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To safeguard the investors' interest, capital markets regulator SEBI (Securities and Exchange Board of India) might soon ask credit rating agencies (CRAs) to make greater disclosure about suspension and subsequent withdrawal of ratings, and periodic review of the criteria used for ratings.
This is on the back of recent episodes of defaults such as Amtek Auto on its loan repayment to JP Morgan Asset Management. With the increasing number of defaults triggered by some recent drastic downgrades by rating agencies, regulator may be now taking up these rating agencies to task. In September 2015, Amtek Auto, a maker of auto components, failed to repay Rs 8 billion worth of bonds on maturity, following which JPMorgan Mutual Fund, which was holding the bonds, restricted withdrawals from two of its funds.
CRISIL, ICRA and CARE are some of the major CRAs that assign credit ratings for issuers of debt instruments. At present, CRAs make limited disclosures as prescribed under SEBI's credit ratings regulations. For ratings assigned and their periodic reviews, the CRAs have to issue press releases which must be put on their websites as well.
Henceforth, the CRAs will have to spell out how the rating is conducted, responsibilities of analysts, and evaluate the performance of their respective rating committees - particularly if there's an unforeseen default. CRAs will have to mandatorily disclose three-year rating history of the borrower, coupon and maturity of a paper, and instances of multi-notch downgrades among other things. Similarly, if a rating agency can give reasons for an upgrade or downgrade, it should explain the reason for the suspension. At present, while suspending a rating, they simply say the borrower is non-cooperative. There would be a periodic review of the criteria used for rating and public disclosure of the periodicity of review. The internal document governing rating process would need to be made available on the website of CRAs.
SEBI had set up a Committee, comprising members from all CRAs, to review the functioning of CRAs in order to enhance the standards and procedures related to assignment of ratings and review of the same. The Committee submitted its report after incorporating recommendations and suggestions of all CRAs. Besides, the issues related to the functioning of CRAs have also been deliberated upon by the International Advisory Board of SEBI.
The markets regulator is now finalising its policy actions with regard to CRAs after taking into account the suggestions made by the expert committee as well as by its International Advisory Board.
SEBI does not want a repeat of the JPMorgan mutual fund issue. After the sub-prime crisis, it was the first time India faced such a situation. This will help the investors take an informed decision while the 'credibility risk' can keep the CRAs as also the concerned companies on their toes.
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