A Hole in the Brickwork – Rating Agencies Respond
After Sebi's ban on rating agency Brickwork, others in the grouping are quickly getting their act together to stay relevant and keep their shops open
The Securities and Exchange board of India had cracked down on what it termed as “rate shopping” after banning the operations of Brickwork Ratings. Having first gone to town describing the SEBI action as harsh and unfortunate, the rating agencies in the country appear to be prepared for stricter norms around their business.
Reports indicate that the credit rating companies have already initiated steps to increase their scrutiny of financial statements of companies as part of their efforts to raise the general standards of data analysis. It is a known fact that companies often do rate shopping with these agencies to secure a higher rating for their financial offerings.
This is a wakeup call indeed
Some members of the agencies described the SEBI move as a wake-up call that should have come some time ago itself. They opined that this move would only help make the capital markets more transparent as most rating companies have either tightened or are in the process of tightening their compliance standards.
Who rates the raters is a question that some of the officials we reached out to said. How does the investor decide if rating agency A is better than rating agency B unless there is absolute transparency around the processes that they use to analyze any financial offering. If this does not happen, why should an investor even treat their assessment seriously?
On its part, SEBI had canceled Brickwork Ratings license citing violation of regulations to which most respondents said the government crackdown was imminent as rating agencies were proving to be a power unto themselves as their word could make or mar a public issue or even a limited debt offering.
The challenges that rating agencies faced
Some of the officials even shared real life scenarios of how promoters influenced their analytics process where the unscrupulous owners of these agencies could even overrule the assemements made by diligent officials at the agencies. In fact, some claimed that people had to face criminal conspiracies when the ratings mandated weren’t given. In fact, they even received threats from such elements asking for an upgrade of the ratings.
With SEBI now cracking down on the compliance norms of the agencies themselves, such activities would not pass muster. Other issues that SEBI brought up ranged from violations that were unearthed during inspections of the ratings done by Brickwork such as failure to document meetings with company managements, site visits and failure to undertake independent analysis of the projections made by the issuer.
