Investors have taken up the matter with Sebi citing uncertainty surrounding the matter following the market regulator’s decision in October 2022 to cancel the certificate of registration given to Brickwork due to certain contraventions and deficiencies, people aware of the developments told ET. Sebi last month revoked the order directing Brickwork to shut down operations.
Rating downgrades for bonds have significant implications for profitability of financial entities such as banks and mutual funds which are investors in such securities.
Apart from NLC India, Brickwork has also downgraded outstanding bonds of Indore Municipal Corporation worth ₹190 crore, people cited above said.
‘No Major Credit Events’
The bulk of the investors in those bonds were institutional players such as provident funds.
“There have been downgrades of some firms by Brickwork, such as in the case of Neyveli Lignite (now known as NLC India Ltd) which was downgraded from AAA to BB+. The rationale behind the downgrades is not clear,” one of the sources said. “Generally, rating downgrades are a consequence of poor financial performance, but given the backdrop in this case, there is uncertainty about the rationale because there haven’t been major credit events for the entities which have been downgraded,” the person said.
An email sent to senior management of Brickwork Ratings did not elicit a response till the time of going to press. A Sebi spokesperson did not respond to an email seeking comment on the matter till press time Sunday.
Sebi had last month said the Securities Appellate Tribunal, while substantially upholding the findings in the regulator’s order dated October 6, 2022, had remitted the matter back to the regulator to reconsider the quantum of penalty. While revoking the order to shut down operations, Sebi issued several directions to Brickwork including not onboarding new clients for a specified period and expanding its board.
NLC INDIA THREATENS ACTION
In a notice to exchanges on Friday, NLC India said it had asked Brickwork Ratings for the withdrawal of credit rating assignments carried out by the latter on February 21, 2023, in compliance with Sebi order issued on October 6, 2022, asking Brickwork to wind down its operations within six months.
Saying that outstanding bonds earlier rated by Brickwork were now rated by other firms, the company said it will take appropriate action against the ratings agency. The central government has a 79% ownership in NLC India.
Brickwork’s website showed that proposed bonds worth Rs 3,000 crore of NLC India had a rating of BB+, with the rating firm saying the issuer did not cooperate and that rating was based on best available information.
INVESTOR IMPACT
For an investor like a bank, a rating downgrade from AAA to BB theoretically implies a sharp rise in the yield of the rated bond and thereby a steep decline in its price. The Fixed Income, Money Markets and Derivatives Association of India provides valuations for bonds based on ratings.
A person aware of the development said a rating downgrade of the magnitude carried out by Brickwork could shave off around 10-15% of the price of a bond. The decline in price would have to be accounted for as a mark-to-market loss for a bank, which would directly hurt profitability. A mutual fund could, at discretion, override the rating if no adverse credit events were responsible for the downgrade, the person added.
In case of Indore Municipal Corporation’s bonds, the rating downgrade implies a violation of the labour ministry laws which do not permit the state provident fund from investing in papers with a rating lower than AA.