the first respondent not to publish the rating in print and electronic media the said order was passed. Of course, order dated 22nd March, 2012 was passed on the returnable date on hearing the first respondent who was and still is the sole defendant in the present suit. By the said order the learned Trial Judge directed a notice of the application to be given to second respondent in the appeal and the matter was due to appear on 29th March, 2012. It is alleged that no notice was served upon the second respondent nor did the matter appear on 29th March, 2012. The second respondent having come to know from Reserve Bank of India approached the learned Trial Court with the above application on 26th July, 2012. Learned Trial Judge recorded this fact in the impugned judgment and order.

Mr. Sudipta Sarkar, learned Senior Counsel with Mr. Sidhartha Mitra, learned Senior Advocate appearing for the appellant submits that the order of injunction granted earlier ought not to have been vacated at the instance of the non party more so when the application for its addition has been kept pending. The second respondent at whose instance order was discharged has not been able to show any legal right for getting aforesaid order vacated. While vacating the learned Trial Judge has committed error asking the appellant to approach the respondent No.2 for resolving the dispute under the provision of Section 29(2)(c) of the Securities and Exchange Board of India (Credit Ratings Agencies) Regulations 1999 (hereinafter referred to as the said ‘Regulation’). The said order is bad as no chance was given to counter the application of the respondent No.2. Mr. Sarkar in order to restore earlier interim order has submitted prima facie case in the manner as follows:-

The contract between the appellant and the first respondent was discharged in view of the breach committed by the sole defendant. The respondent No.1 committed breach of obligation arising out of the said agreement by not disclosing methodology of the rating of the petitioner’s instruments. The said contract specifically provides that the defendant will disclose to the appellant-petitioner the methods of dissemination.

He has drawn our attention to the third schedule relating to the Code of Conduct for the Credit Rating Agencies and also Section 13 of the said Regulation in this regard. In any view of the matter he contends that rating made by the first respondent by downgrading appellant’s instruments was mala fide as it has been done subsequent to the notice of termination. Hence the downgrading is arbitrary and done as measure of retaliation. It is arbitrarily so because other rating agencies in January 2012 had given a higher rating. The rating done by the first respondent is also arbitrary because the same standards have been applied for PFIs and Banks. He further contends that SEBI Act and Regulation do not apply in the facts and circumstances of this case. According to him the above Regulations do not provide for nor take into account of termination of agreements with credit rating agency. Therefore Regulation 29 as relied on by the learned Trial Judge does not provide for mechanism for adjudication nor does it empower the SEBI to grant interim relief. The conduct of the appellant-petitioner has always been bona fide as it has promptly informed its investors of the fact of termination of the agreement with the sole defendant (first respondent herein). The appellant has also given its investors the option of taking back their money in the light of the termination. The petitioner has written to each of its investors informing them of the termination. He submits about legal question, that merely because a contract is entered into in exercise of an enabling power conferred by statute does not make contract a statutory contract and to support this he has placed reliance on a decision of the Supreme Court reported in (2000) 3 SCC 379. He further contends that even otherwise the petitioner is entitled to its remedy in tort for breach of duty of care on the part of the defendant.

The first respondent, Fitch contests the appeal through their learned Senior Counsel Mr. Jayanta Kr. Mitra who submits that learned Trial Judge has justly and lawfully discharged earlier order. He while highlighting various terms of two concluded contracts for the above two instruments, and also drawing our attention to the guidelines issued by the regulatory agency of the Government submits that once the agreement is entered into his client’s obligation is not only towards its client but also to the investor as mentioned in the Regulation, and this has to be discharged and in case of breach his client is to face the penal measure that may be taken by the second respondent. In this connection he has drawn our attention to Regulations 14(c), 14 (e), 15, 16(1), 16(2), 16(3) and 13 to establish its statutory obligations vis--vis its contractual obligation with its client. The credit rating has to be done by his client under the Regulations irrespective of termination of contracts. According to him it is statutory obligation towards the investors and also the public at large.

He has also reminded us the balance of convenience and irreparable injury while discharging the interim order passed earlier. He contends that balance of convenience is wholly in favour of the respondents and against the appellant for not passing any order in the appeal. He has drawn our attention to Ground No.XXXIII in the Memorandum of Appeal wherein it is specifically stated that even after virtual publication of rating in various newspapers by the respondent No.1, the investors in the concerned financial instruments of the appellant continued their investments, indicating the quality and stability of the said financial instruments and justifying the rating by the two individual rating agencies. He submits that in view of the aforesaid admission there is no injury likely to be suffered if credit rating done by his client is allowed to be published on one hand, on the other hand if it is not allowed his client is to face penal measure under the Regulation. He further submits that concession made on earlier occasion by his client in the belief that matter would be heard out very soon but the matter was not even brought in the list for hearing. It was heard when the application was made by the SEBI (respondent No.2).

Mr. Hirak Mitra, learned Senior Counsel appearing on behalf of the respondent No.2 (SEBI) on whose application the impugned judgment and order was passed submits that his client is a statutory body and its sole object is to protect the investors as contemplated under Sections 11(1) and 11(2) of the SEBI Act, 1992. He highlighting the background fact that prompted his client to apply for discharge, contends that irrespective of the terms of contract and objection appellant may have regarding such ratings, it is the statutory duty of the first respondent to go on publishing the said rating and/or review rating of such securities till the entire life of such securities and to disseminate such changes in press releases and website to the concerned stock exchanges. The entire exercise of publishing such reviewed rating is to keep an unwary investing public aware of escalating or diminishing risk involved as the case may be in investing in the securities concerned and such duty of protection of the public in general is paramount consideration for the respondent as a credit rating agency.

He drawing our attention to Sections 15 and 16 and other relevant portion of the said Regulationn, submits that where the issuer of the security i.e., the client of the credit rating agent does not cooperate with it the said regulations enjoins an obligation with such agency to go on rating and publishing reviewed ratings with the best available information. Such ratings should also be published with noting 'Unsolicited'. This has to be done always, only exception is that when the said client is wound up if it is a company, or merger or being merged or amalgamated with another. According to Mr. H.K. Mitra the termination of contract by the appellant herein is of no consequence inasmuch as ordinary terms of the contract stands modified by statutory dictates in this case. The obligations to rate the securities throughout their lifetime survives even after any termination of contract as recognized by the said regulations. He further submits that once the rating agency is engaged it has to discharge duty in relation to the engagement under the provision of the regulations. He contends that the learned Trial Judge therefore considering the facts and circumstances of this case and considering the obligation of the appellant existing in favour of the investor cnsequently the member of the public under the regulation has rightly discharged. Moreover the learned Trial Judge has rightly asked the appellantplaintiff in view of the provision of Section 29(4) of the said Regulations can investigate into any complaint regarding the correctness of rating done by any agency.

We have heard the learned counsel for the parties. While hearing the application for grant of interim relief in connection with the appeal we clearly made the learned counsel clear that hearing of the application would be hearing of the appeal itself. We are thus to decide the appeal and application by this judgment. After considering the submission of the learned counsel and the material placed before us, and going through the papers which in our view areadequate to deal with this appeal also. We think the question which has fallen for consideration in this appeal as to whether the learned Trial Judge in the given facts and circumstances of this case without adding, or allowing, the second respondent to intervene in the suit, is justified in discharging effectively, earlier interim order and that too at the instance of the second respondent.

We shall not make any comment on the issue whether the second respondent is a necessary party or not, but from the order of the learned Trial Judge dated 22nd March, 2012 it appears that the learned Trial Judge desired that SEBI should be notified about the suit and interim order passed. However it appears from the records that no such notice was given, and SEBI itself came forward with the application on which the impugned judgment and order was passed. Thus from initial perception of the learned Trial Judge it is clear that SEBI is required to be heard at the interlocutory stage. While overruling the submission of Mr. Sarkar we think that learned Trial Judge has jurisdiction to vary, modify or discharge the interim order passed earlier even without formally adding second respondent as it is affected by the interim order in exercise of inherent power on the principle that action of the Court does not unjustly injure or affects any one else.

Now the Court is to consider whether basing on prima facie case made out by the plaintiff-appellant, second respondent, and SEBI earlier order is required to be discharged or not. Admittedly the plaintiff-appellant have engaged two rating agencies for the said instruments and both of them in their own way have rated making gradation. Earlier respondent No.1 presently sole defendant graded AA, but this time the moment respondent No.1 sounded that this time the rating might be down graded to A+, the plaintiff terminated the two contracts alleging breach of obligation arising out therefrom and further not adhering to the norms and guidelines issued by SEBI. It is the case of the appellant-plaintiff that the moment contract was terminated the respondent No.1 attempted to publish such mala fide and arbitrary rating in the print and electronic media.

We are of prima facie opinion without intending to bind this finding at the time of final hearing of the application before the learned Trial Judge that the plaintiff has to establish prima facie in a suit of this nature under the contract the first respondent has committed breach of obligation exists in favour of the appellant and lawful termination. In our view it is not an ordinary contract governed by Indian Contract Act. Here once the contract is entered into as rightly contended by both Mr. Jayanta Kumar Mitra and Mr. Hirak Kumar Mitra the rating agents are bound to discharge their obligation in terms of the agreements conforming to relevant provision of the above regulations which have got statutory force. It is settled position of law that irrespective of the terms of the contract whether express or implied between two parties the provisions of law cannot be defeated.

We have seen Section 13 of the Regulation which provides that every credit rating agency shall abide by the Code of Conduct contained in the Third Schedule.

Section 15 of the said Regulation obliges credit rating agency as follows:

Every credit rating agency shall, during the lifetime of securities rated by it continuously monitor the rating of such securities. Every credit rating agency shall disseminate information regarding newly assigned rating and changes in earlier rating promptly through press releases and websites, and, in the case of securities issued by the 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.

Section 16 of the said Regulation Clause (1) provides that every credit rating agency shall carry out periodic review of all published ratings during the lifetime of the securities. Then Section 16(3) of the Regulation provides that a credit rating agency shall not withdraw 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.

Section 34 of the said Regulation provides in case of failure of credit rating agent as follows:-

The credit rating agency shall be dealt with in the manner provided under the Securities and Exchange Board of India Regulation 2002 which envisages amongst other penalties, suspension of registration or cancellation of registration in case of contravention in any of the provision of the Act or regulation.

Keeping in view the aforesaid statutory obligation vis--vis public interest and having given considerable thought we think as rightly argued by Mr. Jayanta Kumar Mitra that the balance of convenience overwhelmingly lies in favour of discharge of interim order, as it appears prima facie that the appellant of its own showing has said that in spite of proposed rating by way of downgrading does not affect its business on the other hand if the respondent No.1 is not allowed to discharge his duty under the statute it has to face the legal consequences. At this stage vacating interim order is quite justified. Moreover, admittedly another credit rating agency has been employed and it is also of international repute as per assertion of the appellant, therefore we do not think at present the appellant cannot have any reason of being affected or suffered irreparable injury.

The decision of the Hon’ble Supreme Court cited by Mr. Sarkar in our view may be appropriate authority at the time of final hearing of the suit or the above application. At the moment the Court is concerned with the balance of convenience weighing both side prima facie case and counter-case

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. We unhesitatingly accept the logic of the learned Trial Judge as balance of convenience is in favour of discharge of the interim order. However we accept the argument of Mr. Sarkar that Section 29(2)(c) of the Regulation is not the complete mechanism for adjudication of the dispute. But aforesaid clause particularly Section 29 clause (c) without any ambiguity empowers the respondent No.2 to investigate into the complaint received from the client in connection with any matter having bearing on act and omission of the credit rating agency. Whether the rate done by the respondent No.1 following Code of Conduct and norms and guidelines and basing on materials supplied by the plaintiff is bona fide or not as alleged by the plaintiff can always be looked into. Therefore, we slightly modify interim order to the effect that in terms of the above section SEBI will look into the complaint whether it has been done following norms and also information and material supplied by the plaintiff bona fide or not. For this purpose notice for making enquiry shall be given to appellant who will be prejudiced. On enquiry if it is found that rating is done conforming the guidelines issued by it, and also the Code of Conduct in the said regulation then the respondent No.1 would be free to publish. However this should be made in terms of the order of the Court not to be treated in terms of the agreement which is said to have been terminated by the plaintiff/appellant. We permit the plaintiff-appellant to issue insertion that rating done by respondent No.1 in terms of the order of the Court. Thus the appeal is disposed of. There will be no order as to costs. Till such investigation is made as above, which must be done within a fortnight from the date of receipt of the copy of the operative portion of judgment and order, no publication shall be made. All the parties concerned shall act on a signed copy minutes of the operative part of the judgement on the usual undertaking. (Kalyan Jyoti Sengupta, J.) I agree.