Regulator tightens disclosure rules for credit rating firms
MUMBAI: India’s markets regulator has tightened disclosure norms for credit rating agencies after they failed to warn investors in time about the deteriorating credit profile of Infrastructure Leasing and Financial Services Ltd (IL&FS).
The agencies will now need to disclose the liquidity position of the company being rated, Securities and Exchange Board of India (Sebi) said in a circular on Tuesday. A company’s liquidity position would include parameters such as liquid investments or cash balances, access to unutilized credit lines, liquidity coverage ratio, and adequacy of cash flows for servicing maturing debt obligation, Sebi said.
Rating agencies would also need to disclose if the company is expecting additional funds to pare its debt along with the name of the entity that will provide the money. Credit rating firms will also have to analyse the deterioration of liquidity and also check for asset-liability mismatch. Tuesday’s circular follows an abrupt downgrade in the ratings of bonds sold by IL&FS and related entities after they defaulted on payment obligations in September. Credit rating agencies (CRAS) had downgraded the bonds from high investment grade (AA+ in some cases) to default or junk.
“Sharp rating changes create an element of surprise and suddenness. CRAS should strive to keep them to a minimum. In this context, disclosure of sharp rating actions made available at one place on the depositories and exchanges website in a consolidated manner is a welcome step. This will enable stakeholders including investors and regulators to compare data across each CRA in an efficient and transparent manner and make comparative assessments,” said Somasekhar Vemuri, senior director, Crisil Ratings.
This is the fourth time Sebi has changed norms for rating agencies. The latest was in November 2016 when Sebi issued a circular revamping norms for rating agencies after it found Crisil and Credit Analysis and Research Ltd (CARE) did not follow due process and had failed in monitoring ratings of JP Morgan’s credit opportunity fund and Amtek Auto Ltd. The rating agencies subsequently settled the case through a consent mechanism.