Sebi cancels license of Brickwork Ratings, orders it to shut down in 6 months
Premium- The Bengaluru-based company promoted by Canara Bank cannot take on any new clients or rating mandates, as per the regulator
MUMBAI : In one of the rare instances the market regulator, Securities and Exchange Board of India (Sebi) has cancelled the license of Brickwork Ratings India Ltd and asked it to wind down its operations within six months.
The Bengaluru-based company promoted by Canara Bank cannot take on any new clients or rating mandates, as per the regulator. Mint had first reported on 12 October 2021 that the regulator is set to take this unprecedent penal action due to alleged egregious violations committed by the rating agency.
The regulator in its order found violations involving failure to document meetings with management, lack of independent analysis of financial projections given by the company, delay in recognizing defaults and conflict of interest.
Sebi and Reserve Bank of India (RBI) had undertaken a joint audit of the rating agency in January 2020. The findings of the audit led to an administrative warning and enquiry. The regulator issued a show cause notice to the rating agency in June 2021.
The agency approached the Karnataka high court for interim relief, the court restrained regulator from cancelling Brickwork's registration.
The regulator then moved a special leave petition before the Supreme Court. On 16 September 2022, the apex court stayed the operation of the high court's order. This cleared the decks for the regulatory action.
The regulatory action is on the basis of successive lapses committed by the rating agency in rating a number of issuers including - Welspun, IDFC First, Adani Rail, Coffee Day Enterprises, Magma Fincorp, Essel Group papers, SREI Infrastructure, Indiabulls Housing Finance and promoter entity, Canara Bank. In each of these cases the regulator had either issued an administrative warning or started an enquiry.
Over and above the regulator had also found a major lapse at the agency where some rating advisors were promising ratings. Then there were concerns around conflict of interest and role of the managing director.
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'There was blurring of analytical and BD (business development) role at the CRA (credit rating agency), the regulator said.
For instance, the regulator's order cites an instance where projections pertaining to Welspun were discussed by the rating analyst with the Brickwork management over a telephone call.
"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. The repeated lapses, noticed across multiple inspections conducted by Sebi, shows that governance changes recommended in earlier inspections, and monetary penalties imposed have not proved effective or deterred the Noticee in addressing very basic requirements of running a CRA. Strict regulatory action, in my considered view, is required at this juncture to address the issue and protect the market ecosystem," said Ashwani Bhatia, whole time member, Sebi in the 50-page order.
Mint reached out to Vivek Kulkarni, founder and MD of Brickwork for a comment via text message, a comment is awaited.
During the personal hearing, Brickwork argued before the regulator that none of the violations raised any integrity issues and were merely clerical violations.
"There is no basis at all to recommend a capital punishment penalty in the form of cancellation of Certificate of Registration. … (It) had conducted over 9000 credit ratings and the Enquiry Report has made observations on 15 cases. Most of the deficiencies observed were with respect to non–material procedural issues or clerical errors (and) without belittling them, (it) has set about remedying them too. None of these deficiencies raised any integrity issues or malpractice, nor did they result in any favour to any Issuers. Hence, the recommendation for cancellation of licence is harsh and not at all commensurate with the alleged findings of the audit," the regulator said in the order quoting Brickwork Rating.
Brickwork on its website claims that it has rated over 102 issuers including public sector undertakings. Some of these include - R&B Infra projects, Dhani Loan Services, Indostar Capital and some papers of Adani Power and Adani Enterprises, GMR Enterprises one paper of Tata Steel.
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