Brickwork mulls legal options against SEBI winding up order

Last week, SEBI had virtually sounded the end of the road for Brickwork Ratings, when it had ordered the rating agency to wind up its operations over the next 6 months. The regulator also asked Brickwork Ratings not to take up any fresh mandates or onboard fresh clients. During the period, SEBI had instructed Brickwork Ratings to intimate of this order and its implications to all its clients. In addition, has also stated that all ratings given by Brickwork Ratings till date would be rendered invalid and these clients will have to seek fresh ratings from another agency. This virtually sounded the start of the winding down of Brickwork.

The cancellation of the registration certificate of Brickwork Ratings had gradually evolved over time. There have been frequent problems that SEBI and RBI had with the methods followed by the rating agency, considering it was one of the seven recognized CRAs in India. SEBI found multiple cases of violations, including delay in recognition of default of non-convertible debentures, failure to do own due diligence before assigning the rating and failure to review ratings even after getting information about delayed payments. SEBI was also unhappy that no records of meetings, plant visits and management briefings were kept.

This time around, Brickwork has been quick to react. It has called the order a shocking development. Brickwork has also underlined that it would seek legal and other recourse as part of its normal process. In 2021, a SEBI appointed committee had ordered the winding up of Brickwork Ratings. However, back then, Brickwork had obtained an order from the Karnataka high court to quash the ban. Subsequently, SEBI had approached which had ruled in favour of SEBI. That is what had led to the latest order by SEBI calling for the winding down of Brickwork Ratings.

However, Brickwork Ratings has continued to maintain that it was innocent and was willing to fully cooperate with the authorities. While Brickwork is cagey about its next step, the first thing it can do is to approach the Securities Appellate Tribunal (SAT). The SAT has the power to overrule the SEBI order, but this time around it may be more sensitive. Since the Supreme Court of India has already ruled in favour of winding up of Brickwork, the position of SAT may be a little more delicate. Apart from going to SAT, the legal options for Brickwork Ratings may be relatively limited, so it remains to be seen what they would do.

For SEBI, this has been a missing link in its regulation. It has been regulating credit rating companies like CRISIL, ICRA and CARE and the other since 2016. However, in many cases, the jurisdiction of various regulatory agencies has been quite ambiguous when it comes to credit rating. There have also been errors of omission and commission in the past when leading rating agencies had assigned a premium rating to companies like IL&FS and Dewan Housing, just before these companies went bust. Earlier in the midst of the financial crisis of 2008, most of the global rating agencies did come under a cloud for their decisions.

Options may still be available for Brickwork but the reputational damage would be huge. The best way out for the regulator would be to help find another buyer for Brickwork and allowing them to continue work, with better systems and processes in place. When such a change can work for Yes Bank, there is no reason why this cannot be applied to Brickwork Ratings also. That would be a better way out than allowing the legal process to drag on.