Rating agencies continue to rate companies that fall in the ‘issuer-not-cooperating’ category, even as they await further word from regulators on the issue.
A recommendation to withdraw ratings of companies that do not cooperate was submitted, but since there has been no movement on this, credit rating agencies continue to rate such entities, said two persons familiar with the development.
Last month, credit rating agencies had written to the RBI and SEBI, suggesting that they withdraw ratings of corporate paper in cases where the companies do not provide sufficient information on their performance.
“In the case of listed entities, there continue to be data such as quarterly results or annual reports that can be used by rating agencies to base their ratings on even if they do not cooperate. But in the case of unlisted firms, it becomes extremely difficult to rate them if they do not cooperate as there is very little data available and it is very dated,” noted one of the persons quoted above.
Issuer-not-cooperating companies is more of a problem for companies taking funding through bank loans, they added, and said that banks must also push their clients to get rated properly.
SEBI move
Market regulator SEBI had, in January, directed credit rating agencies to downgrade an instrument to ‘non-investment grade with issuer-not-cooperating status’, if all outstanding ratings of the issuer remain ‘non-cooperative’ for more than six months. Accordingly, from July 1, rating agencies are supposed to downgrade issuers who have been non-cooperative since January.
The RBI’s Financial Stability Report said there has been a year-on-year increase in the share of downgraded or suspended listed companies during the quarters ended December 2019 and March 2020.
“Downgraded/suspended CARE rated debt issues of listed companies went up to 22 per cent of the total rating action during the quarter ended March 2020, the highest in the last three years. CRISIL-rated downgrades/suspensions witnessed a spike to 17 per cent in the December 2019 quarter, but they went down to 9 per cent during the quarter ended March 2020,” it said.
Covid-led uncertainty
Industry watchers said the economic crisis from the Covid-led uncertainty has further added to the problem and impacted the credit worthiness of more Indian companies.
Experts say the exercise of rating companies which do not cooperate is akin to marking a student who has not submitted his answer paper in an exam — it must be resolved.
“Regulators should come heavily on promoters and management of companies that do not cooperate with rating agencies and should bring in tighter measures to ensure discipline. An undisciplined promoter and management have no place in today’s corporate world. Rating agencies should try and rate them based on possible data or else give them the lowest rating,” said JN Gupta, founder, SES, a shareholder advisory firm.