SEBI tightening disclosure norms for credit rating agencies
Published: Sep 23, 2016
By TIOLCORP News Service
NEW DELHI, SEPT 23, 2016: THE rising graph of corporate indebtedness is compelling the capital market regulator, SEBI to frame stringent disclosure norms by the credit rating agencies. The disclosure norms would aim to fix accountabilities so that fiascos like the one caused by the sudden default of Amtek Auto last September are not repeated.
SEBI has already circulated a set of draft rules which would be finalised soon with the rating agencies.
The agencies will have to spell out how rating is conducted, responsibilities of analysts, and evaluate the performance of their respective rating committees — particularly if there's an unforeseen default. All rating agencies will have to mandatorily disclose three-year rating history of the borrower, coupon and maturity of a paper, and instances of multi-notch downgrades among other things.
Significantly, the regulator has said there should be a standard "definition of default"— unlike the present practice where a bond may continue to be in the 'investment grade' scale of an agency even after the borrower delays payment of interest on term loans, working capital and cash credit obtained from banks. "In such cases a rating agency will have to take a call whether to downgrade the bond as well.
In September 2015, Amtek Auto, a maker of auto components, failed to repay Rs 800 crore worth of bonds on maturity, following which JPMorgan Mutual Fund, which was holding the bonds, restricted withdrawals from two of its funds. After the Amtek Auto stock fell, the rating agency in question came out with its report.
SEBI wants the early warnings for the investors so they stay ahead of the curve. Rating agencies have to give the reasons that led to a suspension of ratings. At present, while suspending a rating, they simply say the borrower is non-cooperative. In the new disclosure framework, the regulator would view the rating committee of an agency as the heart of the entity; it should be responsible and accountable similar to a board of directors in a company.
India was among the first few countries to regulate credit rating agencies. The rules for the agencies were put in place in 1996.
