Market regulator Securities and Exchange Board of India (SEBI) is about to initiate action and revoke the licence of credit rating agency (CRA) Brickwork Ratings India Pvt Ltd, says a report quoting two people with knowledge of the development.
In the report, The Mint says
, "At Brickwork Ratings, one of India's seven CRAs, the regulator found egregious violations on two counts—lack of independence of the rating committee and lapses in following procedures while rating instruments. In an upcoming order, SEBI will also bar from the markets two former senior officials of CARE Ratings—managing director Rajesh Mokashi and chairman SB Mainak—for failing to ensure independence in the rating process."
Infrastructure Leasing & Financial Services Ltd (IL&FS) and a group company were shareholders in CARE Ratings between 2007 and 2013, during which time the agency rated the commercial papers of the same companies.
According to the report, if SEBI bans Brickwork Ratings, it could spell trouble for bonds issuers that it is rating currently and may need to find alternatives. "To be sure, SEBI orders are typically not disruptive, and even in this case, the instruments currently being rated by the rating agency will continue to be rated by Brickwork till their maturity. Bonds sold by Adani group, SREI group, IIFL and Edelweiss, among others, are currently rated by Brickwork," it added.
Bengaluru-based Brickwork Ratings, which is promoted by Canara Bank, told the newspaper that "A few months back, the regulator pointed out some lapses, and we had after that taken active steps and complied with all the requirements. A spokesperson for CARE Ratings told The Mint that they are not aware of any regulatory developments about its former senior officials.
In April this year, the market regulator had issued a show-cause notice to Brickwork Ratings asking why its licence should not be cancelled for repeated lapses in the credit rating process.
Last year in September, SEBI imposed a penalty of Rs1 crore on Brickwork Ratings for lapses while assigning credit ratings to Essel Group companies' non-convertible debentures (NCDs).
Between 12 and 16 November 2018, SEBI and Reserve Bank of India (RBI) conducted a joint inspection of Brickwork Ratings from 1 April 2017 to 30 September 2018. Based on the inspection findings, SEBI initiated adjudication proceedings against the ratings agency under the provisions of Section 15HB of the SEBI Act, 1992, for alleged violations of the provisions of the Act and regulations.
In an order issued on 29 September 2020, Prasanta Mahapatra, adjudicating officer (AO) of SEBI, stated, "The issue here is not of the availability of structured obligation (SO) rating methodology. Rather, it concerns the methodology covering important aspects of undertaking the rating of SOs . It is noted that Brickwork Ratings was not independently assessing the enforceability, revocability and other important aspects of the underlying assurance while undertaking rating of SO. The documents furnished by the lenders were taken without any independent examination."
Earlier in July 2019, Grant Thornton India LLP, appointed to conduct a forensic audit on CRAs by IL&FS, revealed a nexus between key employees of the scam-hit group and top executives of rating agencies. IL&FS and its key employees provided favours or gifts to representatives of the credit rating agencies, says Grant Thornton, adding, "During our email review, we identified various instances where benefits in the form of favours such as, Ramesh Bawa facilitated villa purchased for Ambreesh Srivastava (India Ratings), Arun Saha arranged football tickets for D Ravishankar (Brickwork Ratings) relating to the matches in Real Madrid, and IL&FS group donated to the Sameeksha Trust Rs25 lakh where the managing trustee of the Trust, DN Ghosh is also the chairman of ICRA. Further, our email review indicates that the various key officials of rating agencies were provided gifts such as smartwatches, shirts, and coasters." (Read: IL&FS Mess: Grant Thornton Forensic Audit Exposes Manipulative Nexus Between Key Employees and Credit Rating Agencies
CARE Ratings, ICRA, India Ratings and Brickwork have been the leading rating agencies for IL&FS Transportation Networks Ltd (ITNL), IL&FS Financial Services Ltd (IFIN) and IL&FS during the period reviewed by Grant Thornton. Brickwork was introduced in IFIN and ITNL in 2016, replacing CRISIL (in ITNL), during this period under review, the statement from IL&FS says.