SEBI revokes Brickworks Ratings' licence. Here's all you need to know

Canara Bank-promoted credit ratings agency Brickworks Ratings may no longer be able to operate in India. 

The Securities and Exchange Board of India (SEBI) has cancelled the recognition certificate granted to Brickwork Ratings India, one of the seven registered credit rating agencies (CRAs) in the country, for “repeated lapses” and irregularities in “discharging its duties”.

By when will Brickworks have to close its operations in India?

The capital markets regulator directed Brickwork to wind down its operations within six months and intimate its clients about the same. During this period, Brickwork cannot onboard any new clients or take fresh mandates.

What more has the market regulator said?

SEBI said Brickworks, which counts Canara Bank as its promoter, had failed to take corrective measures despite penal actions in the past. 

“The 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,” Ashwani Bhatia, whole-time member, SEBI, said in the order.

Has SEBI been investigating the ratings agency for a while now?

Yes. According to Business Standard, SEBI carried out a series of inspections against Brickwork, which obtained its licence as a CRA in 2008, starting April 2014, which led to multiple adjudication proceedings against the firm.

In January 2020, SEBI and the RBI undertook a joint inspection of Brickwork, where the two regulators found “several irregularities”. Following this, SEBI issued an administrative warning and directed it to rectify the discrepancies and take corrective measures, the report noted.

An enquiry report submitted in April 2021 had several adverse observations against Brickwork, following which it was recommended that its licence should be cancelled. 

Some of these observations included failure to follow a proper rating process, failure to exercise due diligence while providing ratings, failure to make correct disclosures in its press releases, and failure to address the issue of conflict of interest arising due to a rating committee member, Business Standard reported.

In July 2021, SEBI was served a notice by the Karnataka High Court, where Brickwork had challenged the recommendation of cancellation of its licence. Thereafter, SEBI moved a special leave petition before the Supreme Court, challenging the Karnataka HC order. Last month, the SC allowed Sebi to conclude the proceedings for Brickwork licence cancellation.

In the past, the market regulator imposed penalties on the rating agency for several lapses such as a delay in recognition of default of debentures issued by Bhushan Steel and failure to downgrade the rating for the debentures issued by Gayatri Projects.

So, why is this development important? 

According to the report, officials of ratings agencies said the cancellation of Brickwork’s licence could have ramifications for the banking industry.

“The instruments rated by Brickwork will have to be rated by other ratings agencies. There is a risk that many of them will get downgraded. If that happens, banks would be required to set aside more capital, as their risk-based provisioning could go up,” Business Standard cited an industry official as saying. It added that the Reserve Bank of India might have to make special arrangements for banks rated by Brickwork.