The Securities and Exchange Board of India (Sebi) on Thursday cancelled the license of Brickwork Ratings India and ordered it to wind down operations within six months, citing failure to exercise proper skill, care and diligence while discharging its duties as a credit rating agency.
The market regulator also barred the rating agency, promoted by Canara Bank, from taking any new clients or fresh mandates. This is for the first time that Sebi has cancelled the license of a credit rating agency (CRA).
Vivek Kulkarni, IAS (Retd), former IT Secretary, Govt. of Karnataka, is the Founder and Managing Director of the rating firm, according to its website. RK Nair, former ED of Sebi, and N Balasubramanian, former CMD of SIDBI, are on the board of the company. Sangeeta Kulkarni, founder and CEO, is also on the board. Canara Bank is its promoter and strategic partner, the website says.
“The noticee (Brickwork Ratings) shall wind down its operations (including intimating its client about closure of its operations) within a period of six months from the date of this Order,” Sebi’s Whole Time Member Ashwani Bhatia wrote in an order on Thursday.
The order said SEBI regulations and circulars mandate credit rating agencies to give true, fair, appropriate and accurate rating, and in order to fulfil such obligation the higher standards of due diligence, integrity, dignity, fairness is expected from CRA. “The noticee 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 regulator said in the order.
Brickwork was granted registration by SEBI in the year 2008. It is one of the seven Sebi-registered credit rating agencies operating in the country. The other six agencies are Acuite Ratings & Research Ltd, Crisil Ratings Ltd, Icra Ltd, Care Ratings Ltd, India Ratings and Research Ltd, Infomerics Valuation and Ratings Ltd.
The market regulator had carried out inspections of the rating agency for the periods April 1, 2014 –September 30, 2015 and April 1, 2017–September 30, 2018.
The order said that in both the inspections various violations by the rating agency, including in the cases related to delay or failure in reviewing ratings or taking actions on non-convertible debentures (NCD) of Bhushan Steel Ltd, Gayatri Projects Ltd. Diamond Power Infrastructure Ltd. Great Eastern Energy Corporation Ltd, Essel Corporate Resources Pvt. Ltd. and Zee Entertainment Enterprises Ltd, was found.
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 January 2020, SEBI, along with the Reserve Bank of India (RBI), undertook a joint inspection of the records and documents of the rating agency for the period from October 1, 2018–November 30, 2019.
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, it said.
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, the regulator said.
“Strict regulatory action, in my considered view, is required at this juncture to address the issue and protect the market ecosystem,” Bhatia wrote in the order. BWR has rated debt instruments, bonds, bank loans and securitized paper of Rs 19,02,200 crore. Fixed deposits and commercial papers worth over Rs 83,555 crore have been rated. BWR has rated over 100 PSU and public sector banks, as well as many major private players.