The Securities and Exchange Board of India (SEBI) is not in favor of the demand by credit rating agencies (CRA) to allow them to withdraw ratings from non-cooperative companies that do not provide the required information. The regulator wants to maintain the ratings, as removing them will leave investors with even fewer details. CRAs (Credit Rating Agencies) are mandated by regulations to keep any credit instrument-rated during its lifetime. These can only be removed if a bank issues a certificate of no objection, 75 percent of bond issuers accept, or if the instrument or loan has been given a ‘D’ or default grade.
Rating agencies want to avoid rating uncooperative issuers of credit instruments and bank loans and last week they wrote to SEBI and Reserve Bank of India (RBI) regarding this. They stated that rating without the disclosure of full information would render the whole activity useless. Sankar Chakraborti, chief executive, Acuite Ratings said that there are several cases in which issuers do not comply and don’t have essential information. In this case, it is difficult to continue to rate the instrument solely on the basis of information available in the public domain and it does not give the investors the right image of the ability of the company to repay/default. SEBI doesn’t seem to think this way though.
SEBI understands that there are many bank loans and debenture issuers who have ceased to cooperate with rating agencies, hampering their ability to give a fair rating. Yet requiring withdrawal of any of those ratings of such companies is not a remedy. It would leave investors even less informed. If granted, the demand by rating agencies could lead to the removal of ratings of at least 10,000 businesses, or about half of all outstanding loans and bonds. Those issuers, however, account for around 20 percent of the overall outstanding debt in terms of money involved. The CRAs claimed in their representation that there was an increase in the number of issuers that did not have sufficient details.
The agencies said that the proportion of uncooperative issuers in the two years up to March 2020 has more than doubled to 47 percent of the total and bank loans make up 95 percent of those ratings. The rating agencies believe the lack of information sharing by companies will increase due to COVID-19. A SEBI official, though, said that this would create needless uncertainty for investors. The official said that doing so would tamper the normal market cycle. Having these systemic changes (of rating withdrawals) would leave investors in the lurch at these times. When it comes to bank loans, it’s all about banks and RBI. Sebi had said in January that if companies do not comply with CRAs in reporting loan defaults, they would be given ratings for non-cooperating issuers (INCs). However, if delinquencies occur for longer than six months, these instruments would be downgraded to below investment grade. Sebi is also collaborating with RBI to ensure more access to information for credit rating agencies.
