Market regulator, Seurities and exchange board of India (Sebi) on October 6 issued a winding up order against Brickwork Ratings citing major lapses in its operations including in the case of Bhushan Steel. The action follows probes by the market regulator, along with banking regulator,the Reserve Bank of India (RBI).
In its order, Sebi cited failure on the part of the rating agency to “exercise proper skill, care and diligence, while discharging its duties as a credit rating agency”.
In the past, the regulator has imposed monetary penalty on raters but revoking permit is first time. There is no precedent to such a move. The market regulator has asked Brickwork Ratings to shut down operations within six months in its order.
“There is no precedence to such an action. There are multiple serious violations cited by the regulator in its order,” said a senior rating industry official to Moneycontrol on condition of anonymity.
Brickwork is one of the seven SEBI-registered credit rating agencies. Brickwork Ratings has Canara Bank, a leading Public Sector Bank, as its promoter and strategic partner: as per company’s website.
The others raters are Crisil, Care, Icra, Fitch, Infomerics Ratings and Acuité Ratings & Research. In September this year, the Supreme Court had allowed Sebi to conclude the proceedings for cancellation of Brickwork Ratings’ licence for allegedly violating various credit rating regulations.
Credit rating agencies are institutions which rate the debt instruments of companies. These ratings are used by investors and companies to take business decisions on a particular corporate.
Multiple lapses cited
Among the many lapses of Brickwork Ratings cited by Sebi include delay in recognition of default of NCDs of Bhushan Steel Ltd. by the rating agency even after disclosure of default by the Debenture Trustee for such Issue.
Another instance is failure to downgrade the rating for the NCD Issue of Gayatri Projects Ltd. to ‘Default’, even after receipt of information from the DTfor such Issue, Sebi said.
SEBI further noted that the repeated lapses, noticed across multiple inspections conducted by it, shows that governance changes recommended in earlier inspections, and monetary penalties imposed have “not proved effective or deterred the Noticee (Brickwork Ratings) in addressing very basic requirements of running a CRA. “
Joint investigation by Sebi and RBI
SEBI had began investigating the credit rating agency in 2020 and undertook a joint inspection with Reserve Bank of India (RBI).
Further, the regulator also pointed to a lack of surveillance mechanism for tracking the interest/ principle repayment schedule of issuers, which would hamper the rating agency’s ability to provide accurate ratings.
In September, 2020, Sebi had imposed a monetary penalty of Rs one crore on Brickwork Ratings India, for lapses while assigning credit ratings to non-convertible debentures (NCDs) of Essel Group companies.
At that time, Sebi had said that Brickwork also failed to review the rating of NCDs of Great Eastern Energy Corporation after another credit rating agency downgraded the NCDs in April 2017 due to “delays in debt servicing of bank facilities on account of tightening of liquidity”. Also, the regulator said Brickwork made delay in recognising default of NCDs of Diamond Power Infrastructure Ltd.
Between January 20 and 24, 2020 SEBI had undertaken a joint inspection of Brickwork with RBI, inspecting its records and documents for the period from October 1, 2018–November 30, 2019 which revealed several irregularities and violation of the provisions of the CRA Regulations.
CRAs Gatekeepers to financial markets
In its order, Sebi observed that rating agencies play a critical role as gatekeepers to financial markets and area source of information for investors.
“Credit Ratings are also relied upon by investors, including institutional investors like Provident Funds and Mutual Funds which handle public funds, not just while assessing investment opportunities, but also in making investment decisions,” Sebi said.
Also, given the important public function played by CRAs, it becomes essential to ensure that only entities conforming to best practices in governance, Sebi observed in its order.