Brickwork Ratings closure wake-up call for rating agencies
Rating agencies in the country were given a jolt by the capital market regulator when it ordered the closure of one such firm Brickwork Ratings for its repeated lapses in discharging its duties. The action against Brickwork Ratings was a timely reminder by the regulator that it is not going to treat multiple failures with kid gloves and that it can take drastic action for such lapses—many of which were deliberate.
Sebi’s action serves as a wake-up call to the rating agencies, which are critical for a robust financial market in any country. They serve as the safety valve against any possible future financial mess—the kind of which the world witnessed during the 2008 financial crisis.
Rating agencies received severe criticism in the aftermath of the financial crisis for failing to identify risks associated with debt instruments, which later led to the collapse of the global financial market. The 2008 financial crisis ‘exposed’ the unholy nexus between rating agencies and the companies they used to rate. It also brought to the fore the conflict of interest between rating agencies and the companies they used to rate. India, which was not long ago battling with high NPAs, loan and corporate bond defaults, needs to be extra guarded against another failure of the financial market system. Rating agencies, being a key cog in the wheel of an effective financial market, cannot afford to take this role lightly.
The Brickwork Ratings case has multiple instances, as listed in the Sebi order, of delayed recognition of defaults, material events and even failure to downgrade the ratings of securities. Some of these might be due to inefficiencies of the firm, but there are instances that allude to deliberate non-actions. Sebi also pointed out how the rating agency failed to adhere to a strict separation of its rating operations from the business development team. The influence on ratings due to commercial interest cannot be ruled out. These are serious lapses, and the regulators must avoid ignoring even the hint of such mistakes—deliberate or otherwise. Even RBI recently came down heavily on the rating agencies for not following some of its repeated directions on basic disclosures. Hope the Brickwork Ratings case serves as a lesson to both rating agencies as well as the regulators.