New regulations for the Credit Rating Agencies (CRAs): Reforming ratings

Source: The post is based on an article “Reforming ratings” published in the Business Standard on 31^st August 2022.

Syllabus: GS 3 – Changes in industrial policy and their effects on industrial growth.

Relevance: Credit Rating Agencies (CRAs) Regulations

News: Last week, the Securities and Exchange Board of India (Sebi) released a circular modifying the credit-rating system in ways that would aid in transparency.

The changes would be applicable to already listed debt securities, and also to those proposed to be listed.

What are these new regulations for the Credit Rating Agencies (CRAs)?

(1) Criteria for “sharp rating actions”: It would refer to a drop of three notches or more in two consecutive rating releases. The CRAs must standardise the methodology for “sharp rating action”. Further, these changes will be applicable from the first half of the Financial Year 2022-23

(2) CRAs will highlight non-cooperating issuers, which refers to non-submission of quarterly financial results within prescribed timelines, non-disclosure of current and past operational details about CAPEX plans, debt obligations and repayment details, among others, and any other issue felt appropriate by a CRA.

(3) CRAs should frame detailed policy regarding methodology to assess the non-availability of information from non-cooperative issuers. CRAs should also consider the steps to be taken under various scenarios of non-cooperation. CRAs should follow a uniform practice of tagging such ratings within 7 days of 3 consecutive months of non-submission of the no-default statement (NDS). The changes related to not cooperating will come into force by March 31, 2023

(4) CRAs have been empowered to put in place a framework for rating withdrawal of perpetual debt securities. If a CRAs withdraws any credit rating, a CRA should mention the reasons for withdrawal and will also have to assign a final credit rating to such security, in its press release, except where there are no outstanding obligations, or the company is being merged or wound up.

All the new measures or regulations of Credit Rating Agencies (CRAs) would aid in transparency and improve borrower compliance with CRAs.