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SEBI circular enhances regulation of CRAs

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To make the process of issuing and updating credit ratings of securities more efficient, SEBI, in its circular dated June 30, 2017, has issued certain additional obligations and disclosure norms for Credit Rating Agencies (CRAs) and other entities involved in credit rating process.

The following are some of the key changes introduced in the circular: (i) CRAs will now be required to monitor the repayment of debt by issuers through various readily available sources, such as, websites of stock exchanges on which the issuer is listed and follow-up with the debenture trustees of the debt instruments. This measure is intended to make CRAs take an initiative themselves and ensure detection of any early signs of default. (ii) Under regulation 15 of SEBI (CRA) Regulations, 1999, CRAs were required to continuously monitor the performance of the securities rated by them. SEBI has now made it mandatory for CRAs to review the ratings of particular securities rated by it as and when a material event occurs and has provided an illustrative list of material events, such as, publishing of financial results, merger/amalgamation of companies, debt restructuring, winding-up, etc. Moreover, SEBI has made it mandatory for CRAs to publish the effect/no-effect of such an event on the credit ratings of the securities rated by the CRA within 7 days of the occurrence of such event. (iii) Issuers are now required to provide a monthly ‘No-default statement’ to the CRAs in the format prescribed in the circular. CRAs must undertake a rating review in case of delays. (iv) SEBI has prescribed strict timelines for review, publication of ratings and press releases by CRAs to encourage prompt action on discovery of information. (v) To ensure that the investors may understand the rationale for change in ratings by CRAs, SEBI has mandated that CRAs must explain the change in the press releases issued by them.

This circular has been issued in response to the recent incidents wherein investor interests were affected due to inaction by CRAs despite the fall in an issuer’s credit worthiness. The circular, besides clarifying the application of certain provisions of the CRA Regulations, will also ensure early detection of defaults, safeguard interests of investors, contribute towards effective implementation of the law and keep a check on both issuer companies and the CRAs.