The only purpose of credit rating agencies (CRAs) like Brickwork, CARE, and CRISIL is to assess a company’s likelihood of defaulting on its financial commitments. They score the businesses using a given scale and, typically through letters, assign a probability to such situations. The best rating is often AAA, while a D indicates a default.
It first affects the decisions that investors make. They rely on CRAs to do the inquiry for them. The CRAs are supposed to have carefully examined the company’s financial records. With the management of the company, they would have discussed business objectives. Additionally, if a CRA performs its job well, the investor can skip all of this tedious work. If they assert that the company is competent, investors could just believe them.
Additionally, the borrowing rate for these businesses is also based on their rating. A better grade indicates that the business is given creditworthiness. Due to their confidence in the company’s ability to fulfill its commitments, investors will be more inclined to lend money at a lower interest rate. Higher borrowing costs result from a lower grade since they are thought to be riskier.
Even regulators are aware of the significance of CRAs to the system. Companies are required by the Securities and Exchange Board of India (SEBI) to get a credit rating from a CRA before they seek out a loan. SEBI has faith in the CRA to carry out its duties competently as well.
SEBI ordered Brickwork Ratings (BWR) to permanently close its doors on October 6th. Within six months, operations must come to an end. It’s an unexpected choice. Perhaps even unprecedented, as SEBI has never requested that a CRA wind down in this manner. In addition, BWR is not a nondescript organization. It first appeared in 2008. There are just 7 CRAs that are registered in India. And over this period, it has given over 9,000 different firms credit ratings.
CRAs cannot just award a rating and walk away from the situation. They need to keep an eye on the business to see whether its financial situation is becoming worse. They must take the initiative on this front. That is a responsibility of theirs. You see, Sintex publicly announced to the stock markets on August 14th, 2019, that it had defaulted on certain of its borrowings. Then it added:
Sintex had losses during the most recent quarter, and as of the conclusion of the reporting period, it had a net current liabilities position due to the reduction in working capital facilities that caused activities to be scaled back. Additionally, as of June 30, 2019, Sintex was in default on the repayment of principal due to lenders on its external commercial borrowings and working capital facilities, totaling 57.34 crores. Additionally, Sintex’s credit ratings were reduced during the quarter due to non-compliance with certain financial covenants as stated in loan agreements as of 31 March 2019 and continuing as of 30 June 2019.
According to Sintex, they are out of money and haven’t been able to pay back their lenders. Additionally, they claim that they have violated other conditions outlined in the loan arrangement. They claim that this occurred on March 31, 2019.
But at what point did BWR, a reputable CRA, formally announce that Sintex had defaulted? Only on August 21, 2019. BWR now sought to distance them from the situation. They stated that the delay wasn’t longer than seven days. That it didn’t matter. SEBI, though, is not having it. According to the report, BWR acted in “total contempt” of what is required of a CRA.
And this wasn’t a one-off instance. When Reliance Capital, Bhushan Steel Ltd., Gayatri Projects Ltd., Diamond Power Infrastructure Ltd., and Zee Entertainment Enterprises Ltd. defaulted on part of their debts, BWR was also slow to announce new ratings. There is a big list.
CRAs are not paid by investors to perform the due diligence. Businesses do. So, if a CRA wants to increase its top line, it must befriend the businesses and cooperate with them. And sure, there is a chance that the rating will be biased, particularly if the Business Development department and the Ratings Department start communicating. You may obtain a company’s approval for the deal in exchange for a better rating if the head of ratings ever goes along with the head of business development while wooing new business.
That appears to have been the situation with IDFC First Bank. Everyone gathered in one room to talk about both the ratings and the payments. The regulator also thinks something strange transpired at this meeting. Therefore, it is clear why SEBI made the decisions it did when you consider all of these violations together. It seeks to convey a message. If you’re a CRA and you keep breaking the law, SEBI will now put an end to your business. And regardless of how you look at this, it’s reasonable to conclude that CRAs will proceed with more caution in the future.
Brickwork Ratings has been ordered by the Sebi to close its doors in six months.
Brickwork Ratings India’s license was revoked by the Securities and Exchange Board of India (Sebi) on Thursday, and the organization has been given six months to wind down operations for failing to perform its obligations as a credit rating agency with the necessary skill, care, and diligence. The Canara Bank-sponsored rating agency was likewise forbidden by the market regulator from accepting any new customers or brand-new assignments. This is the first occasion that Sebi has revoked a credit rating agency’s license (CRA).
The rating company’s website states that Vivek Kulkarni, IAS (Retd), a former IT Secretary for the Government of Karnataka, is the company’s Founder and Managing Director. The company’s board of directors includes RK Nair, a former ED of Sebi, and N Balasubramanian, a former CMD of SIDBI. Additionally serving on the board is founder and CEO Sangeeta Kulkarni. According to the website, Canara Bank is both its promoter and strategic partner.
Ashwani Bhatia, a Sebi Whole Time Member, issued an order on Thursday stating that Brickwork Ratings must wind down its business (including notifying its clients of the cessation of its operations) within six months of the date of the order.
According to the ruling, SEBI laws and circulars require credit rating agencies to provide truthful, fair, suitable, and accurate ratings, and CRAs must uphold higher standards of diligence, honesty, dignity, and fairness to fulfill this commitment. The regulator stated in the judgment that “the notice failed to apply necessary skill, care, and attention while performing its obligations as a credit rating agency, which has thwarted the entire aim of regulations, i.e., investor protection and orderly development of the securities markets.”
In the year 2008, SEBI awarded registration to brickwork. It is one of the seven credit rating companies functioning in the nation that are registered with the Sebi. Acute Ratings & Research Ltd., Crisil Ratings Ltd., ICRA Ltd., Care Ratings Ltd., India Ratings and Research Ltd., and Infomerics Valuation and Ratings Ltd. make up the remaining six agencies.
The rating agency had undergone inspections from April 1, 2014, to September 30, 2015, and from April 1, 2017, to September 30, 2018, according to the market regulator. According to the order, the rating agency had committed several violations in both inspections, including failing to review ratings or acting improperly on non-convertible debentures (NCD) issued by Bhushan Steel Ltd, Gayatri Projects Ltd, Diamond Power Infrastructure Ltd, Great Eastern Energy Corporation Ltd, Essel Corporate Resources Pvt. Ltd., and Zee Entertainment Enterprises Ltd.
According to the order, brickwork was the subject of separate adjudication processes as a result of the violations and defects found during the two inspections. Following both inspections, the regulator fined the rating agency, according to the order. SEBI and the Reserve Bank of India (RBI) conducted a joint review of the rating agency’s records and paperwork for the period from October 1, 2018, to November 30, 2019, in January 2020.
During the third examination, several anomalies that violated the CRA Regulations and specific SEBI circulars were found. According to the ruling, CRAs are important as gatekeepers to the financial markets and serve as a resource for information for investors. The report added that credit rating agencies provide critical public duties, so it is crucial to make sure they adhere to the relevant legislative framework and uphold high levels of scrutiny.
The repeated failures, discovered by SEBI during various inspections, demonstrate that the notice has not been deterred from meeting the most fundamental requirements for operating a CRA, despite earlier inspections’ recommendations for governance changes and the imposition of financial penalties, the regulator said.
In the ruling, Bhatia stated that “strict regulatory action, in my considered opinion, is essential at this juncture to address the issue and maintain the market ecology.” Bank loans, debt instruments, bonds, and securitized paper totaling Rs 19,02,200 crore have all been graded by BWR. Over Rs 83,555 crore in fixed deposits and commercial papers have been graded. Over 100 PSU and public sector banks, as well as other significant private entities, have been graded by BWR.
edited and proofread by nikita sharma
