Sebi tightens disclosure rules for rating agencies

Source: The post is based on the article “Sebi tightens disclosure rules for rating agencies” published in Livemint on 27th August 2022.

What is the News?

The Securities and Exchange Board of India has enhanced the rules on disclosures by credit rating agencies and put in place a framework for rating withdrawals of Perpetual Bonds.

What are Perpetual Bonds?

A perpetual bond, also known as a “consol bond” is a fixed income security with no maturity date. This type of bond is often considered a type of equity, rather than debt. 

One major drawback to these types of bonds is that they are not redeemable. However, the major benefit of them is that they pay a steady stream of interest payments forever.

What are the current rating revocation regulations?

According to the current rating revocation regulations, the rating of perpetual bonds such as AT-I bonds cannot be revoked unless the securities are redeemed. 

What is being changed now?

In order to facilitate the withdrawal of perpetual debt security ratings, that are listed or are to be listed on the stock exchange, a credit rating agency may withdraw a rating. This can be done in case it rated these securities continuously for at least five years or received an undertaking from either the issuer or other agencies that a rating is available for such bonds.

Why are these changes being made now?

Sebi has brought these new guidelines after AT1 bonds issued by Yes Bank were written down to zero in March 2020 as part of a restructuring plan, which led to huge losses for several investors.