Why Sebi Asked Rating Agency Brickwork To Shut Down Its Operations

The Securities and Exchange Board of India (Sebi) has ordered credit rating agency Brickwork to shut down its operations for violating rules, the first such action against a rating agency by the regulator.

In a circular, Sebi has asked Brickwork to wind up its operations within six months for "failure to exercise proper skill, care, and diligence, while discharging its duties as a credit rating agency."

The regulator has also barred Brickwork from taking any new clients.

Sebi said that despite financial penalties and past suggestions for governance changes, Brickwork's repeated rule violations discovered during multiple inspections show its inability to adhere to its rules.

Brickwork has failed to meet the basic criteria of operating a credit rating agency, it said.

"Strict regulatory action, in my considered view, is required at this juncture to address the issue and protect the market ecosystem," whole-time Sebi member Ashwani Bhatia said in the order.

In one of the lapses, Brickwork's enquiry report on Zee Group of Companies named Vivek Kulkarni instead of D. Ravishankar as one of the participants of the external rating committee meeting on May 17, 2019, although he was not present.

In 2020, Sebi and the Reserve Bank of India (RBI ) conducted a joint assessment of the rating agency for October 1, 2018, to November 30, 2019.

Sebi stated, "The examination identified various anomalies that were prima facie in violation of the terms of the CRA regulations and several SEBI circulars."

These developments came after the role of rating agencies was questioned in 2018 when many highly rated papers started defaulting on interest payments, and mutual fund investors in various debt funds took the beating.

In a July 2019 circular, "Guidelines for Enhanced Disclosures by CRA," Sebi had set a benchmark for the credit rating agencies (CRAs) probability of default (PD). CRAs were required to produce and publish on their websites standardised and uniform PD benchmarks for each rating category for one-year, two-year, and three-year cumulative default rates, both short-term and long-term.

As per the new regulations, the benchmark for a new AAA rating for one year and two years is 0 per cent, but Brickwork's website showed the PD for a AAA rating was 0.48 per cent for March 2022 and 0.59 per cent for March 2020. For the BBB rating, the benchmark set by SEBI is 3.3 per cent, but Brickwork's website showed 2.42 per cent for March 2022 and 2.02 per cent for March 2020.

The Supreme Court has allowed Sebi to finalise the procedures for cancelling Brickwork's license for alleged violations of various credit rating standards. A bench headed by Justice S.A. Nazeer has reversed the Karnataka high court's order that dismissed the Sebi's motion to overturn previous rulings that barred it from completing the process of cancelling Brickwork's license.