Sebi Issues New Disclosure Rules For Rating Agencies To Boost Transparency

The Securities and Exchange Board of India (Sebi) has announced fresh guidelines for credit rating agencies (CRAs) to boost transparency and standardize the disclosure process for securities.

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

The regulator stressed that additional disclosures would allow the stakeholders, including investors, to correctly assess the credit ratings.

The new rules mandate credit rating agencies to compare two consecutive rating actions if the change between two consecutive actions is more than or equal to three notches downward.

In that case, the same has to be included in their disclosure on sharp rating actions.

The rule aims to standardize the methodology of computation and disclosure of a sharp rating action authorised under its November 13, 2018, guidelines.   

The disclosure will be limited to credit ratings of securities listed or plan to be listed on a recognized stock exchange. The CRAs are also asked to separately reveal sharp rating actions on non-cooperative issuers in addition to the current disclosures of sharp rating actions.

Sebi, in its circular on November 1, 2016, detailed the guidelines for CRAs on what constitutes non-cooperation by the issuer.

In the case of non-cooperation by the issuer, CRAs will need to disclose information concerning non-submission of quarterly financial results, performance or audited financial results, operational details, including capex plans, and debt obligations and repayment, within prescribed timelines.

The regulator has asked CRAs to maintain a uniform practice for three consecutive months of non-submission of No-default Statement (NDS) while considering migrating the ratings. They must tag such ratings as INC within seven days of three straight months of non-submission of NDS.

“The CRA in its judgement may migrate a rating to the INC category before the expiry of three consecutive months of non-receipt of NDS,” the circular said. The rating agencies will also need to disclose on their website the policy on “minimum requirement” sector-wise or types of ratings, etc.

Rating Withdrawal

While withdrawing any credit rating, CRAs must assign a credit rating to such security in its press release, except securities that do not have outstanding obligations, or security rated is wound up, merged or amalgamated with another company.

Additionally, in the case of Perpetual Debt Securities, such as AT-I bonds, listed or proposed to be listed on a recognized stock exchange, a credit rating cannot be withdrawn unless the security is redeemed.

A CRA may withdraw ratings of such securities provided it has rated such securities for five consecutive years and received an undertaking from the issuer that a rating is available on such securities. Also, they should have received an undertaking from other CRAs that a rating is available on such securities.

Static Pool 

Ratings outstanding for each category will apply at the beginning of any financial year. Ratings withdrawn or ratings of non-cooperative issuers during a financial year shall be excluded.

Also, ratings downgraded to D should be treated as default for the rest of the financial year, and those upgraded from D shall to be considered as new rating for the relevant subsequent static pools.

Additional Disclosure Rules 

Besides the current disclosure on CDR (cumulative default rates), CRAs must separately disclose two other CDRs concerning credit ratings of securities listed or proposed to be listed on a stock exchange: ratings of non-cooperative issuers must be included and or excluded in the cohort under the rating category in which the instrument is currently being rated.

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