Sebi issues stricter disclosure regime for credit rating agencies

Promoter group support, linkages to subsidiaries to be stated upfront; Move seen as a fallout of IL&FS crisis

The Securities and Exchange Board of India (Sebi) on Tuesday issued stricter disclosure guidelines for credit rating agencies (CRAs). Under the new framework, CRAs will have to make nuanced disclosures on factors such as promoter support, linkages with subsidiaries and liquidity position for meeting near-term payment obligations.

The latest move by Sebi is seen as a fallout of Infrastructure Leasing & Financial Services (IL&FS) crisis, which brought to light the shortcomings in the credit rating process.

CRAs monitor and analyse the relevant factors that affect the creditworthiness of a borrower and issue a rating, to help price the bond instruments.

Sebi 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 new measures are a direct fallout of the default 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 rating ahead of the 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 Sebi measures will provide more clarity to the investors to make an informed decision.

Sebi's latest circular comes after a series of meetings with senior officials of rating agencies to deliberate measures were 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, adequacy of cash flows for servicing maturing debt obligation.”

Experts say these will help investors understand better the liquidity profile of company.

Sebi has said while monitoring of repayment schedules, CRAs will have to analyse the deterioration in the 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, which often are seeing reacting ahead of formal announcement.

Further, Sebi said the 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 the ratings assigned by the agencies.

CRAs have asked to publish their average one-year 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.

“This will enable all stakeholders, including investors and regulators, to compare data across each CRA in an efficient and transparent manner and make comparative assessments,” said Vemuri.

In a recent speech, Ajay Tyagi, chairman, Sebi had said the default at IL&FS had severely impacted trust and confidence of investors.

The market regulator is also said to have issued notices to certain rating agencies over their handling of the IL&FS crisis.