Sebi wants ratings agencies to rate all issuers2 min read . Updated: 10 Jul 2020, 06:08 AM IST
- The rating agencies believe failure to share information will increase due to covid-19
- The regulator wants the ratings to continue, since withdrawing them would leave investors with even less information
The Securities and Exchange Board of India (Sebi) is not in favour of a demand from credit rating agencies (CRA) to let them withdraw ratings of uncooperative companies that fail to provide required information, two people aware of the matter said.
The regulator wants the ratings to continue, since withdrawing them would leave investors with even less information, the people said, requesting anonymity.
Regulations require CRAs to keep every credit instrument rated all through its lifetime. They can be withdrawn only if a bank issues a no-objection certificate, 75% of bond issuers agree, or if the instrument/loan has been assigned a ‘D’ or default rating.
Rating agencies last week wrote to Sebi and Reserve Bank of India (RBI) that they wish to stop rating credit instruments and bank loans of un-cooperative issuers. They argued that rating without complete information renders the entire exercise futile. “There are many instances where the issuers are not cooperating and are not giving critical information. In that case, continuing to rate the instrument purely based on information available in public domain becomes difficult and it does not give the investors the right picture of the ability to repay/default," said Sankar Chakraborti, chief executive officer, Acuite Ratings.
However, Sebi does not seem to think that way.
“Sebi understands that there are many bank loans and issuers of debentures who have stopped cooperating with rating agencies, which hinders their ability to give a fair rating. But allowing for all these ratings to be withdrawn is not a solution. It will leave investors with even lesser information," said one of the two people cited above.
A request for comment from Sebi was not immediately answered
The demand by rating agencies, if granted, could lead to withdrawal of ratings of at least 10,000 firms, or about half of all loans and bonds outstanding. However, in terms of money involved, these issuers account for about 20% of the total outstanding debt. In their representation, the CRAs said there was a surge in the number of issuers who are not providing adequate information.
The proportion of uncooperative issuers has more than doubled to 47% of the total in the two years to March 2020 and bank loans make 95% of such ratings, the agencies said.
The rating agencies believe failure to share information will increase due to covid-19.
“Issuers who were not cooperating before the covid-19 situation will only become more reluctant as cash flows and financial position have become worse due to the lockdown. Allowing for withdrawals will allow us to start the entire process afresh," an official at a rating agency said seeking anonymity.
However, a Sebi official said this will create unnecessary opacity for investors. “This is not a normal market cycle. Making such structural changes (of rating withdrawals) at such times will leave investors in the lurch. As far as bank loans are concerned, it is more to do with banks and RBI," said the first person cited earlier.
To be sure, even today, Sebi rules have made accommodations for non-cooperating issuers.
In January, Sebi had said if firms are not cooperating with CRAs on disclosure of loan defaults, they will be assigned issuer not cooperating (INC) ratings. Further, these instruments will be downgraded to below investment grade if delinquencies exist for more than six months.
Sebi is also working with RBI to ensure rating agencies have more access to information. “Sebi and RBI are working on a framework to ensure more information on defaults is made available," the first person said.