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The securities market regulator SEBI has tightened rules for credit rating agencies (CRAs), according to the diktats of a circular published on Tuesday. The new guidelines standardises the rating criteria, method of public disclosures, the internal functioning of rating committees and disallows the suspension of ratings.
The theme of the new guidelines appears to be greater disclosure and transparency in the relationship between a rating agency and the company raising debt.
For instance, each CRA shall disclose on its website details of all the ratings it has assigned, irrespective of whether the rating was accepted by the issuer or not, even in case of non-public issues. If the company stops co-operating with the CRA and does not provide information, the CRA must continue to publish a rating accompanied with the statement, “Issuer did not co-operate; Based on best available information” in the same font size. This means a CRA cannot suspend a rating based on a lack of information provided by the issuer.
Preventing ‘rating shopping’ Additionally, if a company, having not co-operated with a CRA in the past, approaches another CRA for a rating, the new CRA shall, in its press release, disclose the aspect of non-co-operation in the past. This prevents “rating shopping” by an issuer, who could until now, pick from among ratings that suited it the most.
In August 2015, investors in JP Morgan mutual fund’s India Treasury Fund and India Short Term Income Fund faced a redemption crisis, brought on by a sharp downgrade and withdrawal of ratings on bonds of Amtek Auto, which was on the verge of defaulting on ₹800 crore in bond repayments. Since then, SEBI has been keen on forcing more accountability among CRAs on the ratings they give to debt issues.
In a comment sent to BusinessLine , Rajesh Patel, CEO, India Ratings and Research, said, “India Ratings welcomes SEBI’s guidelines on enhanced standards for credit rating agencies. The guidelines will bring in greater transparency and consistency in ratings process across the industry which will help investors take an informed investment decision.”
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