Banking Central | SEBI sends a strong message to rating industry with Brickwork ban
Rating agencies are the guardians of trust for many investors in financial markets. The Brickwork episode shows not all is well.
On October 6, after a long series of probes, show-cause notices, and court interventions, the market regulator finally issued the verdict on Brickwork Rating, ordering its closure in six months.
The Securities and Exchange Board of India (SEBI), in its detailed order, said multiple lapses were identified in the operations of Brickwork Rating including delayed acknowledgement of payment defaults by companies and failure to meet disclosure norms to stakeholders.
A number of such lapses by Brickwork has been listed by SEBI in its order.
The SEBI action on Brickwork shouldn’t be seen in isolation. Rating agencies have faced a major trust deficit since the onset of 2008 global financial crisis. No rater offered a clue to the world that a crisis of such magnitude is in the making.
In India too, there are countless examples of lapses by rating agencies in identifying the decay in balance sheets and alerting the investors. In most cases, raters act after the event by when most of the damage is done already.
It’s not just inefficiency, raters are also prone to aiding the so-called ‘rating shopping’.
balance sheets, thus misguiding investors.
In its order, SEBI has touched upon these aspects calling raters the gatekeepers to financial markets.
The regulator has observed that rating agencies play a critical role as gatekeepers to financial markets and source of information for investors.
“Credit ratings are also relied upon by investors, including institutional investors like provident funds and mutual funds which handle public funds, not just while assessing investment opportunities, but also in making investment decisions,” Sebi said.
Also, given the important public function played by credit rating agencies, it becomes essential to ensure that entities conform to best practices in governance, Sebi observed in its order.
Over the weekend, Brickwork issued a statement that it is considering legal actions against the regulator and is ‘shocked’ by the order. Yet, the Sebi order has cast a big shadow on the credibility of raters yet again.
It is a reminder that the time is right, if not too late, for raters to do some soul searching.
Rating agencies are the guardians of trust for many investors in financial markets. The Brickwork episode shows not all is well.(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector’s most important events for readers.)
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