SEBI issues Guidelines for Enhanced Disclosures by Credit Rating Agencies

Nov 13, 2018 | by Avantis RegTech Legal Research Team


The Securities and Exchange Board of India (SEBI) on November 13, 2018 has issued Guidelines to enhance the quality of disclosures made by the Credit Rating Agencies (CRAs).

In pursuance of the same, the following disclosures are being prescribed to bring about greater transparency:

·         Disclosures in the Press Release regarding Rating Actions:

A.      CRAs are required to monitor and analyse the relevant factors that affect the creditworthiness of an issuer and discuss the same in the rating notes considered by the rating committee for assignment of ratings, such relevant factors may also be suitably incorporated in the press release regarding the rating action.

Accordingly, in order to enable investors to understand underlying rating drivers better and make more informed investment decisions, CRAs shall make the following specific disclosures in the section on “Analytical Approach” in the Press Release:

a.       When a rating factors in support from a Parent/ Group/ Government, with an expectation of infusion of funds towards timely debt servicing, the name of such entities, along with rationale for such expectation, may be provided.

b.      When subsidiaries or group companies are consolidated to arrive at a rating, list of all such companies, along with the extent (e.g. full, proportionate or moderate) and rationale of consolidation, may be provided.

B.      The Press Release shall include a specific section on “Liquidity”, which shall highlight parameters like liquid investments or cash balances, access to unutilised credit lines, liquidity coverage ratio, adequacy of cash flows for servicing maturing debt obligation, etc. CRAs shall also disclose any linkage to external support for meeting near term maturing obligations.

·         Review of Rating Criteria:

A.      In terms of Para 2 in Annexure A of SEBI Circular dated November 01, 2016, CRAs may review their 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, etc.

B.      While carrying out “Monitoring of Repayment Schedules”, CRAs shall analyse the deterioration in the liquidity conditions of the issuer and also take into account any asset-liability mismatch.

C.      While reviewing “Material Events”, CRAs may treat sharp deviations in bond spreads of debt instruments vis-à-vis relevant benchmark yield as a material event.

·         Disclosure of Average Rating Transition Rates for long-term instruments:

A.      In order to promote transparency and to enable the market to best judge the performance of the ratings, the CRA should publish information about the historical average rating transition rates across various rating categories, so that investors can understand the historical performance of the ratings assigned by the CRAs.

B.      Accordingly, CRAs shall publish their average one-year rating transition rate over a 5-year period, on their respective websites, which shall be calculated as the weighted average of transitions for each rating category, across all static pools in the 5-year period. The format of the transition matrix is enclosed as Annexure A.

·         Disclosure of performance of CRAs on Stock Exchange and Depository website:

Each CRA shall furnish data on sharp rating actions in investment grade rating category, as per the format specified in Annexure B, to Stock Exchanges and Depositories for disclosure on website on half-yearly basis, within 15 days from the end of the half-year ( 31st March/ 30th September).

·         Internal Audit of CRAs.

 

[SEBI/ HO/ MIRSD/ DOS3/ CIR/ P/ 2018/ 140]

 

URL: https://www.sebi.gov.in/legal/circulars/nov-2018/guidelines-for-enhanced-disclosures-by-credit-rating-agencies-cras-_40988.html


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