Sebi enhances disclosures requirements for credit rating agencies

Capital markets regulator Sebi on Friday enhanced disclosure rules for credit rating agencies (CRAs) and put in place a framework for rating withdrawal of perpetual debt securities.

The move is aimed at allowing investors and other stakeholders to properly use such disclosures in a fair assessment of CRAs, the Securities and Exchange Board of India (Sebi) said in a circular.

The new framework will be applicable to credit ratings of securities that are already listed or proposed to be listed on a stock exchange.

In order to standardise the methodology pertaining to disclosure of a 'sharp rating action', Sebi said CRAs will have to compare two consecutive rating actions.

Further, a CRA will have to disclose a sharp rating action if the rating change between two consecutive rating actions is more than or equal to three notches downward.

The regulator has mandated CRAs to frame detailed guidelines on what constitutes non-cooperation by issuers, which includes non-submission of quarterly financial results within prescribed timelines, current and past operational details about capex plans, debt obligations and repayment details, among others, and any other issue felt appropriate by a credit rating agency as per its internal assessment.

CRAs need to have a detailed policy regarding methodology in respect of assessing the risk of non-availability of information from the issuers, including non-cooperative issuers and steps to be taken under various scenarios in order to ascertain the status of non-cooperation by the issuer company.

"CRAs shall follow a uniform practice of three consecutive months of non-submission of No-default Statement (NDS) (or inability to validate timely debt servicing through other sources) as a ground for considering migrating the ratings to issuers not cooperating (INC) and shall tag such ratings as INC within a period of 7 days of three consecutive months of non-submission of NDS," Sebi said.

It further said the CRA in its judgement may migrate a rating to the INC category before the expiry of three consecutive months of non-receipt of NDS.

While withdrawing any credit rating of securities that are listed, or planning to list on bourses, a CRA in its press release will also have to assign a credit rating to such security, except where there are no outstanding obligations under the security rated by the CRA, or the company whose security is rated is wound up or merged with another firm.

To facilitate withdrawal of ratings of perpetual debt securities that are listed or proposed to be listed on bourses, Sebi has revised the rules, whereby a CRA may withdraw rating of such securities in case the rating agency has rated such securities continuously for 5 years; or received an undertaking from the issuer as well as other CRA that a rating is available on such securities.

Under the current rating withdrawal provisions, it was seen that in case of ratings of perpetual debt securities, such as AT-I bonds, a credit rating cannot be withdrawn unless the security is redeemed. Often, this can result in the issuer of such bonds to stop cooperating with the CRA.

In order to facilitate enhanced transparency and usability of disclosures made by CRAs on their websites, Sebi said these disclosures should be in Excel or machine readable format and an archive of disclosures should be maintained by them on their website for at least 10 years. This also includes ratings press releases by CRAs.

In addition, CRAs will have to disclose separately two other cumulative default rates (CDRs) limited to credit ratings of securities.

The framework pertaining to sharp rating action will be applicable from the first half of the financial year 2022-23, those related to issuers not cooperating by March 31, 2023, enhanced disclosures will be applicable for disclosures made after March 31, 2023 and those pertaining to rating withdrawal will applicable for ratings withdrawn after September 30.