Rating agencies seek harmonisation of norms for debentures and loans

Rating agencies are seeking harmonisation of norms by the Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) for instruments like debentures and loans, especially where ratings are based on enhanced external support.

The purpose of such a mechanism is to get better ratings and reduce cost of funds for an entity floating instruments.

Recently, there was communication from the RBI that dealt with issue ratings assigned to financial instruments based on structures. These included letters of comfort and undertaking, banking sources said.

RBI has cautioned on taking into account such support mechanisms. The assessment for ratings of the instrument being issued by the entity should be done on a standalone basis.

The interpretation of the regulator could be that such support mechanisms are not legally tenable. Sources said RBI rules are perceived tight, especially for instruments that have support through letters of comfort and guarantees for loans.

Debentures, a capital market instrument under Sebi’s ambit, have different norms pertaining to use of external support. As a result, there could be a situation where the same corporate may get a lower rating for loans and higher for debentures.

RBI is also believed to have flagged the point of invoking guarantees. There are clear timelines for invocation to meet a commitment when the entity fails on obligations. Sources said there is also the issue where many special purpose vehicles are bundled into one group. 

This allows access to finance of one SPV to pay repayment obligations of other units in the group and vice versa.

Such an arrangement is in vogue in renewable energy projects during fundraising.