Securities Exchange Board of India –SEBI has cancelled Certificate of Registration of Brickworks Ratings and asked them to wind up operations within six months. Well the decision has shocked many as SEBI has never asked any Credit Rating Company to wind up this way.
So What led SEBI take such a drastic step against the Credit Rating Agency?
To understand this lets first see what is the role of SEBI in India?
- The main objective of SEBI is for reducing speculations in the market so that retail investors do not end up incurring losses in volatile market.
- SEBI protects the interest of the investors in securities and promotes the development and regulates the security market.
- SEBI’s primary purpose is to take care of the interest of investors in the stock market.
- It encourages the development of the stock market and controls the market.
- It offers a platform for investment advisors, portfolio managers, sub-brokers, share transfer agents, merchant bankers, underwriters, bankers, trustees of trust deeds, registrars, and other associated participants.
- It regulates the working of depositories, custodians of securities, credit card rating participants, and foreign portfolio investors. It prevents insider trading and any unfair trade practices in the stock market. It prohibits price manipulation of stocks in the securities market.
- It updates investors about various cautions through media and investors can visit the SEBI office to get answers to their queries.
- They also educate investors by conducting online and offline classes to provide market insights. They regulate the merger and acquisitions of companies.
Role of Brickwork Ratings
- Brickwork Ratings is a SEBI registered Credit Rating Agency which is accredited by RBI, offers Rating services on Bank Loans , NCDS, Fixed Deposits, Securitised Products. Security Receipts etc. Brickworks has its corporate office in Bengaluru and country wide presence.
- Brickwork Rating was established in 2007 and is promoted by Canara Bank.
- Credit Rating Agencies access the Credit Worthiness of organization of different entities.
- These agencies analyses debtors ability to repay the debt and also check the credit risk.
- All the Credit Rating Agencies in India are regulated by SEBI Regulations, 1999 of the Securities and Exchange Board of India Act, 1992.
- There are total seven credit agencies in India i.e CRISIL, CARE, ICRA, SMREA, Brick Work Rating, India Rating and Research Pvt. Ltd and Infomerics Valuation and Rating Private Limited.
Why SEBI decided to Close Down Brickworks Ratings
- On October 6th SEBI ordered Brickwork Ratings to close its shutters with a time limit of 6 months.
- The decision shocked many and even in the history SEBI has never shut down any Credit Rating Agency in such a way. The two reasons why SEBI took such a drastic step are
Failure to Perform its Duties
- Brickworks Have failed to Perform its Duties proactively especially towards Sintex Plastic Technology Ltd.
- Sintex had already declared to the stock exchanges on 14th Augutst 2019 that it defaulted some of the borrowings. Sintex declared that they are cashless and haven’t been able to repay their lenders.They’re also saying that they have breached certain terms set out in the loan contract.
- This, they say happened on 31 March 2019. But BWR, a CRA of high standing actually declared that Sintex had defaulted, only on 21st August 2019.Here BWR took 7 days to declare that Sintex Plastic Technologies Ltd has defaulted.
- Despite its Failure, BWR tried to defend itself stating the delay did not exceed 7 days. But SEBI considered BWR’s behavior is complete disregard which is not expected from CRA’s.
- It was also mentioned that there were lapses in the case of Bhushan Steel and Gayathri Projects. SEBI began probing the credit rating agency in 2020 and undertook a joint inspection with the Reserve Bank of India.
- Credit rating agencies are institutions that rate the debt instruments of companies. These ratings are used by investors and companies to take business decisions on a particular corporate.
- Given the vital public functions performed by credit rating agencies, it becomes important to ensure that such agencies conform to the applicable regulatory framework and have high standards of diligence.
- SEBI regulations and circulars mandate credit rating agencies to give ‘true’, ‘fair’, ‘appropriate’, and ‘accurate’ ratings, and in order to fulfill such obligations the higher standards of due diligence, integrity, dignity, fairness, etc, are expected from CRAs,
- In January 2020, SEBI and the RBI undertook a joint inspection of the rating agency, where the two regulators found “several irregularities”.
- SEBI issued an administrative warning and directed it to rectify the discrepancies and take corrective measures.
- In July 2021, SEBI was served a notice by the Karnataka High Court, where Brickwork had challenged the recommendation of cancellation of its licence.
The second one is Conflict of Interest
- Companies pay Credit Rating Agencies for getting good ratings not the Investors. So if CRA wants to perform better they have to work in line with the Companies.
- If there is a situation where the head of ratings accompanies the business development head when courting new business, the company could sign-off on the deal in exchange for a better rating. So that’s what happened in case of IDFC First Bank.
- The contraventions /deficiencies observed in both the inspections led to initiation of separate adjudication proceedings against Brickwork, the order read.
- The regulator also imposed monetary penalties on the rating agency after both the inspections, the order stated.
- In the third inspection, several irregularities in violation of the provisions of the CRA Regulations and certain SEBI circulars were revealed.
- The order stated that CRAs play a critical role as gatekeepers to financial markets and are a source of information for investors. Given the vital public functions performed by credit rating agencies, it becomes important to ensure that such agencies conform to the applicable regulatory framework and have high standards of diligence
- 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 notice in addressing very basic requirements of running a CRA.