BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

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 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 NonConvertible 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.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.

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 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 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 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