Sebi calls for alternative action for rating suspension

The Securities and Exchange Board of India (SEBI) wants credit rating agencies to avoid suspending ratings if a company stops providing adequate information, the regulator told them at a recent meeting.

At a meeting on 8 October, the markets regulator asked raters for suggestions on ways to continue evaluating an instrument based on publicly available information and avoid suspending an existing rating, according to two people familiar with the discussions. Both of them declined to be named.

“The regulator wanted to know why at all a suspension should happen. The need for the same was explained by the agencies, where during the tenure of a rating, it is possible that the issuer may not share information when not favourable. So the question is, how do you deal with this? At the end, the regulator has asked agencies to articulate and come out with a white paper on a uniform practice that could be adopted,” said one of the people. Rating agencies have been asked to submit this white paper within 30 days.

The big five rating agencies, ICRA Ltd, CRISIL, India Ratings and Research Pvt. Ltd, Credit Analysis and Research Ltd (CARE) and Brickwork Ratings India Pvt. Ltd, declined comment on the meeting with Sebi. An email query sent to Sebi officials on Saturday remained unanswered.

At present, rating agencies can suspend the rating on a particular instrument if the company does not share enough information to affirm or revise the rating.

For instance, in August, CARE Ratings suspended its rating on Amtek Auto Ltd’s bank facilities and non-convertible debentures (NCDs) as the company did not furnish the information required for monitoring.

Standard & Poor also withdrew its long-term corporate credit rating on Amtek Global Technologies Ltd, the Singapore-based holding firm of Amtek Global, citing lack of sufficient information of sufficient quality.

Brickwork Ratings, which also had a rating on Amtek Auto, however, downgraded the company’s NCDs to a C rating in August, followed by a another revision to D rating on 7 October.

The case of Amtek Auto, along with recent suspension of ratings, raised questions over the fairness of the practice as a large number of investors rely on these ratings to make investment decisions. A withdrawal of the rating leaves investors in the lurch.

Defaults could one reason for rating agencies to suspend a rating is that it helps the agency maintain default statistics at a low level, said Amit Tandon, managing director of Institutional Investor Advisory Services, a proxy advisor.

“Rating agencies in India are not required to show defaults that happen post a suspension or withdrawal to be counted in their default statistics. Even if someone defaults for a day or there is a corporate debt restructuring (CDR) one needs to first downgrade it to default and then the rating re-assigned. This is something which does not happen in India in order to show better default statistics,” said Tandon.

However, agencies like ICRA say they update a rating based on the latest available information before they suspend a rating. Even so, a more standardised process across the industry is desirable.

“What we as an agency do is we update our ratings, that is, downgrade or maintain the ratings based on the best available information and then suspend it if there is likely to be no further information. This is an area where the industry needs to have consistent best practices so that suspensions/withdrawals are not used as an excuse to avoid taking negative rating actions,” said Naresh Takkar, managing director and group chief executive officer, ICRA Ratings.

Takkar refused to comment on the Sebi meeting.

One of the early suggestions being put forward is to move from a solicited rating to an unsolicited one which is based on publicly available information. Rating agencies are allowed to hold unsolicited ratings but not many do.

“Even if one moves a rating from solicited to unsolicited, for lack of information from the company, the fee part remains an issue,” said the first official quoted earlier. Rating agencies follow a model where the issuer pays for the fee of a rating.

Takkar of ICRA, however, said availability of information is a bigger concern that fee.

“Many companies, especially unlisted, have very limited public disclosures, if such companies stop giving us information, it is not possible to maintain a meaningful rating,” said Takkar.

The rating agency official quoted above suggests regulatory bodies such as Sebi need to make it mandatory for companies to share information with rating agencies. Others, like Tandon, add allowing access to Reserve Bank of India (RBI) data could aid taking an informed rating call. “A rating needs to be monitored and captured in the rating agencies statistics for default even post withdrawal. This can happen only if a rating agency gets access to RBI data, as well as the data with the information bureaus,” said Tandon.

HT Mint, New Delhi, 13th Oct. 2015