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
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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.

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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
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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
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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
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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
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