SEBI’s Order Cancelling Registration of CRA for Routine Operational Errors & Trivial Violations Was to be Quashed | SAT

Case Details: Brickwork Ratings India (P.) Ltd. v. Securities and Exchange Board of India - [2023] 152 taxmann.com 507 (SAT-Mumbai)

Judiciary and Counsel Details

• • Justice Tarun Agarwala, Presiding Officer & Ms Meera Swarup, Technical Member
  • Somasekhar Sundaresan, Abishek Venkataraman, Ms Savani Gupte, Lalit Munshi & Ms Fatima Fernandes, Advs. for the Appellant.
  • Gaurav Joshi, Sr. Adv., Abhiraj Arora, Shourya Tanay, Ms Misbah Dada & Deepanshu Agarwal, Advs. for the Respondent.

Facts of the Case

In the instant case, the appellant was a Credit Rating Agency (CRA) and a security market intermediary. SEBI along with RBI conducted an inspection for a period 1-10-2019 to 30-11-2019 for ascertaining whether the appellant was complying with provisions of the SEBI Act and CRA Regulations.

On inspection, it was found that the appellant repeatedly violated various regulations and provisions of the SEBI Act and CRA Regulations. SEBI thus, cancelled the certificate of registration as CRA in the exercise of powers under section 19, read with section 12(3) of the SEBI Act and regulation 27 of Intermediaries Regulations.

It was noted that repeated violations were basically two, namely, delay in recognition of default of NCDs and conflict of interest issues due to non-segregation of roles. Further, violations were routine operational errors, which had unnecessarily been escalated to regulatory proceedings.

Some of the violations were trivial in nature. Isolated instances by not meeting rating criteria, not reviewing rating criteria for a shorter period than 3 years/5 years, not signing minutes of the meeting, and not recording names of attendees of a meeting of the rating committee were such violations, which did not warrant cancellation of license of the appellant.

SAT Held

The SAT observed that considering the totality of violations found, alleged violations of the routine matter were not deliberate or fraught with mala fides or fraud and, therefore, could not result in the cancellation of the license.

The SAT held that while partly affirming violations noted in the inspection, the impugned order cancelling certificate of registration as CRA was to be quashed. Therefore, the matter was to be remitted to SEBI to pass a fresh order on the quantum of penalty other than the order of cancellation of license in light of the observation made in accordance with the law after giving an opportunity of hearing to the appellant.

List of Cases Reviewed

• • Jindal Cotex Ltd. v. SEBI [2023] 149 taxmann.com 231 (Sat. – Mum.) (para 20) followed.

List of Cases Referred to

• • Jindal Cotex Ltd. v. SEBI [2023] 149 taxmann.com 231 (Sat. – Mum.) (para 20).