A calculator sits on a desk. (Photographer: Luke Sharrett/Bloomberg)

SEBI Fines Brickwork For Delay In Recognising Default, Violating Norms

Brickwork Rating India Pvt. Ltd. was fined for a delay in recognising a default as the market regulator steps up watch amid concerns over lack of timely action by rating agencies.

The Securities and Exchange Board of India imposed a fine of Rs 3 lakh on Brickwork for not adhering to the code of conduct, according to an Aug. 31 order. The rating company delayed recognition of default in debt repayment by Bhushan Steel Ltd. and Gayatri Projects Ltd. Brickwork has yet to respond to BloombergQuint’s emailed queries.

The market regulator has already tightened rating disclosure norms. Chairman Ajay Tyagi in July said that SEBI is not happy with the current state of affairs at rating agencies. Amid concerns over limited warnings about defaults, the regulator asked rating companies to monitor exchange websites for filings by the issuers of debt.

Axis Trustee Services Ltd., the trustee for Bhushan Steel’s Rs 500-crore non-convertible debenture, had disclosed a default on Nov. 28, 2014. Brickwork, however, downgraded the NCDs only on Dec. 30, 2014, according to the SEBI order.

Brickwork, in its explanations, said the delay was due to the company not cooperating to assign a fair rating. The regulator still found a 15-day delay.

In case of Gayatri Projects, SEBI made a similar observation. Brickwork failed to downgrade the rating even after receiving the information that the revised repayment schedule has been accepted by only three out of five lenders, according to the order.

The agency claimed that the company defaulted due to the “bifurcation of state of Andhra Pradesh”. SEBI, however, said circumstances don’t give a “leeway” in rating action. Moreover, even when the rating was lowered to B- on Aug. 25, 2015, Brickwork didn’t give adequate rationale, SEBI said.

Violation Of Arm’s Length Principle

Employees of rating agencies directly involved with the rating of a company can’t initiate or participate in discussions regarding fees or payments from a client, according to SEBI norms.

The regulator, however, said Ravi Shankar, founder director and a member of central and external rating committees at Brickwork, gave fee approvals. In 71 of 106 cases involving rated amount of nearly Rs 86,842 crore, Shankar gave fee approvals, SEBI said.

Shankar countered that he was not involved in negotiation but the regulator dismissed his defence. Even if Shankar was never involved in the negotiations, the assignment couldn’t be undertaken without his approval, SEBI said. If he didn’t agree with a lower fee, the regulator said that would have been renegotiated before Brickwork would rate the instrument.