REGULATOR TIGHTENS DISCLOSURE NORMS FOR CREDIT RATING AGENCIES
The Securities and Exchange Board of India on Tuesday issued stricter disclosure guidelines for credit rating agencies (CRAs) in a move being seen as a fallout of the Infrastructure Leasing & Financial Services crisis, which brought to light shortcomings in the rating process. Under the new framework, CRAs will have to make nuanced disclosures on factors such as promoter support, linkages with subsidiaries, and the liquidity position for meeting near-term payment obligations. CRAs monitor and analyse the factors that affect the creditworthiness of a borrower and issue a rating. SUNDAR SETHURAMAN reports
The Securities and Exchange Board of India (Sebi) on Tuesday issued stricter disclosure guidelines for credit rating agencies (CRAs), in a move being seen as a fallout of the Infrastructure Leasing & Financial Services (IL&FS) crisis that brought to light shortcomings in the rating process.
Under the new framework, CRAs will have to make nuanced disclosures on factors such as promoter support, linkages with subsidiaries, and the liquidity position for meeting near-term payment obligations.
CRAs monitor and analyse the factors that affect the creditworthiness of a borrower and issue a rating to help price the bond instruments.
The regulator has said when the rating factor is support from a parent company or the government, the names of the promoter and the rationale for any expectations shall be provided by the rating agency. Also, when the subsidiaries or group companies are consolidated to arrive at a rating, CRAs will have to list all such companies and state the rationale for consolidation. Industry players say these two measures are a direct fallout of defaults at IL&FS. Many investors perceived the infrastructure financier to have government backing.
As a result, despite IL&FS’ high indebtedness, investors took comfort in investing in its papers, which enjoyed top-notch ratings ahead of default.
“Enhanced disclosures on parent support, approach towards consolidation, and liquidity will give investors more clarity on the rating drivers,” said Somasekhar Vemuri, senior director, Crisil Ratings.
Anjan Ghosh, chief rating officer, Icra, said the new measures would provide more clarity to investors to make an informed decision.
Sebi’s latest circular comes after a series of meetings with senior officials of rating agencies to deliberate on measures needed to strengthen the rating and disclosures standards.
Sources say Sebi was not happy with the manner in which CRAs handled the IL&FS ratings. The regulator is of the view that CRAs failed to pick up early signs and issue a rating watch.
To provide an insight into how a company is placed for meeting its near-term repayment obligations, Sebi has said CRAs need to include a section on “liquidity” in the press release regarding the rating action. The liquidity section will need to “highlight parameters like liquid investments or cash balances, access to unutilised credit lines, liquidity coverage ratio, and adequacy of cash flows for servicing maturing debt obligation.”
Experts say these will help investors understand the liquidity profile of company better.
Sebi has said that while monitoring repayment schedules, CRAs will have to analyse the deterioration in liquidity conditions of the issuer and also take into account any asset-liability mismatch.
The regulator has also asked CRAs to monitor sharp deviations in bond spreads with relevant benchmark yield. Sebi has said such deviations will have to be treated as a “material event.”
Industry players said the move will help capture the price fluctuations in the secondary market.
Further, Sebi said rating agencies should publish information about the historical average rating transition rates across various rating categories so that investors can understand the past performance of ratings assigned by the agencies.
CRAs have been asked to publish their average oneyear rating transition rate over a five-year period, on their respective websites. Further, each CRA shall furnish data on sharp rating actions in investment-grade rating category, to stock exchanges and depositories for disclosure on the website on a half-yearly basis, within 15 days from the end of the half-year.
“While this will put additional onus on the agencies. I just hope this doesn’t lead to making them over cautious and thereby affecting the market sentiment negatively,” said Moin Ladha, partner, Khaitan & Co.
In a recent speech, Sebi Chairman Ajay Tyagi had said defaults at IL&FS had severely impacted trust and confidence of investors.