It is a given that the winding-up order on Brickwork Ratings India Pvt Ltd by capital market regulator Securities and Exchange Board of India (SEBI) will benefit rivals in the ratings industry, said a section of market experts.
On October 6, SEBI had asked Brickwork to shut down operations within six months citing multiple lapses. This is the first instance of SEBI cancelling the permit of a rating agency.
While Brickwork’s ratings were used by issuers as a secondary option for their debt-related offerings, experts believe it will not be worrisome for issuers as they can opt for ratings from other agencies.
“Brickworks in a short span of time had garnered a decent chunk of the market, especially in the bank loans market,” said Ajay Manglunia, managing director at JM Financial. “The ruling should be beneficial to other rating agencies, as the pie is likely to be distributed among the existing agencies,” he added.
Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincorp, a Mumbai-based debt advisory firm, said SEBI’s stringent action has indicated how the regulator will respond to such issues, serving as a cautionary tale for the entire sector.
Caution in industry
Following the SEBI order, other ratings agencies will be more cautious in rating operations, experts said.
“The unprecedented nature of the ruling could have a big impact on the ratings space as this would make rating agencies more careful about regulations and due diligence part of their rating process,” Manglunia said.
Credit rating agencies are agencies that analyse the financial strength of companies and government entities, especially their ability to meet principal and interest payments on their debts. Large bond issuers receive ratings from one or two of the Big Three rating agencies or their subsidiaries.
SEBI in its order listed lapses by the rating agency including recognition of default of non-convertible debentures (NCDs) of Bhushan Steel even after disclosure of default by the debenture trustee.
A similar instance was its failure to downgrade the rating of Gayatri Projects NCDs to ‘default’ status even after receipt of information from the debenture trustee.
The regulator further noted that the repeated lapses noticed across multiple inspections conducted by it showed that governance changes recommended in earlier inspections and monetary penalties imposed had “not proved effective or deterred the Noticee in addressing very basic requirements of running a CRA (credit rating agency)”.
SEBI had begun investigating the credit rating agency jointly with the Reserve Bank of India in 2020.
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