In the case of Mahasemam Trust v. Union of India & Ors.,(W.P.(MD)No.8037 of 2020 and W.M.P.(MD)Nos.7469 & 9960 of 2020), the Madras High Court had held that the credit rating agencies cannot be considered as discharging public function or public duty. The judge in this case was Hon’ble Justice G.R.Swaminathan.
The facts of the case are that the writ petitioner is a registered public trust. It basically focuses on activities like micro-financing women Self Help Groups. It is a Non-Banking Finance Company (NBFC). The petitioner is a client of the third respondent which is a credit rating agency. The rating agency has downgraded the petitioner’s bank loans’ rating to ‘IND BB+’ from ‘IND BBB-‘. Various term loans are availed by the petitioners from various banks and had fixed ambitious targets for the coming year. The petitioner’s track record of repayment is claimed to be very good. Following Covid-19 pandemic outbreak, the Reserve Bank of India has announced moratorium for the period upto 31st May, 2020 vide Circular dated 27.03.2020. Following the, 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. According to the petitioner, the third respondent has downgraded the petitioner’s rating disregarding the said Circular. Since this will have direct impact or bearing on the capacity of the petitioner to raise loans from the banking institutions, this writ petition came to be filed.
The court had held that, “The learned Senior Counsel first took me through the statutory scheme set out in the Securities and Exchange Board of India(Credit Rating Agencies) Regulations, 1999. As per Clause 2(f) of the Regulations, the petitioner qualifies as a client since their securities are rated by the third respondent/Credit Rating Agency. His core argument is 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. No ouster clause in the rating agreement can resist the jurisdictional reach of this Court under Article 226 of the Constitution of India. The petitioner is based in Madurai. Substantial part of the cause of action arose within the territorial jurisdiction of this Court. This Court does have the territorial jurisdiction to deal with the issue. The learned Senior Counsel also seriously faulted the stand taken by the learned Standing counsel for the Reserve Bank of India as well as the Securities and Exchange Board of India before this Court. He took me through the contents of the Circular dated 27.03.2020 issued by the Reserve Bank of India and that of the Circular dated 30.03.2020 issued by the Securities and Exchange Board of India.”
“According to the learned Senior Counsel, even a bare textual reading of these two circulars can lead to only one conclusion, namely, that the events that have taken place during the moratorium period cannot be factored into the rating process. The learned Senior Counsel placed reliance on quite a few case laws.”
“Rating is an exercise that is carried out by financial analysts and professionals. Writ Court should not assume jurisdiction in matters which are better handled by experts. 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.”
“Rating exercise is all about capturing the “as is condition” of the signified. Rating is expressed through signs and symbols to the world at large. Ironically the effect is far from symbolic. It is real. Semiotics is the academic discipline devoted to the study of symbols and signs and their meaning. Ferdinand d Saussure wrote that one characteristic of the symbol is that it is never wholly arbitrary. Symbol should correctly signify. There should be nothing misleading about it. A symbol in order to carry abiding credibility and lasting value should satisfy the test of truth function. It is like a Thermometer. The instrument should read the body temperature correctly. If I am running a temperature of 101 degree Fahrenheit, the thermometer should indicate it exactly and not as 100. Credit Rating indicates the fiscal health of the person or the institution concerned. It is one thing to say that notwithstanding the actual position, ameliorative relief must be provided. It is one thing to say that loans should be provided notwithstanding the downgrading. But it would be a completely different matter to say that rating should not reflect the actual state of affairs. Any remedial treatment must be preceded by correct diagnosis. Proper diagnosis can be made only if the symptoms are read correctly. If the patient is going to insist that the symptoms should be disregarded, then there can be no proper diagnosis, not to speak of the resulting treatment.”
“Since I have held that a) the third respondent is a private body and not a “State” within the meaning of Article 12 of the Constitution b) by rating its clients, the third respondent is not discharging any public function c) the subject matter involves analysis by financial experts d) and the petitioner is having effective alternative remedies, I dismiss this writ petition as not maintainable. I make it clear that I have not gone into the merits of the matter. The petitioner is at liberty to avail the in-house remedy available to them or move Securities and Exchange Board of India(SEBI) directly by filing a complaint against the third respondent. Whatever remedy that the petitioner may avail, the same shall be attended to with utmost expedition. All the other contentions and remedies of the petitioner are left open. No costs. Consequently, connected miscellaneous petitions are closed.”