A Credit Rating Agency cannot be Considered as “State”

The Madras High Court held that a Credit Rating Agency cannot be considered as “State” within the meaning of Article 12 of the Constitution of India and can’t be considered as discharging any public function.

The Court observed that 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.”

Brief Facts of the Case
  • The writ petitioner 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 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-‘.
  • 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 Covid-19 pandemic outbreak, the Reserve Bank of India has announced moratorium for the period up to 31st May 2020 vide Circular dated 27.03.2020.
  • Pursuant thereto, the petitioner also granted the benefit of the 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.
  • Securities and Exchange Board of India (SEBI) also issued policy Circular dated 30.03.2020 setting out relaxation norms.
  • According to the petitioner, the third respondent 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.
  • Claiming that this would have a direct bearing on the capacity of the petitioner to raise loans from the banking institutions (as its rating was downgraded), this writ petition came to be filed.
  • Since the issue turned on the construction of the circular issued by SEBI, the Court suo motu impleaded it as the fourth respondent in the matter.

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Observation of the Court

The Court cited the verdict of Supreme Court in the case of Rajbit Surajbhan Singh V. The Chairman, Institute of Banking Personnel Selection, Mumbai [(2019) 14 SCC 189], where it was pronounced that the question as to whether a corporation/society would fall within the meaning of Article 12 should be decided after examining whether the body is financially, functionally and administratively dominated by or under the control of the Government. Such control should be particular to the body in question and must be pervasive. A control which is merely regulatory under the statute or otherwise would not make the body ‘State’ Under Article 12.


In this regard, the Court noted that,

Rating is an evaluation and assessment of the creditworthiness of an individual or company. The debtor’s ability to repay the debt is analyzed and based on the same; credit-risk associated with lending is projected. These are normal corporate functions.

Further, the Court observed that,

Merely because they have implications for the general public and lending institutions tend to go by them, credit rating agencies cannot be considered as discharging public function or public duty. Secondly, SEBI has only regulatory and supervisory control over credit rating agencies.

Crucially, the Court said,

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 diagnosisIf 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.

Finally, the Court elucidated that it had ruled 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,

Therefore, the Petition was dismissed as not maintainable.

Case Name: Mahasemam Trust v. UOI and others

Case no.: W.P.(MD)No.8037 of 2020 and W.M.P.(MD)Nos.7469 & 9960 of 2020


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