Markets regulator Securities and Exchange Board of India (SEBI) on September 29 imposed a penalty of Rs 1 crore on Brickwork Ratings India, for lapses while assigning credit ratings to non-convertible debentures (NCDs) of Essel Group companies.
Brickwork Ratings also failed to review the rating of NCDs of Great Eastern Energy Corporation after another credit rating agency downgraded the NCDs in April 2017 due to "delays in debt servicing of bank facilities on account of tightening of liquidity", it said. Also, the regulator has made delay in recognising default of NCDs of Diamond Power Infrastructure Ltd.
According to SEBI, in spite of various negative signals, Brickwork Ratings did not act timely to seek information and waited for receipt of information leading to delay in recognising default. It further said the rating agency failed to exercise proper due diligence and considerably delayed the disclosures about non-cooperation of the issuer and also cautioning investors and stakeholders of the issuer about its credit paying ability to meet out its NCDs' repayment obligation.
With regard to Essel Group companies, it was observed that the agency had rated NCDs of Essel Corporate Resources Pvt Ltd (ECRPL) and Zee Entertainment Enterprises Limited (ZEEL). As per the terms of the NCDs of ECRPL, it had a credit enhancement feature by way of pledge of equity shares of ZEE listed on the BSE and the National Stock Exchange (NSE).
Sometime around the end of January 2019, there was a fall in price of shares of ZEEL and the various mutual funds agreed to reschedule the payment obligation of debt securities to a later date to avoid invoking pledge of shares.
Clearly, there was a breach of the specified security cover of the NCDs and a consequent non-servicing of debt as per the existing repayment terms.
However, by entering into the standstill agreement with lenders, the borrowers managed to avoid bringing in any funds/ securities to restore security cover and avoided any possible default. The lenders rescheduled the payment of NCDs to September 30, 2019, so as to avoid any default on the NCDs.
According to SEBI, a breach of covenant dealing with security cover would normally result in multi-notch downgrade or default. However, the rating agency allegedly did not examine all these factors and only downgraded the ratings by only one notch.
"The noticee (Brickwork Ratings) was fully aware or should have made itself aware of the situation that the terms such as the security cover of the NCDs have been breached..." Sebi said.
It added that while the lenders could have entered into a standstill agreement in their commercial interests or interests of investors, it was the noticee's duty to clearly make it public that there was a default.
A company restructures debt obligations and if the restructuring indicates that the same was done to avoid default, this reflects poor credit quality and the revised rating should indicate the actual picture, it added.
Through such activities, Brickwork Ratings has violated the provisions of credit rating agency (CRA) regulations. Accordingly, the regulator has imposed a "penalty of Rs 1 crore on the Noticee viz. Brickwork Ratings India Pvt. Limited".