The Securities and Exchange Board of India (Sebi) on August 26 enhanced disclosure rules for credit rating agencies (CRAs) and put in place a framework for rating withdrawal of perpetual debt securities.
Key highlights
- The 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).
- The move is aimed at allowing investors and other stakeholders to properly use such disclosures in a fair assessment of CRAs.
- 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.
- 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.
- 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.
What is Sharp rating action?
- 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.
- 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.
- Sharp rating action is seen in case of companies with deteriorating financials.
What is a debenture?
- A debenture is a type of debt instrument that is not backed by any collateral and usually has a term greater than 10 years.
- Debentures are backed only by the creditworthiness and reputation of the issuer.
- Both corporations and governments frequently issue debentures to raise capital or funds. Some debentures can convert to equity shares while others cannot.
What are Perpetual bonds?
- Perpetual bonds are fund-raising instruments that do not carry any maturity date as bonds usually do. Instead, they offer to pay their buyers a coupon or interest at a fixed date for perpetuity.
- While a variety of entities may issue perpetual bonds, the most common ones in India are issued by banks to meet their Basel III capital norms and are called Additional Tier 1 or AT-1 bonds.
- In the case of bank AT-1 bonds, banks can write off the principal in addition to not paying interest if they run short of capital or face bankruptcy.
- For an investor, this feature and the eternal nature of these bonds add to the risk; but they usually fetch higher yields than other debt instruments.
What is a credit rating agency (CRA) ?
- A credit rating agency (CRA) evaluates and assesses an individual’s or a company’s creditworthiness. That is, these agencies consider a debtor’s income and credit lines to analyse the debtor’s ability to repay the debt or if there is any credit risk associated.
- Securities and Exchange Board of India (SEBI) reserves the right to authorise and regulate credit rating agencies according to SEBI Regulations, 1999 of the SEBI Act, 1992.
- SEBI registered credit rating agencies in India are: CRISIL Limited, India Ratings and Research Pvt Ltd, ICRA Limited, CARE, Brickwork Ratings India Pvt Ltd, SMERA Ratings Limited, Infometrics Valuation and Rating Pvt Ltd.
