Reforming ratings

New norms will increase transparency

The Securities and Exchange Board of India (Sebi) last week released a circular modifying the credit-rating system in ways that would aid in transparency. These changes in regulations are applicable to already listed debt securities, and also to those proposed to be listed. In particular, credit-rating agencies (CRAs) are being asked to do the following important things. They must standardise the methodology for what is termed a “sharp rating action”. CRAs are also being told to highlight non-cooperating issuers along with mentioning the reasons why they may withdraw a rating in cases where they do so. Additionally, CRAs have been empowered to withdraw ratings from perpetual instruments. Sebi has now laid down basic criteria for “sharp rating actions”, which are being classified as a drop of three notches or more in two consecutive rating releases. The markets regulator has also mandated that CRAs frame detailed guidelines on what constitutes non-cooperation by issuers.
 

Non-cooperation may include non-submission of quarterly financial results within prescribed timelines, non-disclosure of current and past operational details about capex plans, debt obligations and repayment details, among others, and any other issue felt appropriate by a CRA. Rating agencies should frame detailed policy regarding methodology in assessing non-availability of information from non-cooperative issuers and they should also consider the steps to be taken under various scenarios of non-cooperation. Sebi says 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 “issuers not cooperating” (INC) and they should tag such ratings within seven days of three consecutive months of non-submission of NDS. CRAs would also have the option to issue INC reports in less than three months if necessary in their assessment.
 

CRAs are also being allowed to put in place a framework for rating withdrawal of perpetual debt securities. This class of assets has caused much confusion in the past with, for example, mutual funds not using standard methods of valuation. While Sebi had earlier responded by laying down valuation norms, the inability to withdraw ratings remained a gap in regulations. Under these revised rules, a CRA may withdraw the rating of perpetuals if it has rated such securities continuously for five years, or if it receives an undertaking from the issuer as well as another CRA that a rating will be available on the security in question. In the case of withdrawing any credit rating, a CRA in its press release will also have to assign a final credit rating to such a security, except where there are no outstanding obligations, or the company is being wound up, or merged.
 

The changes in sharp rating action will be applicable from the first half of 2022-23, while those related to not cooperating will come into force by March 31, 2023, enhanced disclosures will be applicable for disclosures made after March 31, 2023, and those pertaining to rating withdrawal will be applicable for ratings withdrawn after September 30, 2022. In future, CRA disclosures should be made using Excel spreadsheets or some other machine-readable format and these disclosures should be electronically archived and accessible on the CRA’s website for a minimum period of at least 10 years. Taken together, all these measures should aid in transparency and improve borrower compliance with CRAs.