What do you check before investing in a bond or a debenture issued by a company? Most of you would say – credit ratings!
Credit Rating Agencies like CARE, CRISIL and Brickworks Ratings offer these credit ratings to the bonds or debentures issued by the company. We investors check these ratings before investing in the bond, with AAA being secure and D being defaulted. However, in the past, these credit rating companies have taken investors for a ride, leading to huge losses. There are ample examples like the IL&FS case, Jet Airways or DHFL case.
Recently, SEBI has asked Brickwork Ratings, a credit rating agency, to wind up its business. Let’s explore the story behind it.
What’s Happening?
There are only seven credit rating agencies in India, and Brickwork Ratings is one of them. Since its inception in 2008, it has offered over 9,000 credit ratings for companies.
On 6th October, SEBI cancelled the Certificate of Registration (CoR) granted to Brickwork Ratings as a Credit Rating Agency. SEBI has imposed monetary penalties on rating agencies but never revoked a permit. Something huge must have happened that led SEBI to withdraw the CoR.
Why SEBI asked Brickwork Ratings to Close its Shutter?
- Brickwork Ratings didn’t mark Bhushan Steel as ‘D’ even after they had defaulted payment of its non-convertible debentures (NCDs).
- A similar situation happened with Gayatri Projects NCDs. It failed to downgrade the rating to ‘D – Default’ even after receiving the information from the company’s debenture trustee. And many such companies are on the list, and Diamond Power Infrastructure Ltd. is one of them.
- The credit rating agency was also slow to announce new ratings.
- There were incorrect disclosures concerning compliance with the provisions of the IOSCO Code.
Back in 2014, SEBI conducted its first investigation against Brickwork Ratings. The second inspection occurred in 2017-18, and the agency was also penalised.
In 2020, SEBI and RBI conducted a joint inspection where SEBI reported a lack of surveillance mechanisms.
What Does it Mean For Investors?
Investors trust the ratings of credit rating agencies. Based on these ratings, they analyse the company’s credibility and invest their money not only in bonds but also pick the company’s stocks. If the CRA delays updating the company’s recent financial picture, shareholders and bondholders will have to bear losses.
Hence, check the company’s credibility before investing in a bond or stock.
What’s Next?
To date, SEBI used to penalise CRAs for non-compliance. But after this move, all credit rating agencies will take steps with caution and strictly follow SEBI’s norms.
