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SEBI has come up with provisions that will enable credit rating agencies (CRAs) to predict potential defaults.
CRAs have been under a cloud as they often downgrade the rating of a company’s debt instruments after a default has occurred. For example, rating agencies started downgrading IL&FS last year after it started defaulting on debt repayments.
On Wednesday, SEBI made changes to the rules that allow CRAs ‘explicit consent’ to obtain details related to a company’s existing or future borrowings of any nature, their repayment, delay or default, if any, and even other such information related to debt or financial instruments that would let them get a detailed picture of where the company stood.
Such information could help CRAs better judge the company’s financial position and chances of default, according to the regulator.
But the move by SEBI would now also render them to be more accountable as their failure to predict defaults could trigger sharp reactions. India is staring at major defaults from non-banking finance companies (NBFCs), many of whose debt instruments would mature in the next couple of months.
In the past few months, India has seen companies like IL&FS and DHFL that enjoyed the highest credit rating, default on their payments on debt instruments triggering a crisis. “This move deepens issue-based disclosures to enable a better rating discovery,” said Vidisha Krishan, Partner, MV Kini & Co. “A reportage of delayed payments and non-payments to lenders not amounting to a wilful default (which is already disclosed according to RBI disclosure norms) will ease the burden on CRAs for obtaining such information. Credit ratings are material for investor assessment and detailed disclosures regarding loan repayments are essential for a complete picture of the rated entity,” Krishan added.
“Access to such information will enable credit agencies better evaluate the company, and as a result, give more informed ratings,” said Geeta Dhania, Partner, L&L Partners.
On share buyback, SEBI said companies with post buyback debt-to-equity ratio of more than 2:1 on consolidated basis will not be allowed to implement a buyback. However, there is a leeway here for companies that have non-banking and housing finance companies as their subsidiaries that can consider debt-to-equity ratio of 6:1 for buyback on standalone basis. On August 20, BusinessLine had reported that SEBI is likely to tighten the screws on share buyback issues.
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