Brickwork Ratings India Private ... vs Sebi

Order Reserved on: 27.05.2019

Date of Decision : 03.06.2019

Appeal No. 439 of 2018

Brickwork Ratings India Private Limited 29/3 & 32/2, 3rd Floor, Raj Alkaa Park Kalena Agrahara, Bannerghatta Road, Bangalore - 560076. ....Appellant

Versus Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent

Mr. Shyam Kapadia, Advocate with Mr. Sameer Bindra and Mr. Vaibhav Wali, Advocates i/b Juris Corp for the Appellant.

Mr. Vishal Kanade, Advocate with Mr. Kaushal Parsekar, Advocate i/b Legasis Partners for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Justice Tarun Agarwala, Presiding Officer

1.

By means of this appeal the appellant is challenging the

legality of the order dated August 31, 2018 passed by the 2

Adjudicating Officer ('AO' for short) of Securities and

Exchange Board of India ('SEBI' for short) whereby a

penalty of Rs. 3 lakhs has been imposed under Section 15-I(2)

of the SEBI Act, 1992.

2. The facts leading to the filing of the appeal is that the

appellant is a SEBI registered Credit Rating Agency (CRA).

SEBI conducted an inspection of the appellant agency for the

period April 1, 2014 to September 30, 2015 and found certain

irregularities which violated various SEBI circulars and

provisions of SEBI (Credit Rating Agencies) Regulations,

1999 ('CRA Regulations 1999' for short). Accordingly, a

show cause notice was issued to show cause as to why penalty

should not be imposed under Section 15HB of the SEBI Act,

1992. The show cause, inter alia, alleged that there was a

significant delay in the recognition of default in the case of

Bhushan Steel Limited ('BSL' for short). Further, there was

failure to downgrade the rating in relation to the Non-

Convertible Debentures ('NCD' for short) issue of Gayatri

Projects Limited ('GPL' for short) even after the Debenture

Trustee had informed the appellant about the default. Further,

the appellant had also violated the provisions of IOSCO Code

of Conduct.

3

3. The AO after considering the reply and after giving an

opportunity of hearing found that the charges stood proved

and, accordingly, imposed a penalty of Rs. 3 lakhs. Hence,

this appeal.

4. We have heard Shri Shyam Kapadia, the learned

counsel for the appellant and Shri Vishal Kanade, the learned

counsel for the respondent. We find that the Debenture

Trustee had intimated the appellant about the default

committed on December 15, 2014 by BSL. No steps

whatsoever were taken by the appellant to downgrade the

credit rating of the BSL. Steps were taken when the second

default of BSL was intimated to the appellant on December

24, 2015. Consequently, there has been a lapse of 11 days in

taking steps from December 26 when the appellant sought

further time till December 30, 2014 to downgrade the credit

rating of BSL. This was apparently in contravention of the

provisions of 2.2.2 of SEBI circular dated May 3, 2010 which

provide that upon non-payment of interest on the principal

amount, the CRA shall recognize the default at the first

instance of delay.

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5. The contention of the appellant that the default could

not be noticed or acted upon on account of the Christmas

season cannot be accepted and appears to be an afterthought.

In the light of the aforesaid we do not find any error on the

part of the AO.

6. The AO has found that GPL had defaulted on NCDs due

for redemption on December 1, 2014 in spite of which the

appellant failed to downgrade the rating to "default" instead

of downgrading the rating to "BWR BB-". It was also

observed by the AO that the details of the default and

restructuring were not mentioned in the Rating Rationale

dated February 27, 2015. The AO further found that the mere

fact that the said Company GPL subsequently rectified the

default did not reduce the gravity of the violation and that the

appellant was expected to act swiftly no sooner the default

was made.

7. We find that the approach adopted by the AO is not

correct. From a perusal of the minutes of the Central Rating

Committee ('CRC') we find that the current outstanding

balance of NCD of the Company and the Company being in 5

dialogue with the investors for reschedulement was noticed

and considered. A conscious decision was taken to downgrade

the rating of the Company from "BWR A" to "BWR BB-".

No Regulation or Circular has been shown to us by the

respondent to indicate that whenever a default is made by a

Company the CRA is required to automatically downgrade

the Company to "default".

8. Regulation 24(7) of the CRA Regulations 1999 provides

as under:-

"24.(1)...

(2) Every credit rating agency shall, in all cases, follow a proper rating process.

...

(7) Every credit rating agency, shall, while rating a security, exercise due diligence in order to ensure that the rating given by the credit rating agency is fair and appropriate."

9. The aforesaid provision indicates that a CRA is required

to exercise due diligence in order to ensure that the rating

given is fair and appropriate. In the instant case, we find that a

conscious decision was taken by the Central Rating

Committee of the appellant and considering the default as

well as the dialogue between the Company and with the 6

investors with regard to reschedulement of the default the

appellant recommended a revision of rating from "BWR A"

to "BWR BB-". In our opinion due diligence was exercised.

Thus, the order of the AO to this extent is not correct and

cannot be sustained.

10. The AO also found that the founder director of the

appellant had violated Clause 2.12 of IOSCO Code of Conduct

Fundamentals for Credit Rating Agencies which provides as

under:-

"As per Point 2.12 of IOSCO Code of Conduct Fundamentals for Credit Rating Agencies states that "The CRA should not have employees who are directly involved in the rating process initiate, or participate in, discussions regarding fees or payments with any entity they rate."

11. It was found that the founder director of the appellant

Mr. Ravi Shankar was a member of CRC (Central Rating

Committee) and ERC (External Rating Committee). The

contention of the appellant that the founder director was never

involved in negotiations of fees and was only consulted when

there was a deviation of the fee and therefore the Code of

Conduct was not violated is patently erroneous. The very fact

that the founder director / member was involved with regard 7

to fixation of fee was clear violation of Clause 2.12 of the

IOSCO Code of Conduct. The finding of the AO on this

aspect of the matter does not suffer from any error of law.

12. In the result, the appeal is partly allowed. The

imposition of penalty from Rs. 3 lakh is reduced to Rs. 2 lakh

which shall be paid by the appellant within four weeks from

today. In the circumstances of the case, parties shall bear their

own costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member 03.06.2019 Prepared and compared by:msb