Sebi tightens disclosure rules for rating agencies

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The Securities and Exchange Board of India has tightened disclosure rules by credit rating agencies and put in place a framework for rating delistings of perpetual debt securities.

In a circular issued on Friday, Sebi said that in order to facilitate the withdrawal of ratings of perpetual debt securities, which are listed or will be listed on an exchange, a credit rating agency may withdraw a rating if it has rated these securities. continuously for at least five years, or received a commitment from the issuer or other agencies that a rating is available for these bonds.

Perpetual (perp) bonds have no maturity date and are treated like stocks. Issuers pay coupons on these bonds “perpetually” and do not have to repay the principal cash flows of the bonds. Under current regulations on rating retirements, ratings of securities, such as AT-I bonds, can only be retired if the asset is redeemed. This often results in the bond issuer not cooperating with a rating agency.

To bring more transparency and make rating agency disclosures more useful, Sebi has repeatedly asked agencies to disclose them on their websites, either in Excel or machine-readable formats.

Sebi’s new guidelines come after AT1 bonds issued by Yes Bank were reduced to zero in March 2020 as part of a restructuring plan, which resulted in huge losses for several investors. In fact, Nippon India Mutual Fund, which had invested in Yes Bank’s additional risky Tier 1 bonds, came under the Sebi scanner for its Investment of 2,500 crores. The value of the bank’s AT1 bonds 8,415 crores were written off as part of the RBI’s restructuring plan following the scam, rendering the bonds worthless.

Yes Bank had lifted around 2,000 crore by issuing these bonds to institutional investors such as Nippon India MF, Franklin Templeton India, Barclays and Kotak Mutual Fund. Nippon invested around 20% of total issues. Many investors were surprised by RBI’s action, considering that in the event of bankruptcy, bondholders often have priority over shareholders.

Regarding rating withdrawals, the market watchdog clarified that unless there are outstanding obligations under the ratings of securities or a company whose security is rated as liquidated, merged, or merged with another company, a rating agency must assign a credit rating to that security and report this in a press release while withdrawing the rating.

In addition, the circular specifies that the rating agencies must compare two consecutive rating actions in order to standardize the calculation and the publication of a “pointed rating action”. 3 notches down…Applicability must be by the first half of FY 2022-23,” Sebi said.

Sebi also said that rating agencies must have a detailed policy on not submitting quarterly financial and performance results, or audited financial results, on time. This policy should include current and past operational details, including details of investment plans, debt obligations as well as repayment details and other appropriate matters, based on internal assessment or as defined by internal policies. from a credit rating agency.

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