Sebi publishes new disclosure rules for rating agencies to boost transparency

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The Securities and Exchange Board of India (Sebi) has announced new guidelines for Credit Rating Agencies (CRA) to enhance transparency and standardize the securities disclosure process.

Sebi’s August 25 circular will apply to credit ratings of securities listed or that plan to be listed on a recognized stock exchange, as well as credit ratings required under various Sebi regulations.

The regulator stressed that additional information would allow stakeholders, including investors, to properly assess credit ratings.

The new rules require credit rating agencies to compare two consecutive rating actions if the change between two consecutive actions is greater than or equal to three notches down.

In this case, the same should be included in their sharp rating action disclosure.

The rule aims to standardize the methodology for calculating and disclosing an authorized net rating action under its November 13, 2018 guidelines.

Disclosure will be limited to credit ratings of securities listed or intending to be listed on a recognized stock exchange. Rating agencies are also asked to separately disclose harsh rating actions on non-cooperative issuers in addition to current statements of harsh rating actions.

Sebi, in its circular dated November 1, 2016, detailed guidelines for rating agencies on what constitutes issuer non-cooperation.

In the event of non-cooperation on the part of the issuer, credit rating agencies will have to disclose information regarding the non-submission of quarterly financial results, performance or audited financial results, operational details, including plans of investment, as well as obligations and repayment of debt, within the prescribed deadlines.

The regulator has asked ratings agencies to maintain a consistent practice for three consecutive months of not submitting no-default statements (NDS) while considering migrating ratings. They must label these ratings as INC within seven days of three consecutive months of not submitting the NDS.

“The ARC, in its judgment, may migrate a rating to the INC category prior to the expiration of three consecutive months of non-receipt of NDS,” the circular states. Rating agencies will also have to disclose on their website the “minimum requirement” policy by sector or type of rating, etc.

Withdrawal of rating

When removing any credit rating, rating agencies must assign a credit rating to that security in its press release, except for securities that have no outstanding obligations, or the rated security that is liquidated, merged or merged with another company.

Additionally, in the case of perpetual debt securities, such as AT-I bonds, listed or offered for listing on a recognized stock exchange, a credit rating cannot be withdrawn unless the security is redeemed.

A rating agency may withdraw the ratings of these securities provided that it has rated these securities for five consecutive years and has received a commitment from the issuer that a rating is available for these securities. In addition, they must have received a commitment from other rating agencies that a rating is available on these securities.

Static pool

Outstanding ratings for each category will apply at the beginning of each fiscal year. Ratings withdrawn or ratings of non-cooperative issuers during a financial year are excluded.

Additionally, ratings downgraded to D should be treated as defaults for the remainder of the fiscal year, and those upgraded from D should be considered a new rating for subsequent static pools affected.

Additional Disclosure Rules

In addition to the current disclosure on CDRs (cumulative default rates), rating agencies must separately disclose two other CDRs regarding the credit ratings of securities listed or offered for listing on an exchange: ratings of non-cooperative issuers must be included and /or excluded from the cohort under the rating category in which the instrument is currently rated.

Additionally, rating agencies must maintain an archive of disclosures, including ratings press releases, on their website for at least 10 years.

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