Credit Rating

SEBI Enhances Disclosures by CRAs and Norms on Rating Withdrawal

On 25^thAugust 2022, vide notification number SEBI/HO/DDHS/DDHS-RACPOD2/P/CIR/2022/ 113, a circular was issued by the Securities and Exchange Board of India (SEBI). Wherein it has enhanced disclosures by CRAsand Norms on Rating Withdrawal under SEBI (Credit Rating Agencies) Regulations, 1999^[1] (CRA Regulations).In order to allow all the stakeholders and investors to assess the disclosures to assess the CRAs properly and fairly, the following changes have been introduced for the disclosures made by CRAs.

Applicability of the Circular on enhanced disclosures by CRAs and Norms on Rating Withdrawal

The Circular on the “enhanced disclosures by CRAs and Norms on Rating Withdrawal” applies to the following entities:

1. All the credit ratings of securities that are either listed or proposed to be listed on a recognised stock exchange; and
2. Other credit ratings are required under SEBI regulations or circulars.

Highlights of the Circular on Enhanced Disclosures by CRAs and Norms on Rating Withdrawal

Methodology to compute Sharp Rating Action

• SEBI’s circular number SEBI/ HO/ MIRSD/ DOS3/ CIR/ P/ 2018/ 140 dated 13^th November 2018 had mandated that CRAs had to furnish data on sharp rating actions in the category of investment grade rating, according to the format prescribed in Annexure A of the aforementioned circular, both to the stock exchanges and Depositories for disclosure of the same on their website. This exercise will be carried out on a half-yearly basis.
• With a view to standardising the technology of computation and disclosure of ‘sharp rating action’, it has been specified that CRAs have to compare two consecutive rating actions. A CRA will be mandated to disclose a sharp rating action if the rating change between two consecutive rating actions is more than or equal to 3 notches downwards. In simple words, if the difference between two consecutive press releases has been found to be more than or equal to 3 notches downwards, the same has to be included in the disclosure on sharp rating actions.
• The mandate of disclosures on sharp ratings actions is limited to the credit ratings of securities that are either listed or proposed to be listed on a recognised stock exchange’ and other credit ratings that are required under SEBI regulations or circulars.
• Apart from the current disclosures of the sharp rating actions excluding non-cooperative issuers, the CRAs are also required to disclose share rating actions, including those on non-cooperative issuers.

Issuers Not Cooperating (INC) and information required for rating

1. SEBI released a circular in 2016 that prescribed the norms related to policy in respect of non-cooperation by the issuer. It further mandated each CRA to frame detailed guidelines declaring what constitutes non-cooperation.
2. In furtherance of the same, a detailed policy shall be put in place by the CRAs, which shall include  the following:
   • Non-submission of the material information (but not restricted to) the following:
     1. Non-submission of the performance results or audited financial results, or quarterly financial results  within the prescribed time limits;
     2. The prevailing and past operational details about the capex plans;
     3. Debt obligations and repayment details; and
     4. Any other issue that is appropriate by the CRA as per its internal assessment or laid down by the CRA in its internal policy document or manual.
   • The criteria or methodology adopted in order to assess the risk of non-availability of information from the issuers, including the non-cooperative issuers.
   • Thereare various steps taken in different scenarios with a view to ascertaining the status of non-cooperation by the issuer company.
3. A uniform practice shall be followed by the CRAs comprising three consecutive months of non-submission of No-default Statement (NDS) (or the inability to validate timely debt servicing through other sources) as a ground for considering migrating the ratings to INC shall tag such ratings as INC within a period of seven days of the three consecutive months of non-submission of NDS. It may happen that a CRA, in its judgment, may migrate a rating to the INC category before the expiry of three consecutive months of non-receipt of NDS.
4. The CRAs are mandated to formulate a policy on “Minimum/ Indicative Information requirement” in terms of various sectors or types of ratings, etc. and make disclosure of the same on their website.

Rating Withdrawal

It has been clarified that at the time of withdrawing any credit rating referred section III above, a CRA has been mandated to assign a rating in its press release. It shall also assign a credit rating to such security except where there are no outstanding obligations under the security rate by the CRA.

Rating Withdrawal of Perpetual Debt Securities

1. According to the prevailing rating withdrawal provisions, it is observed that in the case of rating, perpetual debt securities, such as AT-I bonds, are either listed or proposed to be listed on a SEBI recognised exchange. Its credit rating cannot be withdrawn unless the security is redeemed by such an entity, which might result in the issuer of such bonds stopping cooperating with the CRA.
2. To facilitate the withdrawal of ratings of perpetual debt securities that are either listed or proposed to be listed on a SEBI recognised stock exchange, the proposal has been made to revise the withdrawal norms of ratings of such securities. A CRA can withdraw the ratings of such securities if the CRA has:
   • Rated such security/securities continuously for at least 5 years; and
   • Received an undertaking from the issuer that rating is available on such security/securities; and
   • Received an undertaking from other CRAs that a rating is available for such security/securities.

Disclosures of Average Rating Transitions Rates for Long-Term Credit Ratings

1. SEBI vide circular number SEBI/ HO/ MIRSD/ DOS3/ CIR/ P/ 2018/ 140, released on 13th November 2018, has made it mandatory for the CRAs to disclose a rating transition matrix. Where the static pool excludes ratings that have been withdrawn or ratings of non-cooperative issuers during a financial year.
2. With the increased presence of non-cooperative issuers in the CRAs rates universe, except for such INC ratings, that might not depict an accurate picture of the stability of the credit rating both within CRAs and across CRAs.
3. Keeping the above in mind, the circular mandates that in addition to the existing disclosures of rating transitions as per SEBI’s circular of 2018, the CRAs are also required to make disclosure of two additional and separate rating transition matrices using the following definition of static pool:
   • Static pool: Ratings are outstanding for every category at the beginning of any financial year. The ratings that have been withdrawn or ratings of non-cooperative issuers during a financial year shall be excluded. If the ratings have been downgraded to D, they shall be treated as a default for the remaining financial year. The ratings that have been upgraded from D shall be considered new ratings for the subsequent static pool.
   • Static pool: Ratings are outstanding for every category at the beginning of any financial year. The ratings that have been withdrawn or ratings of non-cooperative issuers during a financial year shall be included. If ratings have been downgraded to D, they shall be treated as a default for the rest of the financial year. The ratings that have been upgraded from D shall be considered new ratings for the subsequent static pool.
4. In the above-mentioned C. (ii), a CRA should add an extra column to indicate the proportion of ratings withdrawn during the financial year.

Enhanced Disclosure by CRAs

1. For the facilitation of the enhanced transparency and usability of the disclosure made by CRAs on their website, the following things are proposed:
   • Disclosures to be made by CRAs on their websites according to multiple SEBI circulars should be provided either in a machine-readable or excel format.
   • The CRAs are required to maintain an archive of disclosures for at least 10 years. The archive must contain the press releases by CRAs too.
2. Apart from disclosures on cumulative default rates (CDR) that include various types of credit ratings and non-cooperative issuers. CRAs are also required to disclose, separately, two other CDRs limited to credit ratings of the securities that are either listed or proposed to be listed on SEBI registered stock exchanges:
   • In CDR (ii), the ratings of non-cooperative issuers shall be included in the cohort under the rating category in which the instrument is currently being rated.
   • In CDR (iii), the ratings of non-cooperative issuers shall be excluded from the cohort under the rating category in which the instrument is currently being rated.

Date of coming into effect

The date of coming into effect of the above-mentioned guidelines has been given as follows:

Part of the Circular	Date of coming into effect
Methodology to compute  Sharp Rating Action	Disclosures for H1 of the Financial Year 2022-23
Issuers Not Cooperating and information required for rating	Latest by 31st March 2023
Rating Withdrawal	The ratings that were withdrawn after 30th September 2022
Rating Withdrawal of Perpetual Debt Securities	The ratings that were withdrawn after 30th September 2022
Disclosures of Average Rating Transition Rates for Long-Term Credit Ratings	Disclosures shall be made for the financial year 2022-23
Enhanced Disclosure by CRAs	The website disclosures shall be made after 31st March 2023

Conclusion

This Circular on the enhanced disclosures by CRAs and Norms on Rating Withdrawal has been issued with the approval of the competent authority and has been brought after exercising the powers conferred on SEBI under sub-section 1 of s. 11 of the SEBI Act, 1992 read with Reg. 20 of SEBI (Credit Rating Agencies) Regulations, 1999. This circular aims at enhancing the disclosures by CRAs and issue norms o rating withdrawal by the CRAs.

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