Regulator to cancel license of brickwork

In a further order, the Securities and Exchange Board of India (Sebi) will also bar two former senior executives of CARE Ratings – Managing Director Rajesh Mokashi and Chairman SB Menak – from the market for failing to ensure independence in the rating process. Infrastructure Leasing and Financial Services Limited (IL&FS) and a group company were shareholders in CARE Ratings between 2007 and 2013, during which the agency valued commercial papers of the same companies.

At Brickwork Ratings, one of India’s seven CRAs, the regulator found serious violations in two respects—lack of independence of the ratings committee and lapses in following procedures during rating instruments.

Such serious action on credit rating agency is rare globally. This comes against the backdrop of a series of financial debacles in which poor-quality ratings played a role, such as the collapse of lenders IL&FS, Dewan Housing Finance Corp Ltd and the controversial extension of the maturity of Essel-Group’s paper debt mutual money by.

If SEBI imposes a ban on the brickwork rating, it could spell trouble for the bond issuers that it is currently rating. They may need to find alternatives. To be sure, SEBI orders are usually not disruptive, and even in this case, instruments currently being rated by the rating agency will continue to be rated by Brickworks till their maturity.

Bonds sold by Adani Group, Shrey Group, IIFL and Edelweiss are currently rated by Brickworks.

SEBI is working behind the scenes to streamline the rating business, taking measures to ensure independence of rating professionals from the firm’s management. In 2018, it was revealed that Brickwork founder-director D. Ravi Shankar was involved in the rating as well as in determining the charges for the service.

In an emailed response, Brickworks, a Bangalore-based company promoted by Canara Bank, said it has taken corrective steps. “A few months back, the regulator pointed out some loopholes, and after that we took proactive steps and complied with all the requirements. Explanations were given where needed. It is important to note that no malicious intent was reported by the regulator. Our company has appealed against the original order as per available legal options. We have faith in our country’s regulatory framework and judicial system and look forward to resolving the matter in a reasonable time frame.”

A spokesperson for CARE Ratings said they were not aware of any regulatory developments involving its former senior executives. However, he highlighted the curriculum reforms that have taken place in the rating agency in the last two years. “Care Ratings has embarked on a deeply transformative journey. To begin with, we started with the placement of new top management. With our new CEO, Chief Rating Officer, Chief Financial Officer, Head of Legal, Compliance and Secretarial and Chief Culture Officer, we now have the right mix of new professional management with existing highly experienced skilled personnel,” said one company. Spokesperson in response to an email.

A SEBI spokesperson did not respond to a request for comment. Mokashi and Menak did not respond to messages.