SEBI Trying to Tie Loose Ends by Tightening the Norms for Rating Agencies

SEBI has taken a pledge to tie the loose ends of rating agencies after they have failed to warn investors in time about the weakening credit profile of Infrastructure Leasing and Financial Services Limited (ILFS). On 13th November 2018, SEBI has tightened the norms of Credit Rating Agencies (CRAs) with respect to the liquidity position of the companies being rated.

SEBI’s Norms for Rating Agencies

  • Highlighting liquidity position of the firms rated or being rated by including parameters like liquid investments, cash balances, access to unutilized credit lines, liquidity coverage ratio, and adequacy of cash flows for servicing manufacturing debt obligation.
  • If a rating is given based on the expectation of funds, then the names of entities infusing the funds have to be disclosed.
  • A check on asset-liability mismatch has to be done along with analysis on liquidity deterioration of the companies rated.
  • A disclosure of historical average rating transition rates to be done across various rating categories.
  • Any sharp deviation in the bond spreads has to be treated as a material event and disclose any external debt support.

What does it mean for investors?

Rating agencies have seen a change in their norms for the fourth time by SEBI since November 2016. SEBI is doing all it can to protect investors from any kind of harm. Investors now can make more informed decisions by a change in the norms. With more information available at their disposal, investors will know what the company’s liquidity information is from time to time.

While the disclosure norms are in place, the main problem of the credibility and rating of rating agencies is still a question to be addressed. This problem is partly solved by SEBI by asking the CRAs to disclose the historical average rating rates. Investors can analyze the rating stability and get quality of rating to some extent with these disclosures. But more norms regarding the quality of ratings of CRAs have to come for the better investor safety. Nevertheless, SEBI can be appreciated for taking a move to improve the quality of ratings of rating agencies.

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