SEBI Proposes Rules For Rating Agencies On Actions Amid Defaults, Upgrades

The Securities and Exchange Board of India (SEBI) has proposed a set of guidelines aimed at enhancing the transparency and accountability of credit rating agencies. These proposed changes, detailed in a consultation paper released on Thursday, focus on providing clear reasons for rating actions, particularly in cases of defaults and upgrades. SEBI also suggests removing the term “technical default” from agency policies to prevent negative market signals and covenant triggers.

Detailed Reasons for Rating Actions

Under the proposed guidelines, SEBI is pushing for credit rating agencies to offer more detailed justifications for their actions. This move is especially pertinent in cases of default and upgrades of default ratings. Currently, a delay of just one day or a shortfall of even Re 1 in payment (whether principal or interest) from the scheduled repayment date must be recorded as a default, unless the repayment schedule is rescheduled by lenders before the due date. By mandating detailed explanations, SEBI aims to enhance the clarity and consistency of credit ratings, thus bolstering investor confidence and market stability.

The proposal to eliminate “technical default” from policies is significant. SEBI argues that labeling minor delays due to operational issues as technical defaults can mislead the market and trigger unnecessary covenants.

Addressing Operational Issues

The proposed guidelines also address various operational issues that credit rating agencies have identified. These include force majeure events, incorrect investor accounts, government freezes, and other significant changes in a company’s credit risk profile. Rating agencies have long argued that such events should be considered in their policies to provide a fairer assessment of credit risk.

SEBI’s new guidelines seek to incorporate these operational challenges into the rating process, ensuring that ratings more accurately reflect the actual credit risk. By acknowledging events like bank strikes or force majeure incidents, the guidelines aim to provide a more nuanced and realistic evaluation of a company’s financial health.

Conclusion: SEBI’s proposed guidelines represent a significant step towards improving the transparency and reliability of credit ratings in India. By demanding detailed reasons for rating actions and addressing operational issues, these changes are poised to enhance market clarity and investor confidence. The public has been invited to provide feedback on these proposals until August 15, ensuring a comprehensive and inclusive approach to refining the credit rating process.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.