SEBI Floats Tighter Norms For Full Disclosure On Loan Defaults With Rating Agencies

The Securities and Exchange Board of India has come out with new norms that make it mandatory for companies to provide details on delayed loan repayments and possible defaults to credit rating agencies amid concerns over banks citing 'client confidentiality' to resist sharing of such information by their borrowers.

The new framework would enable credit rating agencies to get timely information on possible defaults.

The move is aimed at helping the rating agencies better understand the rated entity's financial strength and incorporate the impact of these details in their ratings.

SEBI has amended its regulations for credit rating agencies to ensure that any listed or unlisted entity, before getting rated, gives an explicit consent to obtain from their lenders and other entities full details about their existing and future borrowings as well.

“The client shall provide explicit consent to the CRA to obtain the details related to their existing and/or future borrowing of any nature, its repayment and delay or default, if any, of any nature, in servicing of the borrowing, either from the lender or any other statutory/non-statutory organisation maintaining any such information to enable the credit rating agency to have timely information on the same and to consider the impact of such information on the rating assigned by the credit rating agency,” SEBI said in a notification issued on Monday.

Further, SEBI said the “client shall co-operate with the credit rating agency in order to enable the latter to carry out periodic review of the rating during the tenure of the rated instrument”.

The new framework comes amid several instances of huge loan defaults by corporates, including in cases like Infrastructure Leasing & Financial Services Ltd.. CRAs have also come under the scanner for failing to flag potential credit risks of the securities and entities rated by them.

However, the rating agencies have often sought to shift the blame to companies and lenders by claiming that they find it difficult to get information about delay in meeting bank obligations and payment failures which are considered early indicators of a default.

Officials said there have been occasions when some entities have sought to take the benefit of certain regulatory gaps, as banks are regulated by the Reserve Bank of India while rating agencies and listed companies come under SEBI’s jurisdiction. The problem becomes more acute in case of unlisted companies.

To fill this regulatory gap, SEBI has amended its regulations for credit rating agencies and the new norms would come into force with immediate effect, the regulator said in its notification dated Sept. 23.

The provisions of the rating agreement between a rating agency and its client or issuer of securities is governed by the SEBI (Credit Rating Agencies) Regulations, framed in 1999.

This regulation provides that every rating agency needs to enter into a written agreement with each client whose securities it proposes to rate and mentions detailed provisions that every such agreement should include.

As per these regulations, rating agencies are required to continuously monitor the rating of securities during the lifetime of such securities.