Mumbai: Markets regulator Securities and Exchange Board of India on Thursday came out with a strict disclosure framework for credit rating agencies by which they will be required to provide the probability of default for various rated instruments.
The regulator's move comes against the backdrop of rising instances of debt defaults and concerns over the role of credit rating agencies in assessing possible risks. Credit rating agencies have come under the scanner in the IL&FS case as well.
Issuing guidelines for enhanced disclosures by credit rating agencies (CRAs), Sebi has called for having a uniform standard operating procedure (SOP) in tracking and timely recognition of default. The same has to be disclosed on the website of each CRA.
Besides, the agencies would have to put in place probability of default (PD) benchmarks.
Further, to enchance the rating standards, “it has been decided to disclose cumulative default rates (CDR), which will be calculated issuer-wise, using the marginal default rate (MDR) approach, using monthly static pools. CDR will be accounted for rating withdrawals,” the Sebi circular said.
"In order to enable investors to discern the performance of a CRA vis-a-vis a standardised PD benchmark scale, CRAs, in consultation with Sebi, shall prepare and disclose standardised and uniform PD benchmarks for each rating category on their website, for one-year, two-year and three-year cumulative default rates, both for short-run and long-run," the circular said.
The standardised and uniform PD benchmarks should be disclosed on the website of each CRA for ratings of long-term and short-term instruments on a consolidated basis for all financial instruments rated by a CRA by December 31, 2019.
The Sebi has also prescribed disclosure of rating sensitivities in press releases, critical for the end-users to understand the factors that would have the potential to impact the credit worthiness of the entity.
Rating agencies will now have a specific section on ‘Rating Sensitivities’ in the press releases, which will explain the broad level of operating and/or financial performance levels that could trigger a rating change, upward and downward.
“Such factors will be disclosed in quantitative terms to the extent possible, discernible to the investors, and should not read like a general risk factor,” the Sebi said.
The regulator has also mandated disclosure on liquidity indicators for the end users.
Earlier in November 2018, the Sebi had mandated inclusion of a specific section on liquidity in the press releases, highlighting parameters such as liquid investments, access to unutilised credit lines, liquidity coverage ratio, adequacy of cash flows for servicing maturing debt obligation, etc.
Now in order to make the disclosures meaningful to the end users, it has been decided to mandate disclosure of liquidity indicators using standardised terminology along with the liquidity indicators.
CRAs will now disclose the liquidity indictors, using terms like “Superior/ Strong”, “Adequate”, “Stretched” and “Poor”....