In November 2016, the Securities and Exchange Board of India (SEBI) issued a circular requesting credit rating agencies to put in place interim rating assignment policies. To “standardize and strengthen the provisional ratings policies”, after consultation with stakeholders, the SEBI issued directives in its circular of April 27, 2021 to further regulate the assignment of provisional ratings by rating agencies to debt instruments. The 2021 circular also provides specific provisions on the ratings of property investment funds and property investment funds.
Circular 2021 requires the term “provisional” to precede rating symbols in all provisional ratings. Provisional ratings must be converted to final ratings within 90 days of issuance of the debt securities. This period can be extended up to 90 days by rating agencies on a case-by-case basis. No provisional ratings may be issued by rating agencies after 180 days from the issuance of the debt securities.
To obtain the final rating, certain conditions prescribed in the circular must be fulfilled, such as execution of the term sheet and transaction documents, settlement of the transaction and opening of all relevant accounts. While this may reduce the risks associated with non-compliance with conditions after the final rating is provided, it also creates practical difficulties for issuers of listed debt instruments.
Such a requirement gives the impression that SEBI’s rule-making process lacks internal departmental coordination. Thus, the listing of debt securities must now be carried out within four trading days from the closing date of the issue. Final listing approvals typically require final scoring, which in turn requires execution of transaction documents.
These requirements contradict the provisions of the SEBI debt rating regulations, which prescribe up to 90 days for the execution of transaction documents. While not unmanageable, some of the requirements prescribed by Circular 2021 and their conflict with other SEBI regulations may result in avoidable setbacks in closing issues of listed debt instruments.
Circular 2021 prescribes that no rating, including a provisional one, may be assigned by a rating agency to any client evaluating strategic decisions, such as “project financing mix, acquisition, debt restructuring, scenarios in the refinancing of a loan”.
This requirement follows on from the ratings reports provided to debt securities that are proposed to be issued under resolution plans under the Indian insolvency code. Although SEBI regulations prohibit providing indicative ratings to debt securities without entering into written agreements with the issuers and disclosing such indicative ratings on their websites, this clarification is likely to put an end to any alternative interpretation to provide ratings in the absence of a pending transaction. .
The circular also prescribes additional information to be provided by rating agencies when assigning provisional ratings. This includes disclosure of any ongoing steps or documents that were considered in assigning the provisional rating, the risks associated with the provisional nature of the rating, and the rating that would have been assigned in the absence of the pending steps or documents.
When assigning a provisional rating to a debt instrument, rating agencies must indicate in their press releases that the provisional rating must be converted into a final rating within the prescribed period and the implications thereof. If a provisional rating assigned by the rating agency is not accepted by the issuer, this rating and certain additional information must also be published on the website of the rating agency.
Although the 2021 circular has the laudable objective of standardizing the practices of rating agencies while providing ratings (including provisional ratings) to debt instruments, the time has come to consider an overhaul of the SEBI regulations on debt capital markets to ensure alignment. From a market perspective and to foster the continued growth of debt capital markets, stakeholders prefer regulations to be complementary and not contradictory.
For more information on this subject, please contact Aditya Bhargava or Sristi Yadav to Phoenix Legal by telephone (+91 22 4340 8500) or by e-mail ([email protected] or [email protected]). The Phoenix Legal website can be accessed at www.phoenixlegal.in.