Brickwork Ratings could face Sebi ire over lapses in credit rating process

Brickwork Ratings is one of the seven Sebi-registered credit rating agencies (CRA). The other six being Care, ICRA, Crisil, Fitch and Infomerics Ratings and Acuite Ratings & Research

According to a Mint report, markets regulator Securities and Exchange Board of India (Sebi) could cancel the license of Brickwork Ratings for repeated lapses in the credit rating process. In the recent past, Sebi had asked for removal of top officials at rating agencies. However, this will be a rare instance of a license being revoked of a major market intermediary. We try to simplify the issue for you:

What is Brickwork Ratings?
 

Brickwork Ratings is one of the seven Sebi-registered credit rating agencies (CRA). The other six being Care, ICRA, Crisil, Fitch and Infomerics Ratings and Acuité Ratings & Research. CRAs are also accredited by the Reserve Bank of India (RBI). Their key function is to provide ratings to debt instruments such as bank loans, non-convertible debentures (NCDs), commercial papers and certificates of deposits. The ratings given by CRAs to these instruments are critical as they impact pricing and investment decisions. Bengaluru-based Brickwork was founded by former bankers, rating professionals and regulators. According to its website, the rating agency has rated various instruments amounting to Rs 17.7 trillion.

Why is it in trouble?
 

The market regulator has come across several instances of alleged lapses in the rating process at Brickwork. Earlier this year, in a show cause notice, Sebi sought an explanation from the rating agency as to why its license should not be revoked. This follows Sebi’s directive to the company to improve its rating process. A year ago, the regulator even imposed a penalty of Rs 1 crore for lapses while assigning credit ratings to NCDs of Essel Group and Great Eastern Energy. In the order issued last year, Sebi had said that Brickwork had failed to exercise proper due diligence and considerably delayed the disclosures about non-cooperation of the issuer. It had also failed in cautioning investors and stakeholders about an issuer’s ability to meet payment obligations.

Options before Brickwork
 

The rating agency has moved Karnataka High Court seeking a stay on Sebi's proceedings against it. Brickwork has alleged that the market regulator hasn't given a proper hearing. Sebi is also said to have rejected it's consent application in the matter. Karnataka HC is likely to take up the matter at the end of this month. In cases, Brickwork fails to obtain any relief from the HC, legal experts say, it can move SAT after Sebi passes any order in the matter. 

What is Brickwork saying?

The rating agency believes it has taken corrective steps after the regulator pointed out certain lapses. Brickwork says it has now complied with all the requirements and provided clarifications to the regulator wherever required. It has also appealed against the order issued by Sebi last year before the Securities Appellate Tribunal (SAT).

In an emailed statement to Business Standard, Brickwork said, “Brickwork Ratings came into existence as the 5th Credit Rating Agency (CRA) in India in 2008, when 3 out of the remaining 4 were owned by International CRAs. Canara Bank is our Institutional investor as well as the designated promoter. Over the years we have followed highest standards for issuing ratings in addition to strong internal checks and balances. We are therefore widely regarded as a credible institution for ratings by corporates and lending institutions."

“Few months back, the regulator had pointed out some lapses and we had thereafter taken active steps and complied with all the requirements. Clarifications were given where needed. IL&FS was not rated by Brickwork Ratings and hence there is no case pending against the company for the same. Similarly, the point of missing papers in Essel group is factually incorrect. It is important to note that no mala fide intent was pointed out by the regulator. Our company has appealed against the original order as per the legal options available. We have faith in our country’s regulatory framework and judicial systems and hope to resolve the matter in appropriate timeframe.”

The IL&FS episode
 

The unprecedented collapse of IL&FS in 2018, followed by a spate of defaults at firms such as DHFL, Essel and Yes Bank have put the spotlight on the roles and functions of CRAs in the country. It also brought to light several shortcomings in the credit rating process. Since then, Sebi tightened the regulatory regime for CRAs to make the process more transparent, fair and accurate. The regulator also prescribed several guidelines to minimise conflict of interest between various functions of CRAs.

Sebi has also taken penal action against several CRAs besides Brickwork. In December 2019, it slapped a penalty of Rs 25 lakh – which was later raised to Rs 1 crore - each on ICRA and CARE Ratings. In its order, Sebi said the default by IL&FS occurred due to "lethargic indifference and needless procrastination and laxity" of the rating agencies.

Heads rolled
 

The IL&FS episode also saw several top officials at rating agencies step down. In August 2019, Moody’s India arm ICRA sacked its MD & CEO Naresh Takkar following whistleblower allegations. In December 2019, CARE’s Managing Director and Chief Executive Officer (MD & CEO) Rajesh Mokashi had to step down following whistleblower complaints alleging management interference in ratings of certain companies, including IL&FS. In February 2020, Care’s Chairman S B Mainak also tendered his resignation.