Sebi meets rating agencies to increase monitoring of debt instruments

The Securities and Exchange Board of India (Sebi) had called for a meeting with credit rating agencies (CRAs) earlier this week. According to sources, the regulator had discussed changes in the current reporting system to ensure timely rating action in case of a 'default'. The move comes after the fiasco in the Reliance Communications' debt wherein rating agencies downgraded the papers nearly two months after the actual default happened.

Currently, rating agencies take an action after the depositories confirm a default. This typically takes two to three weeks from the time of actual default. However, the concerned bankers and debenture trustees have real time data of the same. Sebi is said to have asked the rating agencies to work out a procedure where they could get the information directly from the bankers or debenture trustees.

The role of CRAs has come under the regulatory scrutiny in case of Reliance Communications. The company had defaulted on a non-convertible debenture installment of Rs 375 crore, which was due on February 7. However, the rating agencies didn't take any action until May 27, when the company admitted in its quarterly earnings that it had defaulted on an installment.

"CRAs are expected to know and understand the things in advance so that they can advise the investors accordingly by updating the rating. But in this case, the rating agencies had no clue until the company admitted it," said a source.

However, the CRAs are learnt to have raised reservations about such changes. The head of a domestic rating agency said the agencies should not resort to a downgrade unless or until it is confirmed. Otherwise it could create mayhem in the market. He also added such a real-time monitoring could also escalate the costs and difficult especially in the instruments where there is a rollover or extension clause in the agreement.

This is not the first time when the rating actions have come under the regulator's watch. In 2015, the sudden downgrade of Amtek Auto's debt papers had created a panic in the markets as mutual funds holding the paper rushed to sell them at a discounted price. Subsequently, the net asset value(NAV) of the schemes took a hit and retail investors rushed to redeem their folios in the schemes that had exposure to Amtek Auto. A similar scenario happened in Jindal Steel and Power (JSPL) last year.

Post these instances, the market regulator had introduced a new regulatory framework for rating agencies. In the new rules, Sebi tried to enhance the transparency by asking rating agencies to give sufficient reason for each rating action. In case of suspension or withdrawal of rating, the agencies were asked to put the reasons in the public domain.

IN FY17, CRAs assigned rating to 890 instruments worth Rs 12.5 lakh crore. Of these, 97 instruments worth Rs 11,462 crore were attributed 'default' rating by the regulator. On the other hand,185 instruments worth 9.7 lakh crore were attributed 'highest safety' ratings while 275 instruments worth Rs 2.1 lakh crore were rated "moderately safe".