SEBI cancels rating license of Brickwork Ratings

In a move that was both, surprising and unprecedented, the Securities and Exchange Board of India (SEBI) ordered the cancellation of the recognition certificate and credit license granted to Brickwork Ratings India. Incidentally, Brickwork Ratings India is one of the seven registered credit rating agencies (CRAs) in India authorized to rate debt instruments and assign an appropriate rating for the same. SEBI has underlined that Brickwork Ratings India  was guilty of repeated lapses and irregularities in discharging its duties. As per the order, SEBI has directed Brickwork to wind down its operations within a period of 6 months.

This will have a number of implications for Brickwork Ratings and its clients. Firstly, Brickwork Ratings India has to intimate its clients about this cancellation of license. During this period, Brickwork has been specifically barred from onboarding any new clients or take fresh mandates, although they have been allowed to complete existing mandates. This move is likely to have larger ramifications for the banking industry, where there are a number of Brickwork ratings. Now all these entities have to seek a fresh rating from another agency and the fear is that in many cases there would also be a downgrade.

What triggered this cancellation of the license of Brickwork Ratings India? There were several reasons. The first allegation made by SEBI is that Brickwork Ratings did not do independent analysis of projections provided by the issuer in certain cases and relied on the issuer projections. There were also lapses in disclosures and delays in default recognition. Brickwork Ratings also failed to comply with the prescribed timelines in nearly 75% of the cases. SEBI also found major lapses in the documentation of meetings conducted by the rating agency with management of the issuer and their site visits.

Brickwork Ratings is a rating agency that is backed by Canara Bank. Brickwork was founded by Vivek Kulkarni, a former IAS officer in the Karnataka government and who was very closely associated with the emergence of Bengaluru as the IT capital of India in the nineties. The board of Brickworks also includes illustrious persons like eminent banker, R K Nair, N Balasubramanian and legal expert M R Hegde. It looks like the SEBI has tried to send out a very strong signal to all the ratings agencies in India that such repeated lapses in process and quality control would not be tolerated. 

Controversies at Brickworks are nothing new. For instance, Sebi has already carried out a series of inspections against Brickwork and that had also led to multiple adjudication proceedings against them. In 2020, RBI and SEBI had conducted a joint inspection of Brickwork where both the regulators had found ample instances of irregularities. Back then, SEBI had also issued an administrative warning; directing Brickwork to rectify discrepancies and take corrective measures. The problem was that Brickwork did not take adequate steps to arrest this problem and avoid it from ballooning into a full blown crisis.

The troubles escalated in mid-2021 when an enquiry report submitted in April 2021 made several adverse observations against Brickwork. Many of these observations pertained to very serious issues. For instance, there were observations like failure to follow a proper rating process, failure to exercise due diligence before providing ratings and failure to make correct and transparent disclosures in its press releases. The situation was worsened by conflicts of interest pertaining to a member of the rating committee. That was the first instance when the committee had recommended the cancellation of its license.

However, subsequently, Brickwork had challenged this recommendation after which the Karnataka High Court served notice to SEBI. In response, SEBI had moved a special leave petition before the Supreme Court, where it had challenged the notice sent by the Karnataka High Court. It was only last month that the Honourable Supreme Court had allowed SEBI to conclude the proceedings for licence cancellation of Brickwork. This move is certainly grave and unprecedented. In the past, the regulator would give a rap on the knuckles or impose penalties at the most. It has never been as serious as cancelling license.
The last word may not have been said. It remains to be seen if Brickwork still explores other options to save itself. However, even if that were to happen, the damage already done to their image as an independent rating agency is immense.