Indiabulls Housing Finance (IBHF) has filed a writ petition before the Delhi High Court, challenging ICRA’s unpublished decision to downgrade IBHF’s debt instruments and revise the long-term outlook to “negative” from “stable” in the middle of a coronavirus-compelled worldwide lockdown. During a pandemic, “rights and obligations which have an economic impact and public effect are suspended”, it argues.
The company has pleaded that the court should prevail on the rating agency to stop it from publishing the downgrade. Last week, this court had directed ICRA not to publish the revised rating on its website until the next hearing.
This legal battle between Indiabulls and ICRA has dragged market regulator Securities and Exchange Board of India (SEBI) too. The verdict in the case may decide whether corporate houses can save themselves from downgrades till the time the lockdown lasts.
Contrary to the RBI-ordered moratorium on payments of all bank loans, the SEBI has given no uniform rating relief on company bonds.
If Indiabulls wins the case, it may establish a precedent, motivating other companies with outstanding bonds to litigate to block downgrades. The pricing of mutual funds, which arrive at net asset value (or the unit price) after considering acceptable valuation of securities they hold, may get affected too.
The temporary relief by the SEBI — announced through its 30 March circular — is conditional: A “delay in payment of interest or principal may not be treated as ‘default’ if the credit rating agency thinks that the delay” is a result of the lockdown conditions, which would create temporary operational challenges in servicing debt, including that due to procedural delays in approval of moratorium on loans by the lending institutions…” However, SEBI has allowed companies to rejig terms of bonds with the approval of investors.
Indiabulls argues if ICRA finalises this rating and puts it up on its site, it would be akin to the execution of the “acceleration redemption clause”, a clause that implies a default in the scenario of credit rating downgraded to double A-minus.
Indiabulls says ICRA’s decision is arbitrary and contrary to various orders and directions: lockdown, a moratorium on loan payments, pushing back the deadline for filing a tax return, staying auction of properties by banks and extension of time limits under Benami law. These are government, court or regulator-directed provisions.
The company claims it has never defaulted on any borrowing till date. A rating agency is, as per procedure, needed to give a borrowing company the opportunity to explain its stand. For Indiabulls, this meeting was slated to be held on 3 April.
On 1 April, IBHF had told ICRA to defer the hearing till the lockdown was over. However, the rating agency wished to go ahead with the meeting on 3 April. That was perhaps on the basis of the latest message from SEBI that urged rating agencies to “endeavour to finish exercise on a best effort basis.” Indiabulls said, however, the actions of ICRA were “unreasonable” and taken in “undue haste”.
The IBHF petition dwells on two critical matters that have inter alia contributed to the decision to downgrade:
- the cancellation of additional tier-I (AT1) bonds Yes Bank issued and
- Loans of Indiabulls to Yes Bank’s promoter companies.
According to IBHF, they have challenged the cancellation of AT1 bonds in the court. It claims the company’s loans to Yes Bank are secured. And it claims it has repaid the Yes Bank’s term loans.