India Inc's rating interference irks Sebi; MFs told to take action

India Inc’s move to approach courts to prevent rating downgrades, and to seek a stay on payments or sale of pledged shares, has not gone down well with the Securities and Exchange Board of India (Sebi).
 

Sebi has asked lenders, mainly mutual funds (MFs), to act against firms taking the legal route to stave off payments or downgrades. The regulator’s directive comes after at least three companies —Indiabulls, Edelweiss, and Future Group — sought court action in such matters, amid the Covid-19 disruption. People in the know said fund houses and rating agencies first approached Sebi, highlighting the consequences to investors if courts issued adverse orders.

The market watchdog, too, shared the view that seeking court intervention could be a bad practice, and would adversely impact both debenture holders and retail investors, besides hurting future issuances.

 

 

Debenture issuers are parties to the contract that is commercial in nature, and hence requires approval from all stakeholders including debenture trustees, said one of the people. Explaining it further, he said that any contractual agreement, in case of issuance of a debenture, involves an issuer and bond holder. So any decision with respect to payments or defaults should be taken after consultations with holders and the debenture trustee. This is because they serve as a liaison between the issuer company and investors, and are responsible for guarding the interests of debenture holders.

People in the know said MFs have apprised Sebi of their investment in debt instruments, and the status of credit enhancements. Sebi is said to have asked fund houses to initiate necessary steps to ensure protection of the interests of investors.

People in the know said MFs could soon move court with intervening petitions.

Recently, Indiabulls Commercial Credits (an NBFC) obtained an interim stay from the Delhi High Court on payment to fund houses until the Reserve Bank of India’s (RBI’s) moratorium was allowed. Similarly, Edelweiss Financial Services, too, filed a writ petition in the Bombay High Court, seeking to restrain ICRA from downgrading its debt.

On March 30, two group firms of Kishore Biyani-promoted Future Group — Future Corporate Resource (FCRPL) and Rural Fairprice Wholesale (RFWL) — approached the Supreme Court to restrain the trustee from selling the pledged shares. The case was against UBS AG’s London branch and IDBI Bank Trusteeship, to restrain them from selling the pledged shares.  Meanwhile, rating agencies are also monitoring these developments, as it could have a bearing on the rating action. MFs’ exposure to NBFC papers due for maturity over the next few months, stands at around Rs 50,000 crore. MFs are worried they may not be able to meet redemption obligations, as they are not getting any repayment from debenture holders.
 

The situation could worsen if the RBI fails to provide further clarity on the applicability of moratorium on debentures issued by NBFCs.