Sebi cancels certificate of registration granted to Brickwork Ratings

Orders it to wind down operations in six months

The Securities and Exchange Board of India (Sebi) on Thursday cancelled the recognition certificate granted to Brickwork Ratings India, one of the seven registered credit rating agencies (CRAs) in the country, for “repeated lapses” and irregularities in “discharging its duties”.  

The Sebi directed Brickwork to wind down its operations within six months and intimate its clients about the same. During this period, Brickwork cannot onboard any new clients or take fresh mandates.

Officials of ratings agencies said the cancellation of Brickwork’s licence could have ramifications for the banking industry. 

“The instruments rated by Brickwork will have to be rated by other ratings agencies. There is a risk that many of them will get downgraded. If that happens, banks would be required to set aside more capital, as their risk-based provisioning could go up,” an industry official said, adding that the Reserve Bank of India might have to make special arrangements for banks rated by Brickwork.

Sebi said Brickwork, which counts Canara Bank as its promoter, had failed to take corrective measures despite penal actions in the past. “The noticee (Brickwork) failed to exercise proper skill, care and diligence while discharging its duties as a credit rating agency, which has defeated the very purpose of regulations i.e. investor protection and orderly development of the securities markets,” Ashwani Bhatia, whole-time member, Sebi, said in an order.

“Repeated lapses, noticed across multiple inspections conducted by Sebi, show that governance changes recommended in earlier inspections and monetary penalties imposed have not proved effective or deterred the noticee in addressing the very basic requirements of running a CRA. Strict regulatory action…is required at this juncture to address the issue and protect the market ecosystem,” Bhatia added.

BRICKWORK AT A GLANCE

• Obtained CRA licence in 2008
• Was among 7 CRAs registered with Sebi
• Canara Bank holds 10% stake; Founder & MD Vivek Kulkarni and family hold over 60%
• Has conducted more than 9,000 credit ratings
• Rated over 100 issuers

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”.

CRAs are considered as the gatekeepers of the financial markets and customers rely on these ratings while making investment decisions.

Sebi carried out a series of inspections against Brickwork, which obtained its licence as a CRA in 2008, starting April 2014, which led to multiple adjudication proceedings against the firm. In January 2020, Sebi and the RBI undertook a joint inspection of Brickwork, where the two regulators found “several irregularities”.  Following this, Sebi issued an administrative warning and directed it to rectify the discrepancies and take corrective measures.

An enquiry report submitted in April 2021 had several adverse observations against Brickwork, following which it was recommended that its licence should be cancelled. Some of these observations included failure to follow a proper rating process, failure to exercise due diligence while providing ratings, failure to make correct disclosures in its press releases, and failure to address the issue of conflict of interest arising due to a rating committee member.

In July 2021, Sebi was served a notice by the Karnataka High Court (HC), where Brickwork had challenged the recommendation of cancellation of its licence. Thereafter, Sebi moved a special leave petition before the Supreme Court (SC), challenging the Karnataka HC order. Last month, the SC allowed Sebi to conclude the proceedings for Brickwork licence cancellation.

In the past, the market regulator imposed penalties on the rating agency for several lapses such as a delay in recognition of default of debentures issued by Bhushan Steel and failure to downgrade the rating for the debentures issued by Gayatri Projects.

What prompted Sebi action

• Brickwork Ratings did not do independent analysis of projections provided by the issuer in certain cases
• Delay in default recognition, correct disclosures
• Failure to comply with the prescribed timelines in over 75% of inspected cases
• Lapses in documentation of meetings with management, site visits