Sebi tightens disclosure, review norms for rating agencies

The Securities and Exchange Board of India (Sebi) has tightened disclosure and review norms for credit rating agencies (CRAs) on the back of rising concerns over the failure of rating agencies to sufficiently appraise investors or flag deficiencies even after firms collapse.

The Sebi move comes after it failed to raise timely red flags ahead of the collapse of one of India’s top non-banking finance companies, Infrastructure Leasing and Financial Services Ltd (IL&FS).
The regulator has now directed CRAs to analyse deterioration in the liquidity conditions of an issuer, while monitoring its repayment schedules and taking into account any asset-liability mismatches.
When a rating factors in support from a parent/ group/ government, with an expectation of infusion of funds towards timely debt servicing, the name of such entities, along with rationale for such expectation, may be provided, Sebi stated in a new circular.
When subsidiaries or group companies are consolidated to arrive at a rating, list of all such companies, along with the extent (eg, full, proportionate or moderate) and rationale of consolidation, may be provided.
The press release should include a specific section on “liquidity”, which shall highlight parameters like liquid investments or cash balances, access to unutilised credit lines, liquidity coverage ratio, adequacy of cash flows for servicing maturing debt obligation, etc. 
CRAs shall also disclose any linkage to external support for meeting near term maturing obligations.
Review of rating criteria
Sebi said CRAs should review their rating criteria with regard to assessment of holding companies and subsidiaries in terms of their inter-linkages, holding company’s liquidity, financial flexibility and support to the subsidiaries, etc.
While carrying out “Monitoring of Repayment Schedules”, CRAs should analyse the deterioration in the liquidity conditions of the issuer and also take into account anyase the liability mismatch.
While reviewing “Material Events”, CRAs may treat sharp deviations in bond spreads of debt instruments vis-à-vis relevant benchmark yield as a material event.
Rating transition rates for long-term instruments 
Since transition studies are central to evaluating the performance of an entity, Sebi has asked CRAs to provide an insight on the stability of ratings over a period of time. In order to promote transparency and to enable the market to best judge the performance of the ratings, the CRA should publish information about the historical average rating transition rates across various rating categories, so that investors can understand the historical performance of the ratings assigned by the CRAs, the regulator said.
Accordingly, Sebi said CRAs should publish their average one-year rating transition rate over a 5-year period, on their respective websites, which shall be calculated as the weighted average of transitions for each rating category, across all static pools in the 5-year period. 
The regulator also said CRAs should disclose parameters such as liquid investments or cash balances, access to any unutilised credit lines and adequacy of cash flows in a specific section on liquidity.
Rating agencies have come under pressure from authorities and investors over their failure to proactively flag financial problems at Infrastructure Leasing and Financial Services Ltd’s (IL&FS) until after a subsidiary defaulted on some of its debt this year.