InvestorQ : Why has SEBI ordered the winding up of the Brickwork Ratings and what happens to the companies rated by them?
swati Bakhda made post

Why has SEBI ordered the winding up of the Brickwork Ratings and what happens to the companies rated by them?

Sam Eswaran answered.
1 month ago

The recent order by SEBI cancelling the recognition certificate and credit rating license granted to Brickwork Ratings India, is likely to have far reaching implications. After all, Brickwork Ratings India is one out of the 7 registered credit rating agencies (CRAs) and many of the banks have been rated by Brickworks. According to SEBI, Brickworks was guilty on multiple counts, but we will come back to that later. For now, Brickworks has to intimate its clients about this cancellation and cannot onboard new clients or take fresh mandates. They have been given 6 months by SEBI to wind up their organization. It will have legal impact.

SEBI has given a host of reasons to justify this cancellation. The first and foremost allegation made by SEBI is that Brickwork Ratings was not doing independent analysis of projections in most cases. It was purely relying on the projections provided by the issuer of the debt. In addition, SEBI has pointed to lapses in disclosures and delays in default recognition as well as in intimation of the regulators about the same. But what is more egregious of all the faults is that SEBI also found major lapses in documentation of meetings conducted by the rating agency with company management as well as documented details of plant visits.

Interestingly, Brickworks has the financial backing of Canara Bank while it was promoted by Vivek Kulkarni, an IAS officer and former IT secretary of the Karnataka Government in the nineties. Kulkarni was synonymous with the rapid emergence of Karnataka as the IT hub of India. Despite this pedigree, it has had multiple clashes with the law. In the last inspection conducted by RBI and SEBI, they found ample instances and evidence of irregularities. SEBI had already issued an administrative warning but Brickwork did not take adequate steps. Not that has become a full blown crisis and SEBI sees no other option now.

There is a history of legal problems between SEBI and Brickwork. In mid-2021, an enquiry committed had made several serious adverse observations against Brickwork. These pertained to failure to follow proper rating process, lack of due diligence before providing ratings and not making transparent disclosures in its press releases. Then Brickworks filed a challenging petition in Karnataka High Court, which had served notice to SEBI. Subsequently, SEBI moved a special leave petition before Supreme Court, which has now permitted the winding up. It is not clear what kind of legal recourse they could have.

It is not clear what will happen because SEBI wants to take this to its logical conclusion. Brickwork still wants to explore legal options, but the big issue is that its reputation may have been badly dented. It remains to be seen how financers and global investors would react to companies with Brickwork ratings in the future. That would be hard to undo. One option would be to sell the company to a new buyer and bring about a change in the management. That would be a long drawn process but would also be the best choice.