SEBI orders credit rating agency Brickwork Ratings to shut down. Here's why

The Securities and Exchange Board of India (SEBI) issued a winding-up order against Brickwork Ratings on October 6, 2022, because of major lapses in the credit rating agencies' operations.

SEBI issued the order to shut down the agency in 6 months after it was found by them and the Reserve Bank of India (RBI) that the agency did not "exercise proper skill, care, and diligence, while discharging its duties as a credit rating agency".

First, what does Brickwork do? You might have heard of credit rating agencies like Crisil, Icra or Fitch. Credit rating agencies are companies that rate the debt instruments of other companies. Investors and companies use their ratings to take business decisions and investment decisions (like whether a particular corporate's debt is a good place to invest money for returns). 

Well, Brickwork is one such SEBI-registered credit rating agency out of the seven.

Is this a sudden closure? No. SEBI began investigating Brickwork in 2020 and then jointly inspected the agency with the RBI.

• SEBI pointed to a lack of surveillance mechanisms for tracking the interest/ principle repayment schedule of issuers, which hampered Brickwork's ability to provide accurate ratings.
• In September 2020, SEBI imposed a monetary penalty of Rs 1 crore on Brickwork Ratings for lapses while assigning credit ratings to non-convertible debentures (NCDs) of Essel Group companies.
• Brickwork also failed to review the rating of NCDs of Great Eastern Energy Corporation after another credit rating agency downgraded the NCDs in April 2017 because of "delays in debt servicing of bank facilities on account of tightening of liquidity".
• Brickwork delayed recognising the default of NCDs of Diamond Power Infrastructure Ltd.

When SEBI undertook a joint inspection of Brickwork with RBI and inspected records and documents for the period October 1, 2018, to November 30, 2019, they found several irregularities and violations of regulations.

Why is Brickwork being shut down now? SEBI's investigations found that Brickwork delayed recognising the default of NCDs of Bhushan Steel Ltd even after the Debenture Trustee disclosed the default. They also failed to downgrade the rating for the NCD Issue of Gayatri Projects Ltd to ‘default’, even after they received relevant information of default.  

As per SEBI, Brickwork had previously made governance changes and paid monetary penalties after repeated lapses were found across multiple previous inspections. But SEBI found that both measures have "not proved effective or deterred the Noticee (Brickwork Ratings) in addressing very basic requirements of running a CRA. " In September 2022, the Supreme Court allowed SEBI to conclude the proceedings for cancelling Brickwork Ratings’ licence for violating various credit rating regulations.

Though this move seems to be necessary, it comes as a shock in the industry since SEBI has historically only imposed penalties and fines but never revoked licenses.