Credit ratings issued by credit rating agencies to the companies are key indicators of the financial performance of any company – accordingly, credit ratings reflect the existing financial state of affairs and future growth prospects of any company. This is similar to any ratings out in the market about any product or service publicised by the manufacturer, service provider or marketeer – the idea is to make an impact on the mood of the prospective customer.
Credit ratings are one of the key parameters to influence decision of investors to make investments in companies and shareholders decision to purchase shares of such companies and for companies to generate capital for business expansion – Hence, credit ratings agencies must provide accurate and correct financial position of companies without bias or any negligence or favors in issuing ratings as any such thing will have its catastrophic effects on financial interests of the stakeholders in the company.
However, in a latest move, the Securities and Exchange Board of India (SEBI) cancelled the licence of Brickwork Ratings (“BR”), citing violations of various compliance and risk parameters. SEBI directs BR to wind up its operations in next six months and not to take up any new clients. A caution is also issued to prospective clients not to engage BR as credit rating agency.
Violations of BR include:
a) Blind reliance on financial projections provided by companies without doing any independent analysis of its own
b) Significant delay in identifying defaults and conflict of interest
c) Inability to document and register meetings with the companies’ management.
Series of events that led to SEBI’s decision to revoke license of BR are as follows:
a) First administrative warning was issued to BR based on the joint audit of SEBI and the Reserve Bank of India (RBI) in January, 2020 – SEBI had issued successive warnings in different instances of lapses in ratings of many companies which rating was issued by BR
b) In June, 2021, a show cause notice was issued to BR by SEBI, seeking an explanation to show proper reasons to stop SEBI from taking any action of cancelling BR license.
c) Anticipating cancellation of license, BR moved to Karnataka high court and succeeded in getting interim relief from Karnataka high court, which relief restrained SEBI from proceeding with cancellation of license.
d) Irked with interim relief order, SEBI approached Supreme Court with a special leave petition – As a result, Supreme Court ordered stay on implementation of high court interim relief.
e) Supreme court stay paved the way for SEBI to issue order cancelling license of BR
SEBI’s decision to cancel BR license is not a decision taken in a spur of moment – It was taken after multiple warnings, enquiries and imposition of penalties which did not change the BR conduct in its operations.
Failure of BR to comply with applicable compliance and regulatory requirements despite multiple opportunities provided to correct itself pushed SEBI to take this extreme call to cancel license.
BR version is that SEBI’s report provides recommendations on 15 cases out of 9,000 credit ratings, performed by BR and most importantly errors of BR are non-material or clerical errors which did not give rise to integrity or malpractice issues or result in favours to any company. BR further says SEBI order to cancel BR license is a death penalty and impacted its clients and employees significantly.
Current status of this case is, BR moved to the Securities and Appellate Tribunal which issued interim order on cancellation of BR license and directed BR not to take up new assignments until the matter is decided in final hearing scheduled for November 15, 2022.
