SEBI makes stringent disclosure rules for rating agencies

The Securities and Exchange Board of India has augmented the rules on disclosures by credit rating agencies, and has established a framework for rating withdrawals of perpetual debt securities.

In a circular issued, Sebi stated that in order to simplify withdrawal of perpetual debt security ratings, that are listed or are proposed to be listed on the exchange, a credit rating agency may pull back a rating in case it rated these securities steadily for at least five years, or received an assurance from the issuer or other agencies that a rating is obtainable for such bonds.

Perpetual /perp bonds as they are addressed have no maturity date, and are treated as same as equity. Coupons are paid on these bonds ‘perpetually’, and no redemption of the principal bond cash flows is required to be done. Presently, regulations for rating withdrawals, ratings of securities, like AT1 bonds, cannot be pulled back unless the asset itself is redeemed. This tends to often result in the bond issuer being non co-operative with a rating agency as an impact analysis.

To bring in more lucidity and make the disclosures by rating agencies more impactful, Sebi has consistently asked them to disclose on their respective websites either in excel, or machine readable formats.

Sebi’s new directive comes after AT1 bonds issued by Yes Bank were written down to zero in March 2020 as part of a restructuring plan, which led to massive losses to various investors. For the matter of fact, Nippon India Mutual Fund that invested in Yes Bank’s precarious additional tier 1 bonds hit the watchdog’s eye for its ?2,500 crore investment. The bank’s AT-I bonds worth ?8,415 crore were belittled as part of the RBI’s restructuring plan following the scam, proffering the bonds worthless.

Yes Bank raised around ?2,000 crore by furnishing these bonds to institutional investors such as Barclays, Kotak Mutual Fund, Nippon India MF and Franklin Templeton India. Nippon by then had invested about 20% of total value. A significant number of investors were astonished by RBI’s action considering that in a bankruptcy case, bondholders are repeatedly given priority over shareholders.

Regarding the rating withdrawals, the regulator elucidated that subject to outstanding obligations under the security ratings or a company where its security is rated as wound up, merged, or amalgamated with another company, a rating agency should mandatorily allot a credit rating to that security and report the same in a press release; the same should be even done while withdrawing the rating.

Additionally, the circular explained that rating agencies should differentiate two consecutive rating actions to assimilate the computation and revelations of a “sharp rating action". ?A CRA shall reveal the sharp rating action, if the change amongst two successive rating actions is higher or equal to 3 notches downward. This stands applicable from the first half of financial year 2022-23.

Sebi quotes that rating agencies must have a comprehensive policy on the non-submission of quarterly financial and performance results, or audited financial results, within specified timelines. This policy should include present and past operational particulars, including details about capital expenditure plans, debt obligations along with repayment details and other issues that are relevant, according to internal assessments or as stated by a CRA’s internal policies.