The Securities and Exchange Board (SEBI) canceled the license of Brickwork Ratings India PVT. LTD, a credit rating agency, ordered the company to shut down its operations within 6 months in a notification issued by SEBI dated 6th October 2022. SEBI has also said that the agency cannot take on any fresh business. Before going into the detail, let’s first understand what work Brickwork does. Brickworks Ratings is a SEBI-registered credit rating agency that is also accredited by The Reserve Bank of India (RBI). It offers rating services on Bank loans, NCD, Commercial Paper, Fixed deposits, Securitised paper, Security receipts, etc. It has a presence in over 150 locations across India. Brickwork Ratings has Canara Bank as its promoter and strategic partner. Brickwork Ratings provides credit ratings that help investors to make informed investment decisions. What lead to SEBI canceling the Brickwork Rating license? SEBI has been tightening rules for credit rating agencies since 2016, to bring more transparency and accountability. SEBI had investigated Brickworks on several occasions. It also undertook a joint inspection with the RBI. According to the findings of SEBI, the agency had delayed recognizing the default of non-convertible debentures (NCD) of Bhushan Steel even after acknowledgment by the Debenture Trustee. It also failed to downgrade the rating to default for Gayatri Projects LTD, even after the receipt of information from the Debenture Trustee. Irregularities were also found in the ratings of Welspun, IDFC First, and Adani Rail stating that the independent analysis of the projections provided by the companies was not done by Brickwork. SEBI had previously warned Brickwork and had asked to rectify its discrepancies. Even after this, according to the SEBIs inquiry report, the agency had failed to follow the process and exercise heedfulness while providing ratings. It also failed to maintain records supporting its ratings. Why SEBI is strict with its rules for rating agencies? SEBI’s latest action on Brickworks highlights the strictness of market regulators regarding the operations of rating agencies as rating agencies have played a crucial role in financial market debacles around the world. Rating agencies tend to provide AAA ratings to mortgage-backed companies which often misleads the investors as they perceive that the mortgage-backed companies are the safest option for investments. This is because most companies tend to pay these agencies for the ratings of security. To avoid losing an established client, rating agencies inflate the debtor’s credibility. This conflict of interest has been widely criticized following the Global Financial Crisis of 2008. Against this backdrop, it is important to see which of SEBI’s steps - closing down these agencies or formulation of new strict guidelines will be more effective in dealing with the issue of transparency of companies’ ratings. Thank you.
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