Credit rating agencies should verify information received from client: SEBI

Our Bureau Mumbai | Updated on July 28, 2020 Published on July 28, 2020

SEBI said that rating agencies must exercise independent professional judgement at all times in order to achieve and maintain objectivity and independence in the rating process   -  REUTERS

Credit rating agencies should not simply trust the information provided by companies but should verify it, according to SEBI.

“Under the CRA Regulations, the ‘due diligence’ expected from a credit rating agency is much more than just to ‘trust but verify’ the information received from the client,” SEBI said in a case related to CARE Ratings.

“The words ‘true’, ‘accurate’, ‘fair’ and ‘appropriate’ contained in the CRA Regulations enjoins upon a credit rating agency not merely to accept mechanically the information given by its client but to have an independent professional judgement about the quality of information, creditworthiness of the client and about the probability of default of the respective debt security based on any other available information,” the market regulator said in the adjudication order.

This assumes significance in the wake of some rating agencies saying that its obligation is wholly dependent on the cooperation of the client and that the issuer is solely responsible for the quality of information.

SEBI said that rating agencies must exercise independent professional judgement at all times in order to achieve and maintain objectivity and independence in the rating process.

“The ‘objectivity’ and ‘independence’ are very important and crucial elements in the ‘due diligence’ to be exercised by the credit rating agency. Such ‘due diligence’ would follow that the credit rating agency should receive the information from the client, independently verify and confirm the ‘truthfulness’, ‘adequacy’ of the same for the purpose of arriving at and maintaining ‘a true and accurate rating’ of the securities of the client,” the order said.

SEBI said that it did not agree with the proposition of CARE Ratings that the role of a credit rating agency in a rating exercise is only to express its opinion in standardised symbols based on the material made available by the issuer.

SEBI has imposed a penalty of ₹1 crore on CARE Ratings with regard to lapses in assigning credit rating to non-convertible debentures of Reliance Communications (RCom).

RCom defaulted on the repayment of principal amount of ₹375 crore and interest of ₹9.7 crore due in February 2017 and March 2017, respectively. At end-March 2017, RCom’s cash and equivalents stood at ₹1,400 crore – insufficient to pay the short-term debt of ₹10,900 crore. It was only in May 2017 that CARE Ratings downgraded RCom’s rating to default. SEBI found CARE to have failed to monitor the factors affecting the creditworthiness of RCom in a timely manner. SEBI said CARE failed in initiating a review of its earlier ratings assigned to RCom even after publication of Q3 FY17 results.

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Published on July 28, 2020
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