MUMBAI: Securities and Exchange Board of India has tightened and further broad based parameters a rating agency will take into account while rating companies, in a 'guidelines for enhanced disclosures for credit rating agencies' issued on Tuesday.
The new SEBI guidelines asked credit rating agencies (CRA) to take in to account the liquidity conditions of the company, its asset-liability mismatch, monitor repayment schedules, and the credit spreads the company's instruments have in the market to arrive at ratings to reflect the true condition of the company's credit rating.
The new norms come at a time when the rating agencies have yet again drawn flak for having failed to detect the deteriorating financial condition, asset-liability mismatch that was building up over years, during the recent collapse of Infrastructure Leasing & Financial Services (IL&FS). SEBI said the ratings press release should include a specific section on "liquidity" highlighting company's liquid investments or cash balances, unutilised credit lines, liquidity coverage ratio, adequacy of cash flows for servicing maturing debt obligation and also disclose any linkage to external support for meeting near-term maturing obligations. 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".
"These are norms akin to what developed economies/markets might have. It is going to be onerous. How feasible would it go by market spreads as most of the corporate bond or CP market is illiquid," said a former fund manager.
SEBI has also asked CRAs to taking into account the assessment of holding companies, subsidiaries in terms of their inter-linkages, holding company's liquidity, financial flexibility and support to the subsidiaries. "While carrying out "Monitoring of Repayment Schedules". CRAs shall analyse the deterioration in the liquidity conditions of the issuer and also take into account any asset-liability mismatch," it said.
If there are parent, group, government support that is expected in terms of infusion of funds or debt servicing, SEBI said the name of such entities, and rationale for such expectation be provided. The list of all group companies have to be provided when subsidiaries or group companies are consolidated to arrive at a rating. 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. CRAs also needed to publish their average one year rating transition over a five year period on their websites. This will help investors understand the historical performance of the ratings agencies.