Oversight of rating agencies: Piecemeal to structured
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A few companies faced sharp rating downgrades in 2015 and 2016 in India, subsequent to which opinions were voiced, and the Securities and Exchange Board of India (Sebi) issued certain guidelines in November 2016 and then again recently, on 30 June 2017, asking rating agencies to monitor issuers more closely. Rating agencies rate a host of instruments like bonds, money market instruments, structured products, and others as well. These ratings are the barometer or the guide that investors use to take exposure in the rated instruments. While the aim of these guidelines is to help the cause of investor interest, there is a better way to streamline the oversight of rating agencies. We will discuss that, but let us first look at the gist of the latest circular.
A prominent point raised in the circular is that sometimes rating agencies are behind the curve; the market knows about a delay by an issuer in servicing debt, but not the rater. The rating agency is either not aware or is yet to act in terms of rating action. Sebi has mandated rating agencies to monitor servicing of debt obligations, based on International Securities Identification Number (ISIN), and track deterioration in financials for early leads. While this should have been par for the course for raters, sometimes it takes the regulator to remind the basics. This raises two issues: either (a) rating agencies are understaffed, and are unable to track issuers properly; or (b) they are running more for fresh business than tracking the issuers rated. Or, it is both.
The circular says the rating agencies should monitor exchange websites for disclosures by issuers. Again, a reminder of basics. The onus is being put on the rating agency to engage with the debenture trustee and if no confirmation of interest or principal repayment on any outstanding security is received within 1 day post the due date, the rater has to follow up with the issuer. If no confirmation is received within 2 days, the fact has to be disseminated on the credit rating agency's website as a press release, and exchanges have to be informed as well. The rating agency has to inform Sebi, and any failure to pass the information shall be considered as aiding and abetting the issuer in suppressing information.
When we hear the term ‘defaulter’, we relate it to a sub-standard borrower but not with the rating agency that lagged in its job of tracking the company and disseminating information. In this circular, Sebi has not used the term ‘default’ (it has used ‘failure to make reference’), but in a way, for the first time, we see something on lines of ‘default’ by a rating agency. Another phrase we have been hearing is ‘rating the rater’.
Sebi also mandates that all material events or corporate action by the issuer should be reviewed by the rating agency, and the outcome, which could be re-iteration of the existing rating, should be published as a press release on the website, within 7 days of the event. The regulator has also provided for a situation in which all this does not work. There would be a ‘no default statement’ every month from the issuer. If the rating agency lags, it would mean a lag of a maximum of 1 month. If documents like PAN and Aadhaar need to be self-attested by us, ‘no default’ should be self-attested by the issuer.
Even after all these stipulations, and the stipulations of November 2016—that the rating agency should explain sharp changes in ratings and all ratings should be published on the website whether accepted or not, to prevent ‘rating shopping’—investors are left hopping through websites of all rating agencies. As a user of the rating data, I have to know which agency(ies) has rated that particular issue and then hunt the websites.
Subsequent to the recent guidelines, Sebi will have to track the data furnished by rating agencies. Rather, there should be a central repository of the information, hosting everything on one website. The advantages of doing so will be multiple:
•It will provide the current rating and entire rating history across all agencies. A user does not need to know which agency has rated which security or search through various websites;
•Any negative event like delay in debt servicing would be disseminated faster as investors would need to check only one website for daily updates;
•Rating agencies can submit the updates to this central body, which would in turn submit the gist to Sebi for any further action;
•Since this entity would be set up under the aegis of Sebi, it can analyse the data for rating consistency and instances of delinquencies across rating agencies periodically;
•This will provide a benchmark for investors as well as issuers for pricing the service of credit rating;
•Any sharp changes in rating and the explanation from the rating agency can be highlighted in a separate section;
•Sebi is against ‘rating shopping’ (obtaining a rating and not using it if the issuer does not like it). A central repository website can disseminate information on all ratings obtained, used or not, across rating agencies;
•Cost would be reasonable since a small team with the requisite infrastructure can handle it. This would be similar to the entities that compute the equity indices for NSE and BSE.
Joydeep Sen is the managing partner, Sen & Apte Consulting Services LLP