SAT Quashes SEBI Order Cancelling Brickwork Ratings' licence: Indicative Timeline in Operational Manual cannot be Elevated to Statutory Requirement

SAT Quashes SEBI Order Cancelling Brickwork Ratings' licence: Indicative Timeline in Operational Manual cannot be Elevated to Statutory Requirement

The Securities Appellate Tribunal (SAT) has set aside an order passed by the Securities and Exchange Board of India (SEBI) wherein it had cancelled the license of Brickwork Ratings India.

The SEBI in its order had found the appellant-Brickwork Ratings India Private Limited had failed to comply with the timelines as per internal manual of completion of ratings in more than 75% of the cases and therefore violated the Circular dated 1 November, 2016.

However, the division member bench of SAT comprising of Justice Tarun Agarwala (Presiding Officer) and Ms. Meera Swarup (Technical Member) was of the considered opinion that the indicative timeline in an operational manual cannot be elevated to a statutory requirement and non-compliance of the timelines indicated in the internal manual cannot be a ground to impose a penalty. Further, the timeline is indicative in nature, stated the Tribunal.

Brickwork Ratings India Private Limited (the Appellant) had filed an appeal against the order dated 6 October, 2022 (the Impugned Order) passed by the Whole Time Member (WTM for short) SEBI, the respondent, cancelling the Certificate of Registration as Credit Rating Agency (CRA) in exercise of powers under Section 19 read with Section 12(3) of the SEBI Act, 1992 and Regulation 27 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (Intermediaries Regulations).

The SAT observed that the timeline is indicative in nature. They are not cast in stones and the completion of ratings depends on various factors which are supplied by third parties over whom the appellant has no control.

The Tribunal remarked that these aspects have not been taken into consideration by the WTM. The Circular of 2016 does not stipulate any timeline for completion of ratings but merely requires the analysts to adhere to timelines. In view of the aforesaid, no penalty could be imposed for failure to adhere to the timelines, the bench held.

With regard to the question whether the Cancellation of Registration of the Appellant was justified, the SAT perused the relevant Regulation 27 (pre-amended) of Intermediaries Regulations and stated that, “the issue being repeated lapses, noticed across multiple inspections conducted by SEBI, shows that governance changes recommended in earlier inspections, and monetary penalties imposed have not proved effective or deterred the Noticee (Appellant) in addressing very basic requirements of running a CRA.”

Furthermore, the SAT noted that repeated violations, which remain after this Tribunal’s order were basically two, namely, delay in recognition of default of NCDs (one instance each in three inspections) and conflict of interest issues due to non-segregation of roles (in 2 out of 3 inspection).

In these circumstances, imposition of the most-severe penalty possible under the Regulations was not commensurate with the violations affirmed, opined the Tribunal.

Considering the totality of the violations, the SAT observed that the alleged violation of routine matters was not deliberate or fraught with malafides or fraud and therefore could not result in the cancellation of the license.

While appositely stating that proportionality in punitive measures is a vital facet of Article 14 and a disproportionate punitive measure which is not commensurate with the violation would be totally violative of Article 14 of the Constitution of India, the SAT held that the order of cancellation of the license for the violations committed by the appellant was unjustified and was not commensurate with the alleged violations.

Accordingly, the SAT affirmed the regulator’s findings of alleged violations and referred the matter back to SEBI for imposing appropriate penalties.