Sebi tightens norms for rating agencies, CRAs told to analyse deterioration in liquidity conditions

Market regulator Sebi tightened disclosure and review norms for credit rating agencies (CRAs) on Tuesday, following concerns this year after they failed to raise timely red flags ahead of collapse of IL&FS.

The Securities and Exchange Board of India (Sebi) ordered CRAs to analyse deterioration in the liquidity conditions of an issuer, while monitoring its repayment schedules and taking into account any asset-liability mismatches.

The regulator also said CRAs should disclose parameters such as liquid investments or cash balances, access to any unutilised credit lines and adequacy of cash flows in a specific section on liquidity

Rating agencies have come under pressure from authorities and investors over their failure to proactively flag financial problems at Infrastructure Leasing and Financial Service’s (IL&FS) until after a subsidiary defaulted on some of its debt this year.

A string of subsequent defaults at IL&FS triggered sharp declines in stock and debt markets spreading fears of contagion within the rest of the financial sector, and prompting the government to step in and take control of IL&FS.

Sebi said in a circular also said CRAs will also have to disclose any linkage to external support for meeting near term maturing obligations.

These measures will enable investors to understand underlying rating drivers better and make more informed investment decisions.

Sebi said CRAs need to review rating criteria with regard to assessment of holding companies and subsidiaries in terms of their inter-linkages, holding company’s liquidity, financial flexibility and support to the subsidiaries, among others.

Further, while reviewing ‘material events’, CRAs need to treat sharp deviations in bond spreads of debt instruments vis-a-vis relevant benchmark yield as a material event.

Sebi said if a subsidiary company gets support from the parent group or government, then credit rating agencies will have to name the parent company or government that will provide support towards timely debt servicing. Rating agencies will also have to provide the rationale for this expectation.

In case subsidiaries or group firms are consolidated to arrive at a rating, then rating agencies will have to list all such companies and rationale of consolidation should be provided under a heading.

CRAs need to publish their average one-year rating transition rate over a five-year period on their respective websites, which would be calculated as the weighted average of transitions for each rating category, across all static pools in the five-year period.

Every CRA needs to furnish data on sharp rating actions in investment grade rating category to stock exchanges and depositories for disclosure on website on half-yearly basis, within 15 days from the end of the half-year.