Market regulator Securities and Exchange Board of India (SEBI), while directing the appointment of independent directors and one of them as chairperson, has restrained members of the founding management of Brickwork Ratings India Pvt Ltd from being part of rating committees. Further, SEBI asked the rating agency not to appoint to the audit committee or the rating sub-committee of its board persons related or connected to the founding management of Brickwork Ratings. The ban on the rating agency from onboarding any new client continues for six more months.
In an order, Ashwani Bhatia, whole-time member (WTM) of SEBI, says, "...repeated instances of failure on the part of Brickwork Ratings to closely monitor ratings, after being assigned, points towards deficiencies in the monitoring systems put in place by the rating agency. This could potentially be the result of fewer resources being employed by Brickwork Ratings in scanning for new information that may have an impact on the rating or due to gaps within the systems put in place by the rating agency to review ratings that have been assigned."
"The lapses on this count, noticed across the three inspections, point out that considerable effort needs to be put in by Brickwork Ratings to monitor the existing ratings. It is noted that the rating agency, in its replies, has listed an elaborate set of actions taken to improve the rating response. However, the efficacy of these measures is yet to be tested. Further, remedial measures adopted after the first and second inspections do not seem to have had the desired effect, as similar violations have been observed even in the third inspection. The proof, as they say, is in the pudding. Therefore, an embargo on on-boarding new clients needs to be in place for some more time till Brickwork Ratings demonstrates improved surveillance capabilities," he says.
Mr Bhatia asked Brickwork Ratings to broaden its board of directors to nine members by appointing independent directors or non-executive directors not related or connected to the founding management. "Brickwork Ratings shall ensure that not more than 25% of the members of the newly constituted Board are related or connected to the founders or present management of the company."
Further, SEBI asked the rating agency to ensure that only the independent director not related or connected to its founding management is appointed as the chairperson of its board.
"Brickwork Ratings shall ensure that members of its founding management are not part of any rating committees constituted by the rating agency or involved in the rating process. Brickwork Ratings shall ensure that persons related or connected to its founding management are not appointed to the audit committee or the rating sub-committee of the board of the rating agency," the SEBI WTM says in the order.
While asking the rating agency to appoint a professional chief executive officer (CEO), the market regulator directed Brickwork Ratings to ensure that the person functioning as credit rating officer (CRO) has adequate experience in credit rating and risk management, and shall also undergo in-depth training by an entity not related or connected to Brickwork Ratings, to familiarise himself or herself with the regulatory framework. "Such person shall also ensure that systems and rating models are in place at Brickwork Ratings that are fully compliant with the Credit Rating Agency (CRA) Regulations and circulars issued thereunder. The CRO shall provide a certificate to SEBI evidencing compliance with this direction."
"Brickwork Ratings shall be restrained from on-boarding new clients or taking fresh mandates from existing clients for a period of six months from the date of this order or till such time the rating agency ensures satisfactory compliance with the directions contained in this order, whichever is later," SEBI order says.
Brickwork Ratings has been given five months to comply with SEBI directions. After six months, SEBI will conduct a review to examine the compliance by the rating agency.
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. "
After SEBI's order, the Reserve Bank of India (RBI) also advised regulated entities and market participants not to obtain fresh ratings or credit evaluations from Brickwork Ratings.
In June 2023, the securities appellate tribunal (SAT), while granting relief to Brickwork Ratings in a matter about cancelling its licence by SEBI, remanded the case back to the market regulator for considering any direction other than the cancellation of the licence.
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.
Brickwork is one of the seven SEBI-registered credit rating agencies (CRAs). The others are: CRISIL, CARE, ICRA, Fitch, Infomerics Ratings and Acuité Ratings & Research. Credit rating agencies are institutions that rate the debt instruments of companies. These ratings are used by investors and companies to make business decisions on a particular corporate.