A worried Securities and Exchange Board of India (Sebi) had met with credit rating agencies earlier this week. According to sources, the regulator discussed changes to the current reporting system, for timelier rating action. Sebi, which also regulates the Rs 19-lakh crore mutual fund space, enquired about the health of debt markets, added the sources.
The move comes after the Reliance Communications (RCom) fiasco, wherein rating agencies downgraded the papers nearly two months after the actual default happened. Currently, rating agencies take action only after depositories confirm a default. This typically takes two to three weeks from the time of actual default. However, the bankers concerned and debenture trustees have real-time data on this. Sebi is said to have asked the rating agencies to work out a system wherein information is had directly from the bankers or debenture trustees.
RCom had defaulted on a non-convertible debenture instalment of Rs 375 crore which was due on February 7. However, the rating agencies didn’t take any action until May 27, after the company admitted in its quarterly earnings statement that it had defaulted. “Rating agencies are expected to know and understand things, so that they advise investors. Sebi was keen to understand if the rating process can be improved,” said a source.
The agencies are learnt to have listed some challenges in moving to a more real-time system. The head of one said the agencies should not resort to a downgrade without confirmation, to avoid confusion in the market. And, that real-time monitoring could escalate the costs and was difficult, especially in instruments where there is a rollover or extension clause in the agreement.
Rating action had also come under the regulator's watch earlier. In 2015, a sudden downgrade of Amtek Auto’s debt papers had created panic in the markets, with mutual funds holding the paper rushed to sell these at a discounted price. Subsequently, the net asset value of their schemes took a hit and individual investors rushed to redeem their folios in schemes with exposure to Amtek. Something similar happened within Jindal Steel and Power last year.
After these instances, Sebi had introduced a new regulatory framework for rating agencies. In these, Sebi asked the agencies to give sufficient reason for each rating action. In a suspension or withdrawal of rating, they were asked to reveal the reasons in the public domain.
In 2016-17, the agencies assigned a rating to 890 instruments worth a combined Rs 12.5 lakh crore. Of these, 97 instruments worth Rs 11,462 crore got a ‘default’ rating; 185 instruments worth 9.7 lakh crore got ‘highest safety’ ratings; 275 instruments worth Rs 2.1 lakh crore were rated “moderately safe’.