- SEBI has tightened disclosure norms for credit rating agencies after they failed to warn investors in time about the deteriorating credit profile of Infrastructure Leasing and Financial Services Ltd (IL&FS).
- SEBI Guidelines:
- The credit rating agencies (CRAs) will now have to take into account various factors, including asset-liability mismatch, liquid investments, cash flows and capital infusion from parent or group entities while performing any rating action.
- The regulator has also made it mandatory for rating agencies to disclose full list of subsidiaries or group companies if such entities form part of the consolidated ratings.
- “When subsidiaries or group companies are consolidated to arrive at a rating, list of all such companies, along with the extent (e.g. full, proportionate or moderate) and rationale of consolidation, may be provided.
- A company’s liquidity position would include parameters such as liquid investments or cash balances, access to unutilized credit lines, liquidity coverage ratio, and adequacy of cash flows for servicing maturing debt obligation, the Sebi circular said.
- Credit rating agencies would also need to disclose if the company is expecting additional funds to pare its debt along with the name of the entity that will provide the money.
- Credit rating firms will also have to analyse the deterioration of liquidity and also check for asset-liability mismatch.
- SEBI also mandated CRAs to include a specific section on “liquidity” to highlight parameters like cash balances for servicing maturing debt obligation.
- To ensure investors have some way to analyse the performance of a rating agency, SEBI also asked them to publish details about the historical average rating transition rates across various rating categories.
- This will equip investors to make more informed decisions and be more discerning when comparing different ratings,
- Publishing transition statistics will help investors get a perspective on quality of ratings especially rating stability; an integral part of evaluating the performance on any CRA.
- This along with the default statistics will enable comparison of performance across CRAs.