India’s securities regulator is forcing rating agencies to comply with stricter assessment norms to prevent a repeat of the IL&FS crisis


  • The Securities and Exchange Board of India (SEBI) has imposed stricter disclosure and review requirements on the country’s credit rating agencies.
  • Under the new requirements, credit ratings agencies will have to include a special section devoted to “liquidity” in their ratings actions announcements.
  • In addition, credit ratings agencies will have to publish information related to the historical average rating of an issuer, highlighting any gradual change in the company’s rating.
  • The new norms will help institutional and retail investors get a better picture of the financial health of an issuer.
On 13 November, the Securities and Exchange Board of India (SEBI) released a circular imposing stricter disclosure and review requirements on the country’s credit rating agencies so as to prevent a repeat of the IL&FS crisis.

In the wake of the collapse of IL&FS, wherein India’s largest infrastructure lender defaulted on its debt payments and now teeters on the edge of bankruptcy, a lot of the blame has been passed around.

And now, India’s securities regulator has pinned part of the blame on credit ratings agencies, which failed to monitor IL&FS’s liquidity situation closely in the build-up to the default. As a result, investors had no idea they were propping up the cash-strapped lender. Following a series of defaults, IL&FS’s bonds were finally given a junk rating in September.

Under the new requirements, credit ratings agencies will have to include a special section devoted to liquidity in their ratings actions press release. This involves a regular and rigorous assessment of a bond or stock issuer’s liquidity situation and repayment performance.

As their final assessment hinges more on liquidity, agencies will also have to disclose discrepancies between the assets and liabilities of an issuer as well as cash flow issues and existing short-term credit lines. These review requirements also extend to all the subsidiaries of the said issuer and the support they receive from their holding companies.

In addition, credit ratings agencies will have to publish information related to the historical average rating of the issuer, highlighting any gradual change in the company’s rating. This includes the annual publishing of a one-year historical rating transition for an issuer over a five-year period.

The new norms will help institutional and retail investors get a better picture of the financial health of an issuer and allow red flags to be raised well in advance of an actual default.

As the main lender for government infrastructure projects, IL&FS benefitted from a lack of regulatory oversight while its promoters failed to carry out adequate due diligence before extending loans.

Interestingly, the SEBI isn’t the only regulator whose crosshairs these credit ratings agencies are entangled in. Last week, the Serious Fraud Investigation Office (SFIO) was reported to be investigating the methods used by rating agencies as part of a wider investigation into the IL&FS default.


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