Back
HIGH COURT OF CALCUTTA
Bhaskar Bhattacharya, J.
Magma Leasing Limited
Vs.
Credit Rating Information Services of India Limited
GA No. 442 of 1999; GA No. 627 of 1999 and CS No. 58 of 1999
Decided On : July 16, 2001
RATING AGENCY - RIGHT TO RATE - TERMINATION OF CONTRACT - INJUNCTION - Whether a credit rating agency has the unfettered right to rate the performance of a Company and publish the same even though the company has expressly terminated the contract for credit rating and makes it known to the concerned credit rating agency that it will no longer accept or use its rating.
Fact of the Case:
The plaintiff, a non-banking finance company, entered into two agreements with the defendant, a credit rating agency, for rating its debenture and fixed deposit programmes. The plaintiff subsequently terminated the agreements and requested the defendant to cease rating its programmes and publishing the results. The defendant refused and continued to rate the plaintiff's programmes, prompting the plaintiff to file a suit for injunction to restrain the defendant from doing so.
Finding of the Court:
The court held that the plaintiff had the right to terminate the agreements with the defendant and that the defendant was not entitled to continue rating the plaintiff's programmes or publishing the results thereof. The court found that the defendant's continued rating of the plaintiff's programmes, despite the plaintiff's express termination of the agreements, was a breach of contract and an infringement of the plaintiff's right to control its own reputation.
Issues: 1. Whether a credit rating agency has the unfettered right to rate the performance of a Company and publish the same even though the company has expressly terminated the contract for credit rating and makes it known to the concerned credit rating agency that it will no longer accept or use its rating. 2. Whether the plaintiff had the right to terminate the agreements with the defendant. 3. Whether the defendant was entitled to continue rating the plaintiff's programmes or publishing the results thereof.
Ratio Decidendi: 1. A credit rating agency does not have the unfettered right to rate the performance of a Company and publish the same even though the company has expressly terminated the contract for credit rating and makes it known to the concerned credit rating agency that it will no longer accept or use its rating. 2. The plaintiff had the right to terminate the agreements with the defendant because the agreements were terminable at will. 3. The defendant was not entitled to continue rating the plaintiff's programmes or publishing the results thereof because the plaintiff had terminated the agreements and the defendant's continued rating of the plaintiff's programmes was a breach of contract and an infringement of the plaintiff's right to control its own reputation.
Final Decision: The court granted an injunction in favour of the plaintiff, restraining the defendant from rating or purporting to rate the plaintiff's fixed deposit and non-convertible debentures programmes, from making any representation with regard thereto or from publishing any purported rating result of the said programmes of the petitioner or any observations with regard thereto.
Bhaskar Bhattacharya, J.: The only question that arises for determination in these applications is whether a credit rating agency has the unfettered right of rating the performance of a Company and publishing the same even though the company has expressly terminated the contract for credit rating and makes it known to the concerned credit rating agency that it will no longer accept or use its rating.
2. The plaintiff is a non-banking finance company engaged in the business of asset financing including leasing and hire- purchase, real estate leasing and bills discounting. The plaintiff is duly registered with the Reserve Bank of India.
3. The respondent carries on business as credit rating agency, inter alia, rating debt commercial programmes of companies including fixed deposit programmes and debenture programmes.
4. Till a few years back, rating of services, programmes or instruments was almost unknown in the business circle of India. Over the past few years, Indian businesses have however started getting their services, programmes and instruments rated with the object of presenting a true image of its services, programmes and performances to the general public.
5. Rating services are provided by credit rating agencies at the invitation of companies or businesses against realisation of fees for rating and surveillance. The contract for rating service is as such entered into at the invitation of the concerned company. The rating of financial programmes and instruments was optional for non-banking finance companies till December 1997. However, since January 1998 the Reserve Bank of India has made it compulsory for non-banking finance company to have the same rated. Although the Reserve Bank of India has made it compulsory for non-banking companies to engage a rating agency, such non-banking finance company is not obliged to engage the services of any particular agency and is not prevented from engaging the services of more than one agency at the same time.
6. The plaintiff entered into two different agreements with the respondent for rating its debenture programme as well as fixed deposit programme against payment of agreed rating charges and surveillance fees.
7. At this stage it will be appropriate to quote the request of the plaintiff for rating :-
"We request you to determine the rating of our above debenture programme and should we decide to use the rating in any manner, to keep the rating under surveillance during the life of the debentures.
We are pleased to provide you the audited annual accounts for the past five years as also the financial projections for the next five years with the relevant assumptions. We also undertake to provide you such other information that you may require on the understanding that it will be treated strictly confidential.
We understand that in determining the rating, CRISL, relies on the information before it and not on any subsequent information. We also understand that CRISL, does not guarantee the completeness or accuracy of the information on which the rating is based.
We note that the right to use the rating will rest with us; however, should we decide to use the rating in any manner, CRISL" will also have the right to publish the rating.
We are pleased to enclose our cheque for Rs. 1,50,000/- being non- refundable fees payable for obtaining the initial rating. Should we decide to use the rating, we also undertake to pay an annual surveillance fee, from the second year onwards, at rates as applicable from time to time, for the continuous monitoring of the rating of the debentures over their life. We also agree to reimburse CRISIL, all travel and out-of-pocket expenses that it may incur in connection with the initial rating as well as surveillance.
We note that the current annual surveillance fee is 0.03% of the outstanding amount of debentures subject to a minimum of Rs. 25,000/- per annum and that the fee may be revised by CRISIL prospectively to a maximum of 0.05% of the outstanding amoun
An indispensable Tool for Legal Professionals, Endorsed by Various High Court and Judicial Officers
Please visit our Training & Support
Center or Contact Us for assistance
Scan Me!
India’s Legal research and Law Firm App, Download now!
For Daily Legal Updates, Join us on :
Back to top
