Sebi tweaks rules for sharp rating actions, non-cooperating issuers

Sebi comes out with circular with changes, also tweaks policy to deal with non-cooperating issuers

The Securities and Exchange Board of India (Sebi) has tweaked the framework around ‘sharp rating actions’ and also fine-tuned the policy for dealing with non-cooperating issuers for credit rating agencies (CRAs).

Sharp rating action is when the credit rating of an issuer gets downgraded in a very short time period. This often leaves investors in the dark or provides them with little time to react. Meanwhile, non-cooperating issuers are those who drag their feet when it comes to providing adequate and timely information to rating agencies. This makes it challenging to assess and monitor their rating.

“A CRA shall disclose a sharp rating action, if the rating change between two consecutive rating actions is more than or equal to three notches downward. In other words, if the difference in credit rating between two consecutive press releases is more than or equal to three notches downward, it has to be included in the disclosure on sharp rating actions,” Sebi has said in a circular.The move comes following instances of sharp rating actions in cases such as Amtek Auto and IL&FS, which had rattled investors. For instance, in 2018, the rating assigned to the debentures issued by IL&FS went from ‘AAA’ to ‘D’ in less than six months.

Typically, sharp rating action is seen in case of companies with deteriorating financials.

For CRAs to regularly assess the financial health of the issuer, they depend on information available in the public domain. They also seek information from banks and issuers. Sebi directed CRAs to separately disclose sharp rating actions, including actions on non-cooperative issuers.

In 2016, Sebi had prescribed a policy around issuers not cooperating.

The regulator has now said, “CRAs shall have a detailed policy in this respect, which shall include the following: i. Non-submission of material information, including (but not limited to) the following: a) Non-submission of quarterly financial results or performance results or audited financial results within prescribed timelines, b) Current and past operational details, including details about capex plans, c) debt obligations and repayment details and d) any other issue felt appropriate by the credit rating agency, according to internal assessment or as laid down by a CRA in its internal policy/manual.”

Sebi has further said CRAs should 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. 

They have to tag such ratings as “issuers not cooperating” within a period of seven days of three consecutive months of non-submission of NDS.

“The CRA — in its judgement — may migrate a rating to the ‘issuers not cooperating’ category before the expiry of three consecutive months of non-receipt of NDS,” the circular further states.

Sebi has further clarified that while withdrawing any credit rating, the CRA in its press release has to assign a credit rating to such a security.

The exception to this rule would be cases 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 or amalgamated with another company.

In order to ensure smooth transition to the new framework, Sebi has issued different applicability dates.

Changing times

(New criteria and when they become applicable) 

 

New methodology for computation of sharp rating action

Disclosures for H1 of FY23

Issuers not cooperating (INC) 

By March 31, 2023

Withdrawal norms

Ratings withdrawn after September 30, 2022

Rating withdrawal of perpetual debt securities

Ratings withdrawn after September 30, 2022

Disclosure of average rating transition rates for long-term credit Ratings

Disclosures for FY23

Enhanced disclosures by CRAs

Website disclosures made after March 31,2023
 

Source: Sebi circular