SAT gives relief to Brickwork Ratings, stays cancellation of licence

But keeps Sebi ban on taking up new clients

The Securities Appellate Tribunal (SAT) on Friday granted interim relief to Brickwork Ratings by staying the cancellation of its licence, as ordered by markets regulator Securities and Exchange Board of India (Sebi), until the next hearing, which is scheduled for November 15.

Keeping the cancellation of licence on hold, the tribunal maintained the ban on onboarding any new client, as directed by Sebi.

“The SAT has stayed the operation of Sebi’s order pending final hearing of the appeal, stating that in the meantime until the appeal is heard finally, Brickworks should not take up new assignments,” Brickwork Ratings said in its statement.

Brickwork pleaded a stay on Sebi’s order, calling it a “death penalty” for the credit rating agency that has over 300 employees. The counsel representing the rating agency called the markets regulator’s order a “gross misuse of power”.

The SAT gave the agency two weeks to file their reply and a similar duration to Sebi for filing a rejoinder.

A Sebi counsel argued that a delay in disseminating information by a credit rating agency impacts decisions by investors and mutual funds. The regulator noted a total of seven instances were considered before the order. 

“In the matter of default in debt by Sintex Plastic, the rating agency did not take any proactive action and waited for the company to publish the results admitting the default,” the counsel highlighted.

The Bench enquired about why action was not taken against the agency after the third inspection, to which Sebi's counsel cited the regulatory process, which involved providing a hearing and taking on board the recommendations of “designated authority”.

Sebi carried out a series of inspections against Brickwork — which obtained its licence as a CRA in 2008 — starting April 2014. This led to multiple adjudication proceedings against the firm.

In April this year, Sebi undertook a joint inspection with the Reserve Bank of India (RBI) of the records and documents of Brickwork for the period from December 2019 to January 2022, which is at present pending.

After Sebi’s order, the RBI on Wednesday advised regulated entities and market participants not to obtain fresh ratings or credit evaluations from Brickwork Ratings. In an order dated October 6, Sebi cancelled the licence of Brickwork and directed it to wind down its operations within six months for allegedly violating various rules.

In its order, the market watchdog highlighted several violations by Brickwork. An enquiry report submitted in April 2021 had several adverse observations about Brickwork, following which it was recommended that its licence should be cancelled. 

Some of these observations included failure to follow a proper rating process, exercise due diligence while providing ratings, make correct disclosures in its press releases, and address the issue of conflict of interest arising due to a rating committee member.

Experts said the unprecedented action against the ratings agency was expected to send a strong signal to the market, improve the ratings standards, and deter the practice of “rating shopping”.

Points to ponder  

• The Securities Appellate Tribunal (SAT) has given Brickwork 2 weeks to file reply and a similar duration to Sebi for filing a rejoinder
• Sebi counsel argued that a delay in disseminating information by a credit rating agency impacts decisions by investors and MFs
• The SAT Bench enquired about why action was not taken against the agency after the third inspection
• Sebi carried out a series of inspections against Brickwork starting April 2014