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Credit Rating Agencies To Disclose Historical Performance Under New SEBI Guidelines

In an effort to enhance disclosures made by credit rating agencies and ensure that investors are better informed, the Securities and Exchange Board of India has issued guidelines covering parent company support, liquidity parameters, material events and the historical performance of credit rating agencies.

In a circular, SEBI said a credit rating agency’s press release on a rating action must now also include details on group support and consolidation.

  • List name of parent/government entities if rating factors in their support towards debt servicing and explain rationale.
  • List all subsidiaries or groups consolidated to arrive at a rating and detail proportion and rational for consolidation.

The rating action press release must also include a special section on “liquidity”. This section should:

  • Highlight parameters like liquid investments/cash balances, access to unutilised credit lines, liquidity coverage ratio, adequacy of cash flows for servicing maturing debt obligation, etc.
  • Also disclose any linkage to external support for meeting near-term maturing obligations.

Enhanced disclosures on parent support, approach towards consolidation and liquidity will give investors more clarity on the rating drivers and assist in their own analytics, said Somasekhar Vemuri, senior director at CRISIL Ratings, in an emailed statement.

Additionally, while monitoring repayment schedules credit rating agencies shall analyse deterioration in liquidity conditions of issuer and also take into account any asset-liability mismatch.

SEBI said agencies, when reviewing material events, may treat sharp deviations in bond spreads of debt instruments against the relevant benchmark yield as a material event.

So that investors can understand the historical performance of ratings, agencies have been directed by SEBI to publish information about the historical average rating transition rates (changes in ratings) across various rating categories. Specifically, credit rating agencies shall publish their average one-year rating transition rate over a five-year period on their respective websites, SEBI said in its circular.

This shall be calculated as the weighted average of transitions or rating changes for each rating category, across all static pools (ratings outstanding for each category at the beginning of each financial year) in the five-year period.

Publishing transition statistics will help investors get a perspective on the quality of ratings especially rating stability; an integral part of evaluating the performance on any CRA. This along with the default statistics will enable comparison of performance across CRAs.
Somasekhar Vemuri, Senior Director, CRISIL Ratings

SEBI has also mandated that credit rating agencies provide stock exchanges and depositories data on sharp rating actions on a half-yearly basis.

These actions by the market regulator follow its circular on Nov. 1, 2016 in which it had laid down guidelines for credit rating agencies that covered...

  • Formulation of rating criteria and rating processes and public disclosure of the same.
  • Accountability of rating analysts.
  • Standardisation of press release for rating actions.
  • Functioning and evaluation of rating committees/sub-committees.
  • Disclosure of ratings in case of non-acceptance by an issuer.
  • Disclosure in case of delay in periodic review of ratings.
  • Policy in respect of non-co-operation by the issuer.
  • Strengthening and enhancing the relevance of internal audit of credit rating agencies—appointment and rotation of auditors and scope of the audit.