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SAT Sets Aside SEBI Order Cancelling Brickwork Ratings' Licence
Moneylife Digital Team 06 June 2023
Investor Interest
The securities appellate tribunal (SAT) has granted relief to Brickwork Ratings India Pvt Ltd in a matter about cancelling its licence by the market regulator Securities and Exchange Board of India (SEBI). While setting aside SEBI's order cancelling the rating agency's licence, the tribunal remanded the matter back to the market regulator for considering any direction other than the cancellation of the licence.
 
SAT also directed SEBI to hear the rating agency before passing any order. 
 
In an order, the bench of justice Tarun Agarwala (presiding officer) and Meera Swarup (technical member), says, "Considering the totality of the violations found we are of the opinion that the alleged violation of routine matters is not deliberate or fraught with malafides or fraud and therefore cannot result in the cancellation of the licence...in our opinion the order of cancellation of the licence for the violations committed by Brickwork Ratings is unjustified and is not commensurate with the alleged violations."
 
"...while partly affirming the violations noted in the third inspection, paragraph 13.1 of the (SEBI) order cancelling the certificate of registration as credit rating agency (CRA) is quashed. The appeal is allowed. The matter is remitted to SEBI to pass a fresh order on the quantum of penalty other than the order of the cancellation of the licence in the light of the observation made above and in accordance with law after giving an opportunity of hearing to Brickwork Ratings," SAT says.
 
In October last year, SAT granted interim relief to Brickwork Ratings by temporarily keeping the cancellation on hold while maintaining the bar on on-boarding any new client.
 
Counsel for Brickwork pleaded for a stay on SEBI's order, calling it a 'death penalty' for the credit rating agency, which has over 300 employees and had provided over 2,000 ratings. A SEBI counsel argued that a delay in disseminating information by a credit rating agency impacts decisions by investors in instruments like mutual funds.
 
"In the matter of default in debt by Sintex Plastic, the rating agency did not take any proactive action and waited for the company to publish the results admitting the default," counsel for the market regulator said. (Read: SAT Grants Interim Relief for Brickwork but Ban on Onboarding New Clients To Continue)
 
In an order dated 6 October 2022, SEBI cancelled the licence of Brickwork and directed the credit rating agency to wind down its operations within six months citing "failure to exercise proper skill, care and diligence, while discharging its duties as a credit rating agency."
 
In its order, SEBI had highlighted several violations by Brickwork such as failure to follow a proper rating process and exercise due diligence while providing ratings.
 
SEBI further noted that the repeated lapses, noticed across multiple inspections conducted by it, show that governance changes recommended in earlier inspections and monetary penalties imposed have "not proved effective or deterred the Noticee (Brickwork Ratings) in addressing very basic requirements of running a CRA." (Read: SEBI Issues Winding Up Order against Brickwork Ratings)
 
Brickwork is one of the seven SEBI-registered CRAs. The others are CRISIL Ltd, Credit Analysis & Research Ltd (CARE), ICRA Ltd, India Ratings and Research Pvt Ltd (formerly Fitch Rating), SMERA Ratings Ltd and Infomerics Valuation and Rating Pvt Ltd. Credit rating agencies are institutions that rate the debt instruments of companies. These ratings are used by investors and companies to take business decisions on a particular corporate.
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