Sebi cancels Brickwork’s licence, orders wind-up by April


MUMBAI : The Securities and Exchange Board of India (Sebi) on Thursday cancelled the licence of Brickwork Ratings, prohibited it from taking up new clients and directed it to wind up operations in six months, in the toughest regulatory action against any credit rating firm.

The Sebi order listed various violations by Brickwork, including failure to document meetings with the management, lack of independent analysis of financial projections given by companies, delay in recognizing defaults and conflict of interest. Mint was the first to report on 12 October 2021 that the regulator has decided to revoke the licence of the Bengaluru-based company promoted by Canara Bank.

Sebi and the Reserve Bank of India (RBI) conducted a joint audit of the rating agency in January 2020 that led to an administrative warning and enquiry. The regulator issued a show cause notice to the rating agency in June 2021 about why it should not be wound up. Brickworks sought interim relief in the Karnataka high court, which restrained the regulator from cancelling Brickwork’s registration.

Sebi then moved a special leave petition before the Supreme Court. On 16 September, the apex court stayed the operation of the high court’s order, clearing the deck for regulatory action.

The Sebi action follows successive lapses in the ratings of several issuers, including Welspun, IDFC First, Adani Rail, Coffee Day Enterprises, Magma Fincorp, Essel Group, 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.

Sebi also found a major lapse at the agency where some rating advisers promised favourable ratings. There were also concerns about conflict of interest and the role of the managing director. “There was a blurring of analytical and BD (business development) role at the CRA” (credit rating agency), the regulator said.

The Sebi order cites an instance where the rating analyst discussed projections pertaining to Welspun with the 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, show that governance changes recommended in earlier inspections and monetary penalties imposed have not proved effective or deterred the noticee from addressing the 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,” Sebi whole-time member Ashwani Bhatia said in the 50-page order.

Mint reached out to Vivek Kulkarni, founder and managing director of Brickwork, for comment via text message but did not receive a response.

During the hearings, Brickwork argued before the regulator that none of the violations raised any integrity issues and was 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 9,000 credit ratings, and the enquiry report has made observations on 15 cases. Most 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,” Brickwork Rating said, according to the Sebi order.

Brickwork claims on its website that it has rated over 102 issuers including PSUs.

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