The Securities and Exchange Board of India (Sebi) on Thursday asked Brickwork Ratings to wind down its operations within six months for failing to exercise proper skill, care and diligence while discharging its duties as a credit rating agency (CRA).
The regulator has cancelled Brickwork’s certificate of registration, granted in 2008.
Brickwork is one of the seven credit rating agencies registered with Sebi. The others are Crisil, ICRA, CARE, Fitch, Infomerics Ratings and Acuité Ratings & Research.
“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,” the regulator said in its 51-page order on Thursday.
Last month, the Supreme Court had allowed Sebi to conclude the proceedings for cancellation of Brickwork Ratings licence for allegedly violating various credit rating regulations.
“This is the first instance of Sebi cancelling a licence of a credit rating agency and the matter is going to be litigated till the Supreme Court. This shows that Sebi is closely monitoring credit rating agencies as well as the issuers,” said Sumit Agrawal, founder, Regstreet Law Advisors.
Brickworks had said it had taken remedial measures, and so “the judgement may seem harsh”, Abhinay Sharma, managing partner, ASL Partners, said. “Additionally, the cascading effect of the order so passed on the ratings already provided by Brickwork was not considered,” he added.
The remedial steps highlighted by Brickwork include timeline compliance; automation of receipt and follow-up of no default statements to be provided by its clients; bankers feedback schedulers; automation process of tracking rating mandates due for surveillance coupled with frequent alerts to analysts; maintenance of a centralised repository of database and addressing conflict of interest with respect to the roles performed by the MD and FD.
“The judgement, if it is upheld by the Supreme Court, may help in creating a roadmap for other CRAs to regulate their business practices as per the applicable regulations issued by Sebi. CRAs would be expected to apply guidelines and regulations in letter and spirit,” Sharma.
Sebi had carried out inspections of Brickwork for the periods April 1, 2014-September 30, 2015, and April 1, 2017-September 30, 2018. The deficiencies observed in these two inspections led to initiation of separate adjudication proceedings against Brickwork.
The first adjudicating order was challenged in the Securities Appellate Tribunal, which upheld some of the findings of the AO, but reduced the penalty to Rs 2 lakh from Rs 3 lakh. The second adjudicating order was challenged in SAT, which partly upheld the findings of the AO and reduced the penalty to Rs 10 lakh from Rs 1 crore.
Sebi undertook a joint inspection with RBI between January 20 and 24, 2020, of the records and documents of Brickwork, for the period from October 1, 2018-November 30, 2019. It later initiated enquiry proceedings. Brickwork filed for settlement for violations alleged in the enquiry show cause notice. A post-enquiry SCN was later issued and Brickwork was granted the opportunity of personal hearing.