Sebi issues norms for enhanced disclosures by rating agencies

"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," the regulator said.

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

“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,” Sebi said in a statement which was posted on its website.

On review of rating criteria, "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."

"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. 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," Sebi said.

On disclosure of average rating transition rates for long-term instruments, Sebi said, "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."

"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."

For static pool, "Ratings outstanding for each category at the beginning of any financial year. However, it shall exclude ratings that have been withdrawn or ratings of non-cooperative issuers during the financial year. Ratings downgraded to D shall be treated as default for the rest of the financial year. Ratings which are upgraded from D shall be considered as new rating for the relevant subsequent static pools."

For transition rate, "The number of movements/ transitions from each rating category to another, as at the end of the financial year, as a percentage of the total number of ratings in the static pool."

For averaging, "All averaging across static pools for transition rate computations must be based on the weighted average method where the weights are the number of issuers in each static period."

On 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 to stock exchanges and depositories for disclosure on website on half-yearly basis, within 15 days from the end of the half-year (March 31/September 30)."

Speaking on norms for enhanced disclosures, JN Gupta, former executive director at Sebi, said the final outcome of the credit rating agencies earlier were disappointing to investors and it's was causing problems. Now, they have have to use their intelligence and the market information.