A representation from rating agencies which sought to withdraw ratings of companies who are not cooperating has met with resistance from the markets regulator, the Securities and Exchange Board of India (Sebi).
The regulations for credit rating agencies (CRAs) require that an instrument should be rated all through its lifetime and Sebi is unwilling to change the regulation as it could leave investors in a lurch, said two people with direct knowledge of the matter.
At present ratings can be withdrawn only if a bank issues a no objection certificate or if the instrument/ loan has been assigned a ‘D’ or default rating.
“Sebi understands that there are bulk of bank loans and issuers of debentures who have stopped cooperating with rating agencies which hinders their ability to give a fair rating. But allowing for all these ratings to be withdrawn is not a solution. It will leave investors with lesser information,” said the first of the two people quoted above.
Last week, the rating agencies had written to Sebi and the Reserve Bank of India (RBI) that they wish to stop rating issuers’ instruments and bank loans that provide inadequate information. They argued that rating without complete information renders the entire exercise as futile.
“There are many instances where the issuers are not cooperating and are not giving the critical information. In that case, continuing to rate the instrument becomes difficult purely based on information available in public domain and it does not give the investors the right picture of the ability to repay/ default,” said Sankar Chakraborti, chief executive officer, Acuite Ratings.
The demand by rating agencies could lead to withdrawal of ratings of at least 10,000 companies.
These make about 50% of the total loans and bonds outstanding. However, in terms of money these issuers contribute about 20% of the total outstanding debt.
In their representation, the CRAs also cited that there has been a surge in the number of issuers who are not providing adequate information.
Going forward the rating agencies believe that the delinquencies on sharing information will increase due to Covid-19.
To be sure, even today, Sebi rules have made accommodations for non-cooperating issuers.
