SEBI amends SEBI (CRA) Regulations, 1999; allowing disclosures to be used in fair assessment of Credit Rating Agencies

On 25-08-2022, the Securities and Exchange Board of India (‘SEBI') has issued a circular on Enhanced Disclosures by Credit Rating Agencies (‘CRA') and Norms on Rating Withdrawal amending the SEBI (Credit Rating Agencies) Regulations, 1999, to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market by enhancing transparency.

It will be applicable to credit ratings of securities that are listed, or proposed to be listed, on a recognized stock exchange.

Key Points:

Methodology for Computation of Sharp Rating Action (‘SRA'):

Date of applicability: FY 2022-2023

1. Vide Circular dated 13-11-2018, SEBI mandated CRAs to furnish data on SRA in investment grade rating category to Stock Exchanges and Depositories for disclosure on website on half yearly basis.

2. To standardize the methodology of computation and disclosure of SRA, the CRAs have to compare 2 consecutive rating actions. To do the same, CRA has to check if the difference in credit rating between 2 consecutive press releases is more than or equal to 3 notches downward then it has to be included in the disclosure on SRAs.

3. SRP on non-cooperative issuers should also be disclosed separately by CRAs.

Issuers Not Cooperating (‘INC') and information required for rating:

Date of applicability: 31-03-2023

1. In continuation to the Circular dated 01-11-2022 that prescribes norms regarding policy in respect of non- co-operation by the issuer and guidelines on what constitutes non-cooperation, the CRAs will also have to provide a detailed policy of:

   • Non- submission of material information of:

     1. Quarterly financial results/ performance results/ audited financial results

     2. Current and past operational details- including capex plans

     3. Debt obligations and repayment details

     4. Any other issue felt appropriate by CRA as per internal assessment or as laid down by CRA in its internal policy/ manual

2. A uniform practice of 3 consecutive months of non- submission of No-default Statement has to be followed by CRA, as ground for considering migrating the ratings to INC and tag such ratings as ‘INC' within a period of 7 days.

Rating Withdrawal:

Date of applicability: ratings withdrawn after 30-09-022

While withdrawing any credit rating, a CRA in its press release has to assign a credit rating to such security excluding the cases where there are no outstanding obligations or the company has been wound up or merged or amalgamated with another company.

Rating Withdrawal of Perpetual Debt Securities:

Date of applicability: ratings withdrawn after 30-09-022

1. To facilitate withdrawal of ratings of perpetual debt securities that are listed or proposed to be listed on a recognized stock exchange the CRA has to revise withdrawal norms of ratings of such securities.

2. The CRA has to withdraw ratings of perpetual debt securities if the CRA has:

   • Rated such security continuously for 5 years

   • Received an undertaking from the Issuer that a rating is available on such security

   • Received an undertaking from other CRA that a rating is available on such security

Disclosure of Average Rating Transition Rates for Long -Term Credit Ratings:

Date of applicability: Disclosures for FY 2022-2023

1. Vide circular dated 13-11-2018, SEBI mandated CRAs to disclose a rating transition matrix, where the static pool has been defined to exclude ratings that have been withdrawn or ratings of non-cooperative issuers during the financial year.

2. In addition to the current disclosure of rating transitions, 2 additional and separate rating transition matrices have to be disclosed by CRAs, one shall exclude ratings that have been withdrawn or ratings of non-cooperative issuers during the financial year and the other one shall include the same.

Enhanced Disclosure by CRAs:

Date of applicability: Website Disclosures made after 31-03-2023

1. CRAs, on their websites should provide:

   • disclosures in excel/ machine readable formats and

   • archive of disclosures for at least 10 years, including the ratings press releases.

2. In addition to the current disclosure on Cumulative Default Rates (‘CDR'), 2 other CDRs are to be disclosed, one where ratings of non-cooperative issuers shall be included in the cohort under the rating category in which the instrument is currently being rated and the other one where it has to be excluded.