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Rating agencies are suspending action on a number of companies that refuse to disclose information.
The reasons include lack of adequate information from companies issuing financial instruments; non-transparent balance sheets; and dissatisfaction with current ratings.
“An entire group of issuers has stopped sharing information. But we are under obligation to maintain the ratings based on existing information.
“Unless we get information from the issuer directly or from the banks, it will be difficult to maintain a rating as that could give a completely wrong message to the investors. Hence, we are forced to suspend or withdraw the ratings,” said Atul Joshi, Managing Director and Chief Executive Officer, India Ratings and Research (formerly Fitch Ratings India). India Ratings has suspended ratings of nearly 250 entities since 2011. “A large part of the withdrawn ratings are bank loan ratings,” said Tarun Bansal, Senior Director, India Ratings.
As of September 2012, India Ratings had over 1,200 ratings outstanding across corporates, banks, infrastructure, public finance and structured finance.
The experience of rating agency ICRA is no different. About 10-15 per cent of its company ratings are under suspension or in the non-monitored category.
“This is more prevalent for companies with lower ratings, especially during the slack period,” said Anjan Ghosh, Group Head-Corporate Sector Ratings, ICRA Ratings. “Sometimes, companies refuse to co-operate as the ratings assigned to them could restrict the benefit they get from banks,” said Ghosh.
Similarly, more than 350 companies rated by CARE Ratings (from September 2010 to August 2012) have been withdrawn or fall in the suspension category. The majority of them are from the financial sector. “Usually, companies undergoing liquidation or those wanting better ratings choose to opt out of the ratings procedure. We issue warnings to the companies due to lack of information,” said Arun Kumar, Chief General Manager, CARE Ratings.
‘One-sided’
Speaking on condition of anonymity, a senior official with an infrastructure company said: “It is a one-sided issue as the regulation allows only rating agencies to cancel the contract if unsatisfied. However, the issuer of the instrument cannot do so. Hence, the only option we have is to stop providing information.”
“Currently, we are getting rated by India Ratings. Since we did not want to continue with the previous agency, we stopped providing them information,” said Prashant Rai, Assistant Manager - Finance, Kwality Dairy (India) Ltd. Kwality Dairy’s rating with India Ratings is ‘BBB+’. It was suspended by CARE Ratings on February 22, 2012 on the grounds of “non-submission of the information required for monitoring the rating”.
Arun Kumar of CARE Ratings said non-submission of information cannot be called a breach of contract.
Systemic issue
One of the repercussions of a ratings suspension is that banks which use these ratings to assign risk weights for their loans are also affected.
“Banks would need to provide higher capital for non-rated category borrowers, leading to other borrowers getting less funds. And the economy as a whole may suffer with second order effects,” said Brett Hemsley, Managing Director, Head Asia Pacific, Fitch Ratings Japan Ltd.
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